The Leather Pipeline - 03.04.18
03/04/2018
Who cares about data from the financial markets anymore? The stock and currency markets have found a new guru: politics. Economists can quit their jobs because interest rate spreads, CPIs and labour market data, all of which were once eagerly awaited to take new investment decisions, have lost their importance and their impact on the markets.
This hadn’t been seen until a short time ago. The good news is that the consumers and markets are not paying too much attention and are shrugging off most of the threats that politics are sending out.
As long as tariffs are not yet in place and are not affecting consumer prices, as long as they can buy products from anywhere, as long as jobs are not lost, as long as monthly wages are paid, and as long as imports and exports remain untouched, the consumer is not impressed. They walk along believing that the spreading nationalism and the rising tensions remain something for the news headlines but have no importance in their daily life.
Markets took the situation as a trigger for a rollercoaster ride depending on the updated daily situation. Tariffs? Falling markets. Oh, they are in talks! Rising markets. Considering the big egos that are in play it is difficult to see how they can please their citizens by compromises now.
In the meantime, we had more politics with unclear long-term effects. The West and Russia are in a ping-pong game of expulsion. At the same time, politicians are discussing if the sanctions against Russia are still an appropriate tool. North Korean president Kim Jong-Un travelled to Beijing on a secret mission, which after it was finished was turned into a PR campaign with unclear intentions.
Facebook has shown its ugly face and confirmed what its business concept is; grab and trade data, no matter what it is, to whom it belongs or what will be done with it. Slowly, more people are beginning to understand that Facebook is not your friend and doesn’t respect you or your privacy.
It not just about the data, it is a question of what is being done with it. People and businesses have hyped social media so much and it has infiltrated the daily lives of individuals, so it is unlikely this can be turned back. The question is if a private company in the free world can be the pool, distributor and filter of private information without being controlled. In China, it is easy. This information is privately collected, fully controlled and delivered to the government for further ‘interpretation’.
Regardless of what all this will mean to the economy, we end with generally positive news. Inflation in the EU is getting closer to the 2% target. The labour markets remain strong all over, industrial output and exports in China have rebounded and GDP results and forecasts remain strong.
In the currency market, one has to be surprised by the performance of the US dollar. All fundamentals would call for a firmer greenback, but since the last slump in mid-January the greenback has traded in a very narrow range. Any advances are immediately stopped by the markets. The narrow range against the Euro in the last three months is at least unusual. One could be invited to believe that US policies are also trying to influence the value of the currency. In the logic of the US administration, a weak dollar helps exports, makes local production more competitive and reduces the trade deficit. If the world were that simple, everything would be much easier.
Market Intelligence
It is Groundhog Day in the leather pipeline. We continue to discuss the same topics we have been discussing for a long time and nothing is triggering a fundamental change in leather demand.
We are at the end of the winter season and this means activity in the leather pipeline will slowly decrease. This is due to the seasons and production cycles, but also because spring and summer are the slower retail periods.
The regular sources we speak to, and which do not have particular commercial interest in the leather pipeline, have been expressing their concerns for a long time. If rational analysis, rather than commercial interest or emotion, is the driving force behind statements, these statements are more justified.
As far as the leather pipeline is concerned the insiders warned two years ago that leather had to be watched far more than just from the manufacturing perspective. It has actually been driven and influenced by the big marketeers and retailers, who were able to shift the consumer to more casual dressing and fast fashion. The sporting goods and athletic footwear companies saw the limits of their growth if they remained within their own boundaries.
Sport and music stars became fashion trendsetters, most importantly for young people. Banker, lawyers and white-collar management were not only boring in their conservative dress style but also lost their social credibility due to the 2008 financial crisis. So, why dress better when there was little public difference between the street gang member and the Wall Street investment banker? This opened the door for casual dress in all places, including in the office. The casual Friday became the casual week.
The timing was perfect, and the marketing power of the sport brands meant that they were able to work on the consumer conversion from head to shoe. At the same time, fast fashion retailers like H&M and Spain’s Inditex group changed fashion retail. There were no longer two or four seasons, but instead a dynamic and constantly changing offering, combined with controlled manufacturing to avoid unsold stock and end-of-season discount sales.
This was garnished with the rise of internet selling and online retail platforms, which focused on speed, faster delivery and faster flow from material to finished product.
Footwear and furniture
It began slowly, but as time progressed this trend increasingly worked against leather in the mass production of shoes. The worst thing was that, at the end, the consumer was happy with the shoes they bought. Fashionable, lightweight, comfortable and frequently something new. Nobody seemed to care about durability or sustainability. People still buy leather shoes and brands that have found a niche or customer group still have their place in the market, but the demand for leather shoes no longer swings with the ups and downs of consumer activity.
Quite the reverse, in fact. We are now living in the best of all worlds with rising income, constant growth, low energy costs and low interest rates. Consumers shop everywhere and retail sales are excellent, including for shoes. The demand for shoe leather has fallen, however, and the beef and leather industry has been watching it while discussing the issue with an industry group (brands and retailers) that has absolutely no interest in supporting the leather industry and leather consumption. And, indeed, why should they while they have all the benefits of using alternative materials and while the end consumer is happy and sees no reason to ask for something made from leather?
