The Leather Pipeline - 19.02.19
19/02/2019
In the past two years geopolitics has become so eventful that it is quite difficult to pick what is the most interesting in the period we cover.
Until some years ago the world had a general idea of compromise and cooperation. There have always been regions and countries where this did not apply, but either they did not play a very important role or they were under the control of the hegemony of powers. This has changed and we are now living in a totally different world. Nationalism and populism in combination with the change in the balances of power have made the world different.
We have an increasing number of local conflicts and tensions. China’s activity in the South China Sea, the Ukraine conflict, the conflict in the Arabian Peninsula, North Korea and Syria may just be taken as examples. In addition we have political shifts and movements that may not have the potential for real conflicts of nations, but might have a strong impact on the economy. Brexit, the trade war between China and the US, sanctions against Russia and Iran have, for a long time, only had a minor impact, but slowly and surely people are beginning to realise that this could increase.
The European Union, which has been trying to become the number-four major power in the world, able to be an important counterweight to Russia, China and the US, is beginning to fall apart. It is not just Brexit that is causing headaches; absolutely nothing seems to be clear any more. The type of Brexit will not make too much difference because, literally, economies are not prepared for whatever happens. The new crisis in Italy and the tensions with France, new elections in Spain and more elections across the continent in 2019 could quickly raise the influence of nationalists and extremists. This would obviously weaken the common strength of the EU, which is already damaged anyway. Big, global industrial changes could also hit the economic strength of the EU by reducing its global position in several key industries, not to speak about exports in general.
In the financial markets not much of the above is being reflected so far. Most investors continue to enjoy low interest rates and continue with business as usual. Anyway, it is only a question of time until the expected decline in corporate earnings will be reflected in stock market values. The optimists will see this as no more than the normal cycle while the pessimists might see a major thunderstorm on the horizon.
Despite local conflicts in the US and the declaration of a national emergency, the US dollar has climbed. The problems in the EU seem to count for more at the moment than a possible slowdown in the US economy. So far the labour market in the US continues to be strong, interest rates are higher. The EU faces big challenges in the coming months and so the euro is less attractive at the moment.
Market Intelligence
Over the past two weeks the leather pipeline has been dominated by the holiday in Asia for Lunar New Year. By the end of last week most people in China and the wider region were reaching the end of their long annual break. Officially, public offices and banks and also several commercial organisations opened again in the middle of last week, but perhaps only to sort information out and prepare for the normal routine again.
For the past two weeks, we have been left with small bits and pieces happening outside Asia and the slowdown has offered a chance to have a general look at things again. Many will agree that it is a long time since the future of leather was as unclear as it is now. We have had financial crises, mad cow disease, major structural changes, shifts in production, bankruptcies and legal complications, but nothing had such an intense and extended influence on the question of leather’s future as a material.
If we start at the top, one gets the impression that the luxury market continues to live in a different universe. The results of the main luxury groups for the year 2018 recently have been impressive, without exception. They have had record profits and, in almost all cases, the leathergoods division has been the biggest contributor to profit and growth. One can only admire their strategies and success, but it will be interesting to see what happens to luxury brands if the global road becomes bumpy. In general, one would expect people to spend less. However, it might also be that consumers look even more for long-term value. It is also interesting that the big luxury groups are concerned about sustainability and animal welfare but are far away from the headless excitement and obsession the standard consumer labels and retailers display at the moment.
When you are located in Europe you get the impression that the end of leather, in combination with the end of beef, is just around the corner. Hectic and uncoordinated activity dominates. Going through an analysis of media in continental Europe, one gets to the impression that beef production and consumption combined with leather use, is one of the top-three threats to mankind. The main concern must be that there is no separation between beef consumption and leather use. Even if one day global beef consumption reduces, we would still have to walk a long road before the number of hides and skins available to tanners dropped. Until then all those who are mixing the same cocktail must answer the question about how moral it would be to destroy a natural resource that nature offers to us.
The situation is completely different in other parts of the world. The big problem is still that, for various reasons, producers of consumer products, international labels and retail conglomerates think that it’s a good idea to refrain from using leather so as not to run into any kind of public conflict. Large global shoe brands are quite happy to avoid leather for totally different reasons and are very happy that they have an additional excuse.
