The Leather Pipeline - 13.11.18
13/11/2018
There was no shortage of activity in the financial markets or in politics. The mid-term elections in the US were possibly the event which captured most of the attention in the past two weeks. The win for the Democrats in the House of Representatives might be the biggest impact. Mr Trump will not have it as easy any more to push his ideas through. However, the elections were not the big anti-Trump movement the Democrats had been hoping for. The financial markets reacted very moderately and neither the currency nor the stock markets were shaken by the results.
In Europe the era of Mrs Merkel is beginning to reach its end. She is giving up the leadership position in her party; her term as Chancellor ends in three years, but this seems to be a first move into retirement. Her party is now trying to identify the people who will sell it in the future. It has to be expected that this is going to have major impacts on Europe for the next decade.
Elections in Brazil have brought the next right-wing populist into power, something that could become the next threat for regional and global stability. Nationalistic populism is presently the biggest threat for global stability. Looking at the trend and counting the number of countries which are now under control of autocratic leaders begins to be a worry. History offers no good examples.
The general data from the global economy showed mixed results. While the US economy continues to run strong on the back of strong consumer spending, the economies in Europe and China are doing worse. The purchasing manager’s index in China has been falling and is getting close to the level of 50. Less than 50 would indicate that the economy was contracting. Growth in the Eurozone fell to 1.7%, down from 2.2%.
Stock markets went through a pretty negative trend in October with international stock markets reflecting the voice of investors about the future of the global economy.
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The exciting and interesting part of the leather pipeline has always been the vibrant and dynamic development of the material, which can be used for so many different products. There used to be more competition between sectors and this made it interesting to analyse the trends to see which sector was in pole position for the raw material and offering the best return to the beef industry for its major by-product. Bringing information into a pattern to allow reliable predictions was a big challenge, but it was also a very interesting and pleasant task to fulfil. Since the beginning of 2015 this has changed fundamentally. Prices hit record levels and there were numerous warnings to the beef industry not to forget that leather is rarely a ‘must have’ product. You can use leather to make shoes and it might definitely be the better option. You can use it to make fine, exclusive furniture, or garments, or you can upholster vehicles, aircraft or trains with leather, but in all of these you can also use substitute materials.
Strong demand for leather resulted from the consumer boom in China, in combination with the constant rise of vehicle production. This made the beef industry believe there would be a bottleneck of raw material. Studies pointing to strong growth in demand for leather and in the production of hides and skins were warmly welcomed and used to scare the leather industry and retailers about supply shortages and ever-rising prices. This is a classical description of a bubble and pretty much a copy of the first ever recorded speculation bubble, which is said to have been the tulip mania in the Netherlands in the 17th century. The greatest parallel between both events is the fact that we are talking about products that nobody really needs.
It could be interesting to hold a discussion between knowledgeable and experienced scientists and members of the trade about the present situation and the existing imbalance between supply and demand. Could it have been avoided if prices had not pushed to the levels we saw in the first quarter of 2015? Was price the only factor, or did the attitude of the industry help make consumer product manufacturers switch to alternative materials? Was it about function in garments? Was it only fashion, as many say it was for shoes? Did consumer safety questions and the easier manufacturing processes and automatisation trigger the decline in leather demand? It is undoubtedly a bit of everything, and we tend to believe that attitudes and pricing accelerated a trend that has not slowed down since then. Nobody was able to predict the massive slide in oil prices either, which made alternative products more attractive in price and far easier to plan because long-term price contracts were easy to agree.
Nevertheless, people continue to spend money on consumer products. They buy what they need and often what they merely want. Nobody needs a smartphone with a price tag of $1,000; phones that cost half the price perform the same functions. The same logic applies to handbags, if not to the same extent.
We need to find a way to redirect consumption back to products that could use leather again. Let’s repeat: leather is not a ‘must have’; but it is a product that you can use. When you touch something every day, it is much nicer for the contact to be with a natural product. When you use a product that has to adjust its shape to your body, it is much nicer to use leather. If you want a sustainable material that has the chance of a much longer lifecycle, you should choose leather instead of plastic. Properly produced leather is the better product, but it has to compete with the alternatives and the consumer must understand why leather is a good choice.
We should also see indicators of better times. Look at the new HP Spectre computer line, which has leather on the outside instead of plastic or aluminium. Lightweight notebooks are carried and touched a lot. The decision to use leather is logical and right and an extension of all the tablet sleeves that are already offered in leather. If the leather industry plays its cards well, it could gain from this decision from a tech giant; there are plenty of opportunities for more, and here there is far more market than supply.
We could never supply the entire global population with only leather shoes, but if we can convince consumers to choose leather for some of their shoes, it should be enough to prevent a valuable natural resource from going to waste. If, in the end, the anti-beef campaigners are successful and there is a reduction in global beef consumption, there will be less availability of hides and less leather produced. Until this happens, not destroying natural resources should be part of what guides purchasing decisions.
The last two weeks changed nothing in the leather pipeline. We are in full swing of the high season of leather production and even the high season is not enough to absorb the raw material that is coming onto market. Prices continue to fall, and even lower prices cannot trigger any serious rise in demand.
The big news in the past two weeks has been the public announcement of a cut in soaking by one of the leading global automotive leather producers. It was not a surprise to anyone following the situation closely. The decision not to discuss this just in private with the suppliers, but to use a letter as an email attachment was certainly also a strategic decision. It was a clear signal to the beef industry in central Europe that the time of endless high prices are over. The general hide market had declined in price already, but prices for heavy and high-quality males remained stubbornly high. The decline in demand has been in evidence since spring. The diesel scandal and new testing methods, in combination with the general fatigue in vehicle sales and political uncertainties, compounded this decline in demand. The recent slump in car sales in Europe for some of the premium brands was just a confirmation of what everyone already knew.
However, this is not the only problem. For premium hides, the quality may be higher, the size may be bigger, the split return may be better, but falling split prices and the percentage of low selections have hit revenues with these favoured raw materials too. The EU beef industry made the same mistake as ever. It decided to try to squeeze the last drop out of the market instead of anticipating and adjusting to prevent major negative consequences. It is definitely too early to come to any final conclusion and maybe the decline in vehicle production is only temporary, but the risk of serious, long-term cuts has definitely increased.
Except for some vegetable tannage, there is not much leather production in which these heavy, big hides can easily be used. If the auto industry takes the option of walking away from leather too, the consequences could be as bad as we have seen in other markets already. Higher raw material production in the coming three or four months will show which direction things are going to take. For the moment the reduced demand will create a surplus.
The split market continues to be a reflection of the hide market. There is a massive surplus of raw material, which is not being absorbed by the industry. Some niches and sidelines continue to be strong performers.
It’s the same for skins. Price corrections came a long time ago; niche products are still doing quite well, supporting the supply industry in these fields. But the majority continues to suffer and we are getting frightening reports about inventories of raw material in many countries. Here, even giving the skins away for free would not bring any takers. If this is true it means people are not even willing to take skins because of the cost of transportation because there is no hope of a successful sale.
For the coming weeks, we continue to believe that the situation is not going to change. There will be business; there is still leather demand and tanneries and manufacturers continue to need supply. However, there is plenty of inventory along the supply chain that has become stranded and needs to be cleared. Only more demand can trigger this. That’s what we are missing. We will have to continue to spend time talking to consumers, retailers and brands to understand what could make leather products more attractive. Everyone should do anything they can to restore the positive image of leather and to raise desire for the real thing.
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