In furniture upholstery, the situation is somewhat different. It is less about fashion and more about price and material specification. The support for upholstery leather came from the boom in China, which resulted in an inflated production capacity. Everyone jumped on the bandwagon, including importers, traders, tanners and furniture makers, but nobody was willing to accept that the party was over.
The boom in real estate in China, the positive image of leather and the cheap production costs fed a massive growth in the consumption of standard furniture leather, which added to the basic global demand that already existed and that grew in line with positive economic trends. The writing on the wall wasn’t noticed. Corrected grain and heavily-finished leathers lost the more they came to market and the more plastics and microfibres were able to match leather at a cheaper price.
A sharp rise in the production costs of leather in China, in addition to environmental concerns, hit the import traders who continued to believe that the market was just a series of ups and downs. They simply watched the prices and matched them with their grid of experience. This meant they overstocked, having failed to properly analyse the market demand and trends. Inventory grew slowly; only the better qualities moved, while the rest got stuck as the customer base eroded.
Success stories
In this issue, we don’t need to discuss the success stories which we also have. Automotive is, so far, totally unimpressed by the anti-leather campaigns. Luxury brands and conglomerates perform brilliantly. Their huge wealth, a result of the cheap money policy, has led their business to new records. Believe it or not, luxury made with leather is one of, if not the, best performer of all. Confidence in this business is so solid that all are planning massive expansion in production and sales in the next year. The top names are not just marketeers. They have also become producers (for good reasons) of leather and finished products and continue to invest in production and labour training. This makes it unlikely they will turn their business concept around the favour plastics.
Everyone talks about automotive and luxury as the only strong performers in the leather market, but we think there is another field that serves as a good example of what to do and where to go. We don’t know if our readers have recognised the large number of premium tablets and smartphones which have leather on the backside or on the cover. These come either with the product or as an accessory, from which even more money is made.
These could so easily be made from plastic, and at a lower cost, so why is leather used? The frequent use of these devices means the feel and aging of the cover is much more important. The image factor adds when it comes to the brand. Touching the material helps it age in beauty. It is nice to touch from day one and gets better from there. It is all yours, it is the story of your days and your hands, and it becomes more individual every day. This is what electronics brands have realised and this is why they have chosen to combine a modern gadget with the functionality and history of a thousand years. Their investment of a few cents results in a profit of many euros or dollars.
You don’t touch your shoes everyday but leather can offer a lot of superior functionality. This could and should encourage people to buy with more intention. There are many uses for shoes where leather means something, even if it is only that they become more and more ‘yours’ as you use them. We need to make sure the consumer buys ‘the real thing’ and loves and enjoys it just as a certain group of consumers loves their luxury products.
More challenges to come
In the meantime, we have to deal with the realities of the current situation. While the pipeline remains intact for the raw materials directly connected to the successful sectors, the situation continues to deteriorate for the others. The pipeline for cows and low grades is increasingly congested.
We should ignore the market reports trying to give the impression of a functional and active market. We have had our doubts for a long time, but they have increased in the last few weeks. The concern is less about there being fewer hides sold and more about the reports about inventories. It is not just that hides are not moving the way they should on the supplier side; people are now talking about high stocks in parts of China (Hebei province), in addition to the stocks of low grade materials which are sitting all over in all conditions. It seems that those who have tried to protect the value of their inventory (for obvious reasons) are now worrying about how they are going to manage their cash flow over the summer.
So far, it is just gossip that Chinese buyers will once again walk away from their contracts, but, if there is any truth in it, it could trigger serious problems in the pipeline. A quick look at the calendar is not making it any better.
The split market continues to mirror the hide market. We have also received reports that collagen and gelatine are facing problems with demand. Alternative sources are pressing hard. Everything remains the same in the leather section; high-quality suedes, heavy splits, some automotive articles and specialties for vegetable leathers find homes, while standard, commodity products see demand shrinking.
The skin market remains a mixed bag but is fundamentally the same as the hide market. Specialty, high quality, niche and luxury-related articles sell well, while the low-end nappa skins are wasted. If you can’t use it, you lose it.
The next few weeks will likely offer us more clarity about how difficult things really are. The problems could spread because tanners of better quality leather are starting to feel the pain in the distribution of their lower selections. They have to pay high prices for quality hides in order to meet the demand for high-quality leathers, but they are beginning to come under fire in terms of the returns for the lower grades they also have to market.
They usually have customers to take them, which are sometimes their prime customers, but there are so many cheap offers circulating that buyers are dropping their prices. This results in an average return that isn’t enough to cover the raw material cost of purchasing expensive hides. Producers that are cutting their leather can still cope, but it is getting difficult for others.
In the other markets, the key question is if the situation is not as bad as it seems and if a paralysis can be avoided. That would be better news, but the reality is that we could see more bumpy roads ahead.
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