The Leather Pipeline - 21.08.18
21/08/2018
We passed the peak holiday season in the Northern Hemisphere over the past two weeks. It appears those in Asia have learned to enjoy a summer break as well.
The parliaments and politicians of many countries also take a summer break and so general political activity has slowed down and left us with pretty much the same as what we had before the holiday period.
US President Donald Trump continued to make the major headlines. The trade war with China, sanctions against Iran and Turkey, and a constantly offensive mode against the European Union have a major influence on the financial markets. The situation with China deteriorated, with new tariffs imposed as the tit-for-tat policy continues.
The Chinese government has announced that a high-ranking delegation will travel to Washington in the coming weeks to discuss matters, but it doesn’t seem like there is much willingness to compromise on either side at the moment. It must be obvious for both players that this dispute could cause severe damage to the two blocks and to the global economy.
The situation in Turkey is isolated, but the country is a member of NATO and is a key player in the refugee situation in Europe and in the Syrian conflict. This means things are not easy. The tariffs have sent the Turkish Lira into freefall. The president and his government are trying their best to stabilise the situation, but this hasn’t been successful so far.
The global financial markets are beginning to worry that the problems in Turkey could trigger a domino effect in other emerging markets. A lot of emerging markets are still financed by foreign currencies, in particular the US dollar. Rising interest rates and the lack of confidence could become an explosive cocktail for the currencies and the financial situation of many of them.
The uncertainties and rising risks have once again made the US dollar a safe haven. It is unknown if the US President favours this trend or not, but for the time being global investors are willing to buy the greenback. This has made the currency a few per cent stronger against many of its important counterparts.
The global economy continues to display significant strength as far as the most recent quarters are concerned. However, new polls are have shown that corporations have big concerns about the trade wars, sanctions and tariffs, which could weigh heavily on international trade and business.
In the UK, the Brexit situation continues to be the major topic. It should be made clear that this is not just an issue for the UK economy, it will affect the EU economy as well. There is still a very strong underlying hope that there might be a way to reverse the decision to leave the EU, with a number of initiatives working to achieve this. The closer it gets to the time the more people are realising how deep and negative the consequences are likely to be.
The oil prices and other industrial commodities faced declines due to major concerns about the future of the global economy. Gold continues not to benefit from all the risks.
Market Intelligence
In recent issues we have talked a lot about the holidays and we are now right in the middle of them. It might be wise to skip reports and publications at times like this because there is too little information to have anything to write about. However, things will get better for the next issue, which will be published right after ACLE in Shanghai (August 29-31).
If there is not too much activity, it might be a good time to look a little more at the sidelines and at the general parameters that we can expect for the coming winter semester, traditionally the most active one along the leather pipeline.
The past two weeks have not delivered any news that would influence the situation we have been in for the past 18 months or so. The raw material markets are in retreat for the majority of the articles and products. This is purely the result of declining demand for leather as a material and of the reduction in production capacity in China.
As we all know, the reduction of production capacity in China is not just related to shrinking demand, it is also due to the desire of the government in Beijing to stop the so-called polluting industries wherever it can. With the profitability of leather production shrinking, a lot of investors and company owners in China have lost interest in the tanneries.
We understand from sources in China that a number of tanneries have simply been left alone, with their owners either disappearing or no longer taking any interest in their factories. They would rather take their money and use it for other business interests. This has created a natural decline in production activity, which has been confirmed by the shrinking raw material demand that global supply origins have been experiencing for some time.
Close watch
The bigger players go on and one can be quite sure that they are taking a reasonable benefit from the situation. Tanners are enjoying cheaper raw material costs and manufacturers of consumer products are enjoying lower prices for leather. For strong brands and retailers, it means wider and better margins. For commodity players, the fight for margin has become even more difficult. Brands are holding their retail prices fairly steady, while unbranded discount stores are dropping their prices to levels at which one can barely see how the production pipeline can generate any kind of margin, regardless of the material used.
For the others the situation is quite pleasant. Retail prices for branded consumer goods are holding their levels quite well. If it is the right design, colour and image, the price for a pair of ‘fancy’ shoes hasn’t really changed. The inflated margins may be distributed so that the material manufacturer is the one who benefits least.
