The Leather Pipeline - 04.09.18
04/09/2018
Over the past weeks most of the global financial community was dealing with two major subjects. One is the almost daily broadcast reality show called ‘Donald and his enemies’ in which the president of the United States is the star of a drama series in the style of, ‘I fight them all and at the end all will be good’. This season it was Nafta and Canada, and China with the threat of the next tariffs on $200 billion of goods. For the next season the EU is already back on the agenda and the audience is waiting to see what happens next.
The second subject is the upcoming crisis in emerging markets. What began in Turkey has now spilled into Argentina and the first signs can also already been seen in other countries such as Indonesia and even Brazil. A mixture of political instability and rising interest rates in the US has created a dangerous cocktail that is producing its first hangover in collapsing currencies. The answer is always rising interest rates, which have peaked in Argentina at 60%, or to impose taxes on the ownership of foreign currencies as has happened in Turkey. All this simply accelerates the temptation to flee from the currency and to place money in ‘safe havens’ instead. For businesses – in particular locally focused ones – this could become dramatic because finance will be difficult to obtain and inflation for standard consumer goods will soar.
News from China is also pretty mixed. The government is trying to stimulate production and demand, but obviously only with the limited success. The PMI (purchase managers’ index) rose just a fraction in July, when manufacturing levels rose too, indicating that a lot of products that are made are not actually sold. A number of pundits are also explaining the expansion in manufacturing by pointing to advanced production methods and attempts to avoid tariffs on exports to the US. If that is the case, and it seems pretty likely, it means that after a rise in production one would have to expect a drop as this effect fades.
The stock markets and the major exchanges were still holding up relatively well. However the general trend continues to be weaker and it looks pretty much like a wait-and-see situation in regard to what happens next in international trade.
The US dollar took a little jump then fell quickly back to the levels we have had for quite a while. The range is so tight that people are struggling to find any kind of explanation.
Considering the tensions in the Middle East and the new sanctions on Iran, the oil price continues to trade at the upper end of the range and all the declines we saw have been erased. The barrel, depending on its origin, is trading at between $70 and $80.
Market Intelligence
The summer vacation period can be considered over now. General manufacturing has begun to resume and within a few weeks everything should be back to normal according to the order books that producers along the leather pipeline have in hand.
At the All China Leather Exhibition (ACLE) in Shanghai at the end of August everyone was expecting more inside information about the situation along the leather pipeline these days. This business is famous for still being driven by people up to the semi-finished level at least, and people sometimes use the old smoke-and-mirror trick in an attempt to influence prices. The lack of reliable, up-to-date statistics and global raw material sourcing and production make it difficult to know exactly what is going on, even in internet times.
This is why tradeshows such as ACLE are still where a lot of people to to gather important information. Face-to-face meetings and the messages you can pick up if you read between the lines, plus the ability to see and speak to a wide range of players in the business cannot be substituted by modern communication tools.
The number of exhibitors and visitors has definitely gone down, no matter what the finer statistics tell us. Those who have visited the show for many years can easily figure out that a lot of exhibitors are missing and a lot of visitors are not willing to spend the time or money to come. However, it there are still enough people for ACLE to be considered a must, especially for anyone interested in collecting their own information rather than rely on third-hand sources. There is still nothing better than speaking face-to-face to people you trust.
The show took place in the same number of halls as usual, but the volume of non-leather materials is rising in proportion to what we have seen for some time in the shoe industry. The adventure time and the boom in the Chinese market, which is what pulled so many to Shanghai to exhibit in earlier years, is definitely over. We have come to the conclusion that this show is going to become a more local event in future with only those who already have a substantial foothold in the market taking part.
If one tries to summarise the event in one sentence, we think that a comment one of the old pundits made puts it well. Anyone who needed confirmation of what we have all been thinking and talking about for almost a year got that confirmation at ACLE 2018. What he meant was that leather in shoe manufacturing continues to be in retreat and what has been lost already seems unlikely to come back in 2019. Statements from shoe companies have made it very clear that they have no intention of even considering using more leather in the seasons to come, in spite of lower prices.
Considering that most design and material selections for the next two seasons are already made, one cannot expect anything different. On top of this, we should also remember that we are living in one of the best times in decades for private consumer spending. Rising income, low interest rates in combination with quick fashion changes have boosted consumption significantly.
Since we still have to consider the shoe sector as the most important consumer of leather, the above has a significant effect and confirms what we have known already for a while (even if some did not really want to recognise it). The net production and consumption of leather is declining, because other sectors are not compensating adequately for the decline in footwear’s use of leather. On top of that, the use of leather in the shoe industry is actually the most forgiving, because the cuttings are small, finishing offers plenty of options and there is a pretty large market for cheaper footwear anyway. Since most of the substitution by fabric and plastic has been made in this cheaper part of the market the pain is being felt in particular there.
Everyone is blaming the sneaker and athletic footwear segments for being the enemy and the reason for the decline of leather in footwear. However, this is only part of the story. Many casual and dress shoes these days are also made from artificial materials. Leather is complicated, has long lead times, is never 100% uniform and, due to the volatility of the raw material market, is a headache if you are a mass producer. With the consumer putting no pressure on shoe manufacturers and retailers, there is absolutely no reason why leather should make a comeback.
In garments, leather jackets were standard 25 years ago but here too leather has now largely been replaced by microfibre and plastic and been pushed into niches such as the luxury design sector.