In the meantime, those who are still using leather and have good access to the material are pushing the supply chain for more traceability and sustainability. Superficially this might be a good idea, but all the bureaucracy and cost cannot be handled by smaller operators. In many regions around the globe, traceability cannot be provided.
Those who are entertaining this idea should think twice. This group is mostly the large industrial players. By setting standards, inventing labels and creating expectations at consumer level they are disqualifying others. It would be not only cynical, but also not very smart to take this road. This could disqualify a lot of beautiful leathers, and that could hurt leather in general. The inflation of certifications and labels might become counter-productive in the long run.
There was commercial activity in the past two weeks. Despite the holidays we spoke to various people who delivered some news of interest. In Europe the beef scandal in Poland has hit slaughter in that country significantly. This means that the supply and demand balance is being disturbed in the short term. There is no shortage of hides. However, fresh hide supplies are planned around four or even six weeks in advance so several trucks will have to be rescheduled for the coming weeks. This comes just before carnival when slaughter is not very big; some isolated hide grades may face temporary supply disruptions. However, this is not really a shortage because there are plenty of salted hides looking for an outlet that could easily fill any gap created.
The rising conflict between the European car industry and the US might lead to short-term changes. It would be bad news if EU, in particular German, cars were declared a national risk in the US. In the coming weeks we will see what the car industry really expects and what they are going to decide for production. The US market is very important for premium vehicles, despite the large production facilities that brands are running in the United States as well.
After massive price corrections in the past few months, tanners are buying better raw material when they have the choice. With limited demand for commodity leathers, lower-quality hides continue to struggle to find sufficient outlets and sales of better-quality hides continue to grow. We all know how the beef industry deals with this kind of situation: and any kind of positive trend in any isolated regional market will be used to try to push prices higher again. Well, everyone would be well advised to analyse the position and the pricing very well because, with the general oversupply that we still experience, the interest of potential buyers can quickly and easily shift towards other options. The time for a fundamental change has definitely not yet come. Those who have sufficient sales to clean up production should enjoy it and do everything not to put that situation at risk. There are too many unknowns in the global economy and in the leather pipeline to take more risks than necessary.
As far as market gossip is concerned, we have been told that one of the leading traders of European hides has decided to wind down its business. Nothing is confirmed yet, but most likely the Lineapelle exhibition in Italy will tell us more about what is really happening. Such things can never really be kept secret. After one bankruptcy already at the beginning of 2018 and considering what has happened in the business in the past 12 months, it would not be a surprise to see further operations close.
In the split market, in particular lime splits, the reductions in stock are starting to have consequences. Several larger operators can no longer guarantee supply because there are simply not enough hides going into tanning drums. With a grim outlook for low-grade materials, the industry is beginning to experiment with the option of using the cheapest hides in the market as a supply base for their productions. These hides still have to meet certain specifications and, in particular, also come with gelatine certificates, which is not as easy as it looks at first glance with so many hides looking for a buyer.
The skins market is showing the same huge spreads between the desired raw materials and the rest. Top-quality merino skins still fetch prices well above $10 per piece and, at the same time, coarse wool standard types cannot find a buyer even for, almost, free. It’s the same situation as in the bovine section. Leather as a base material is not in sufficient demand to clear raw material resources, while at the same time niche and speciality material continues to enjoy excellent consumer interest.
The next two weeks will offer us a lot of news and possibly also changes. First of all, fashion trends and the general mood in the leather industry will be in evidence at Lineapelle. Fundamentally, we do not expect much news. As we already mentioned above, we are quite positive about the clearance of raw material in the higher-quality sections, and we continue to be negative and pessimistic about the medium and lower end. However, there are also external influences that could soon leave a mark on the market too. All the political and economic tensions could cause serious changes, more negative than positive. With no fundamental change we come to the conclusion that hides and skins of better quality have a good chance to remain in supply-demand balance until the summer. Less supply and stable demand could create a reasonable safety-net.
However, there is strong pressure on leather prices and the outlook for automotive leather production is not particularly positive. For female hides we would say that the price correction in the US and Europe has created a pretty strong competitive position. Under the present conditions, and with the outlook from the automotive industry, we would not say the same for male selections.
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