For the coming production season, we have to figure out in autumn if the raw material surplus situation that we have had for some time in the ovine section will also become a reality in the bovine section. It is too early to judge at this stage but we will continue to carefully monitor the leather pipeline, the leather fairs and the upcoming shoe and upholstery exhibitions.
Consumer choice
Consumers now have the chance to let the industry and retail know if they still want shapeless, non-sustainable, buy-and-dump plastic products. They must show if they are willing to see hides and skins as a natural resource, one which depends on the consumption of meat and not on the demand for leather products, or if they would prefer to see this readily available raw material be destroyed or buried at significant costs simply because their ignorance does not leave a better option.
If you have the chance to discuss this with people in private conversations, it is incredible that so few have thought about the consequences of grabbing the cheap, buy-and-dump sneaker. At the same time, many are complaining about not having the option to choose as all the products they see are the same, albeit branded under a different name.
It is interesting that when the discussion gets to leathergoods and handbags, leather suddenly becomes very important. For a wallet, belt and handbag, almost everyone still considers leather to be important. In short, for products that are touched frequently and are a close part of daily life it is very important.
If you tried to copy this to shoes and asked those same people if the hands are more important than the feet, they may begin to think about the great pair of shoes they once owned that were so comfortable, got better with age and lasted for a long time. What’s more, they were said when they finally had to go. Have we seen anybody in the industry using this technique? No. They would rather spend their money on a constantly defensive strategy.
Industry tricks
Business continues at the same levels we have seen for many weeks now. The only exception was the release of the US Export Sales report two weeks ago, which suddenly showed one of the largest numbers ever with a total of well over a million hides. It didn’t take the industry long to realise that the figure was the result of efforts to aggregate as many sales as possible by late reporting, compressing longer programmes into that week’s statistics or pulling all the triggers in order to get hide sales into the book in preparation for the market turn before the buyers’ trips to Asia and to the fair in Shanghai. These attempts were not very successful and clients have not given the impression that they expect prices to go up if they wait before buying.
For the time being, tanners buy what they need and the pipeline has not been able to remove the congestion at the beginning of the supply chain.
Some relief came from the automotive industry, which had prompted worries in June and July with reports of a reduction in orders. Things returned to normal in August, with suppliers reporting normal order intake again. This means production in September/October seems to have been safeguarded.
However, we have noticed some uncertainty with large discounts for new car sales and the inventory of unsold vehicles increasing, at least in Europe. We all know that the car industry does not tend to cut production, instead preferring to keep lines running for as long as possible and becoming aggressive discount sellers before other options are considered.
Splits and skins
The split market was almost paralysed over the summer and we have absolutely nothing new to report from this sector. Due to the production break in Europe, the supply of lime splits dried up, which was greatly welcomed by the collagen and gelatine industries. With the winter season starting soon, everyone hopes that the food industry will become more active and that some of the overhanging volumes could be cleared in autumn. The demand may rise, but so will the tannery output. The situation continues to be much better for specialties for suede and vegetable leathers.
In the skins sector, the nappa market is almost completely dead and for the double face market a lot of eyes have been on Turkey. The sharp decline in the value of the Turkish Lira should make manufacturers in Turkey more competitive, but they must first pay for the import of materials before it can be compensated for by the export of the finished product.
We have seen a good amount of leather in the collections of several designers, most notably in ladies’ fashion. There is also evidence that the men’s leather jacket is not completely dead. Designers collections are one thing, but retail brands are another. It is only a feeling, but one gets the impression that there is a good chance the style of the 1980s and 1990s will come back. Let’s hope this is not just wishful thinking.
The double face section has its issues again. The usual spring hype has disappeared and many European lambs have come under fire in terms of price once again. The key player of China is playing a special role here too.
All eyes on Shanghai
The next two weeks will hopefully offer more detailed information. In the first week, we will see many people returning from their holidays. In the second, all eyes will be on the fair in Shanghai. Although we expect less activity, conversations with international exhibitors and visitors at ACLE will give us the chance to get a general impression.
The Chinese leather industry will be well represented and this will give each individual their own impression, depending on the meetings and talks they have there. We will publish again right after the show, so we hope it will serve as an initial guide before the other major shoe, upholstery, fashion and leather shows that follow.
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