In handbags we are begin to see the same trend; the only part of a handbag that can be still aggressively defended for leather is the handle. This is what you touch every day and this is where leather has still numerous advantages versus plastic. The same applies to upholstery.
The show in Shanghai proved once again that at this moment the automotive sector continues to perform very well. The number of vehicles being produced in 2018 requires a decent quantity of leather, although here also the trend is not uniform. The diesel scandal and the new test requirements make it difficult for a number of European brands to handle the situation. Many brands are claiming that they don’t have the right testing facilities, which is making vehicle shipments to customers difficult and delayed. A huge inventory of new cars can be seen all over and one has to be pretty sceptical about the new regulations being the only reason for that. Car sales seem to be pretty unevenly spread within the brands and the models they have to offer. Some are certainly still doing extremely well while others might have to face up to the situation that the cars they have produced are not what consumers want. An exception continues to be China where almost everyone is reporting full order books.
Presently, not all the raw material produced by the beef industry is finding a home in leather production now. We have been saying this for a long time but there were still a lot of people not believing it. The visit to ACLE and the rational analysis of what they saw and discussed within the trade has possibly now convinced the last sceptics. Prices, which have in many cases already dropped by 50% or more for the low-quality material, are beginning to get close to levels where it makes no sense to bother any more. There’s not enough demand and price levels have gone beyond what makes it really worthwhile to invest in collecting, processing and distributing the material.
This is a pretty tough statement. We are not used to it, because for centuries it was a given that there would never be a hide destroyed and it would just be a series of ups and downs where you needed, at most, some money and patience to prevail. With the present kill levels and the current demand for leather the balance isn’t there now. The optimists were hoping that a sharp correction in prices such as we have seen would stimulate demand and all would be the same as usual. More leather demand would absorb the existing excessive inventories, prices would settle down, demand would grow and so the next cycle would begin soon. Apart from the true fact that we are now beginning the winter half, which is traditionally busier and will definitely see more production, it does not seem that this is going to be enough to absorb all the hides and splits that are being produced presently. So there’s only one way to bring the market into balance again and that means supply has to be restricted.
This is more difficult than it sounds. The beef business is in many parts of the world pretty profitable. There is no reason to reduce slaughter even considering the sharp reduction in the revenue of the main by-product. Globally and despite all the anti-beef campaigns there is also still an abundant supply of cattle for years to come. This means that the supply of hides will continue to be reasonably high. The problem in general might ease a little, because the kill may reduce fractionally in total due to the season and leather production may increase gradually.
The problem is that we don’t have a plan B; we have never needed one before. How do we get rid of excessive low quality hides? Is not as easy as it sounds to put them all into rendering. A lot of rendering plants are not really equipped and ready for the product. Incineration or landfill sounds unbelievable and also the production of gelatine and collagen is a theoretical option, but practically it has a lot of unresolved problems too. We fail to see what the real solution could be. Most likely the leather pipeline will try to resolve things by stocking up and hoping, and perhaps the moment for the really tough decisions has not come yet.
There is better news from the handful of leading luxury brands. They are good users of leather and there are a few more who can be called hidden champions. They are all doing well and so are the tanners who supply them. They can take advantage of the stable, and in many cases reduced, raw material prices, and they report solid and healthy interest for their finished leather. If there’s anything they have to complain it is the extremely high demand from their customers in the luxury segment for quality and flexibility. Well, they shouldn’t complain: there’s a reason why they can supply these companies and others can’t and why their business is good and others’ is bad.
There are also some big brands in the automotive industry that are sticking to leather because they think it’s part of their product identity. There are also still quite a few consumers buying dress shoes made of the real thing. Consequently it’s a problem of finding a balance again. We would also wish that along the leather pipeline players would start looking at things from a mutual interest point of view. Price does not stimulate demand any more but means that extra margin potential is there. From retailers and brands it would be wise to understand that this extra margin should be more evenly distributed instead of trying to get it all for themselves.
There is no need to repeat the above for the split market. It was and is exactly the same. Mass production and standard are facing more supply of splits at this moment than demand for split leather. Specialties, high-quality suede, heavy veg-tan and so on, still find enough demand and business continues to be good. We hope that one of the rumours we heard is actually true. Some of the big athletic footwear manufacturers are set to consider putting splits back into their real sport footwear, because of the prices and the fact that in real sports many players begin to miss leather, because they do not find the properties they want in the artificial materials they have had to use for a while now. Let’s hope that this is not just wishful thinking, because it would be a good start if leather is in demand again simply because it is better.
A lot of people are now digesting the impressions from the mass production markets in Asia and will begin to focus from now on on the fashion-oriented fairs in Paris and Milan. Any new trends and change for the better can only be triggered there. LeatherNaturally says leather has to be cool again and that is very true. The question is just how and where to achieve it. The trigger has to be pulled somewhere and it’s difficult to say where this could be. The fact is that plastic can and must not be the enemy of leather. We can never serve every person around the globe with shoes, upholstery, handbags, cars and so on exclusively using leather. Other materials are needed and have their place too. However, it is not acceptable either if we find that leather is no longer even an option available to consumers.
The by-product from the beef industry is there as long as consumers decide that they want to consume meat. And as long as a natural raw material is available, nobody can justify to dumping it instead of using it. Consumers must have the option to have leather in the products they buy.
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