The Leather Pipeline - 22.01.19
22/01/2019
Brexit, the government shutdown in the US, the trade war and so on continue to dominate the headlines. It’s interesting how relaxed the financial and commodity markets are in the face of these problems, which in the past would have created quite a bit of movement and reaction. In the past two weeks their effect has been limited.
Stocks have been stable, in many cases even rebounding. Commodities, including oil, continued to trade firmer in very narrow ranges and also in the currency markets the fluctuations were small when we consider the circumstances. Local challenges are preventing leading politicians from taking part in this year’s World Economic Forum in Davos, which is normally an absolute must for the elite.
As far as the economy is concerned there is quite a bit to deal with. More and more big corporations are beginning to publish their concerns about sales and profits for 2019. What started with Apple has now begun to spread. Profit warnings, lay-offs and revised budgets are becoming more common every day. General optimism about the global economy, which was still in evidence just some months ago, is beginning to fade; most large global organisations are revising their forecasts for 2019.
There are also rising concerns about the Chinese economy. Imports and exports fell sharply in December 2018 and the official growth rate for the full year of 6.6% is questioned, even though it is the lowest for almost 30 years. The biggest worries are around bad debts and government spending. Sources in China report aggressive tax collection, which is not a bad thing in general, but the interpretation of the sources is more related to serious income needs of the government to finance mega projects such as Belt and Road Initiative and to finance the bad debts of government companies. There is also the questio of protecting the real estate markets and to offer sufficient liquidity to local banks to ease lending again to keep consumption steady. We have already read about the decline in car sales and the lagging sales of Apple products; all of this suggests Chinese consumer are beginning to close their wallets a bit.
Market Intelligence
From the holiday season in the western world we are now heading towards the holiday season in the eastern world, at least in the China and the regions with strong Chinese influence and presence. Chinese New Year falls this year on February 4.
While in the past business used to influence how much of a break people took, it is more and more the case now that companies simply close. The myth that Chinese people are always working and never take a break is fading. The labour force is becoming more demanding and for those who are working far away from home, holiday time with their families is precious; willingness to sacrifice that for money is fading.
The leather pipeline is beginning to wind down already. The official days for Chinese New Year holidays are only in the first week of February, but productions are winding down somewhat earlier. Some operations are already closed this week and most will definitely be closed by the weekend. Reopening is not planned before February 18, with government offices and banks having a slightly shorter break.
Looking at the leather pipeline, the Chinese tanning industry took the chance replenish inventory before leaving for the holidays. The interpretation of their increased purchasing activity was uneven. Raw material sellers, mainly those representing the beef industry, were already calling a market rebound. More prudent players and pundits in the market have taken a more conservative position, saying that nothing has really changed in terms of leather demand. Nobody can really say if people bought the hides because they were cheap or because they really are desperately needed.
Our sources in China have mentioned a number of reasons. There is definitely a reaction to the massive price declines that we saw in 2018. Leather production may be substantially down, but there are still a lot of leather producers with orders for finished leather and they have to secure raw material.
Leather demand is not evenly spread; certain articles are doing much better than others. There are definitely still abundant supplies and stocks of low-grade material all over. However, to fulfil leather orders for better selections you have to replenish with adequate raw material, even if you already have stock that, unfortunately, does not fit. This mirrors pretty well the reports we have received from suppliers around the globe, mainly from Europe. Chinese tanners are trying to buy good-quality hides and seem disappointed that neither the price they have in mind nor the volume they are looking for are easy to satisfy. We have a feeling that there might be tanners in China putting themselves in an awkward position by booking orders that they might find difficult to cover, at least at the price they originally calculated.
Another interesting comment was made by people close to the shoe business in China. Cold and wet weather conditions have reached even the southern provinces of the mainland this winter and our sources are reporting that shoe sales had been much better than anticipated and stocks and retail level are moving well. This has offered quite a bit of demand for leather for replenishment and has eased also the cash flow situation along the supply chain. This could also explain why we are not hearing of complaints any more regarding delayed payments and letter of credits from China. This was definitely still the case at the end of the last year.
In particular in the US raw material suppliers have taken the chance to raise asking prices and to call the market for raw material firmer. One should be careful with such news. The market is missing USDA statistics because of the government shutdown. This means there is no way of knowing how many hides have been really been soipped in the past four weeks.
General consensus remains that demand for leather in upholstery or in side leather has seen no fundamental uptick yet. Demand for these types of leather might stabilise after the sharp decline of the past two years, but we have no indication that demand is rising. Considering that automotive tanners have put the brakes on and are trying desperately at the moment to reduce inventory along the supply chain, we have to believe that demand for raw material cannot be really any better. Never forget buyers are not always buying because they need to; some are also willing to invest in something that looks cheap.
In 2019 global kill is expected to be a few million head higher than in 2018. Certainly we expect no major reduction.
On the demand side the situation cannot be generalised. For various reasons one has to remain concerned about the demand for standard commodity leathers. Leather buyers in particular from the big brands and retailers now consider leather just as one material option and they are pressing extremely hard on prices. Regardless of raw material prices, the price of tanning and manufacturing can never really be competitive versus the alternatives. Tanners may fight for their lives, but if leather does not bring in an adequate revenue, fewer and fewer people will find it commercially viable to continue to produce.
Global media continue to worry about the future of humankind and have a lot to say about plastic waste and its long-term consequences. The media seem to be concentrating more on what will make a good headline than on suggesting any alternatives. Natural materials, including leather of course, should have a good chance of becoming an alternative. However, many journalists and influencers have previously taken a negative view of leather and are not famous for changing their positions, but we continue to work on it.
In the meantime we continue to see that leather of premium quality and natural beauty remains in very strong demand. Another confirmation of this theory came at the IMM furniture fair in Cologne in January. This exhibition, which is important for the European market, proved once again that good and natural leather continues to have a strong customer-base. We couldn’t see any premium upholstery manufacturers complaining about interest or orders. The reverse situation we understand applies to mass production. There is no premium for leather as a material and in a direct price competition it can only lose. These furnigure manufacturers have simply no reason to opt for leather.
The split market is showing the same pattern. Particular types are in demand for leather production as well as for the production of gelatine and collagen. However the vast majority continues to struggle and revenue from splits is not helping the calculations of tanners at the moment.
The skin market continues to be in the same doldrums as it has been now for almost two years. Good-quality linings, special selections for decoration and other products continue to do well. All the standards, which can just be used for mainstream fashion articles, can hardly be moved.
The next main event is going to be the India International Leather Fair in Chennai (February 1-3) and, later, Lineapelle in Milan (February 20-22). Both events will see a lot of suppliers, producers and manufacturers and will definitely be the next milestones for judging the future of the industry. Generally most experts are very cautious for the year 2019.
As far as the leather pipeline is concerned we should expect the coming weeks to be of subdued activity. If all the information in all the readings are correct, tanners in Asia should already have satisfied most of their appetite and requirements for production in March and April. Only a massive change of mood could push things forward. No matter what happens in the raw material market, tanners face massive pressure on finished leather prices and the positive trend can only be sustained by an increased demand for finished leather. We should not forget that we are now at the peak of the busy season and by April we will be heading towards the slow season again.
Let’s focus on promoting leather to achieve a safe basis of business for the ones who are producing the byproduct, but even more for the ones who make it into a beautiful and sustainable material.
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