Leather Pipeline - 01.10.19
01/10/2019
We are now into the last quarter of the year and nobody can complain that there is a lack of activity and excitement in global politics.
In the past two weeks there was sufficient news every day to keep everyone following international developments. One can debate which events were the most important, but certainly the attack on Saudi Arabian oil facilities was one and the whistle-blower information about Mr Trump’s activity against his Democratic opponent was another. It is becoming a side note that Mr Trump has fired his main security adviser at a time when stability and well thought out action will be required. This is another indication that within the US government opinions and strategies are not well synchronised.
Everything is destabilising the balance of power and, in particular around the Arabian Peninsula, the situation is becoming pretty stressed. Elections in Israel and the new government formed will also play a role in the near future.
In the UK, the situation around Brexit is also becoming increasingly complicated with just another few weeks to go until the crucial date. Mr Johnson is coming under pressure and his position is weakening by the day. Whether this is enough for a change or possibly the chance to deviate the process remains to be seen. At least parliament is back from an involuntary holiday and this means that normal political discussion has resumed.
The financial markets are dealing increasingly with the rising risk of a global slowdown in the economy. While analysts are in agreement that the global economy is slowing down and are only discussing how deep and sharp the trend is going to be, stock markets continue to ignore the fact. Stocks are trading at pretty close to historical highs and every setback and correction is answered with a new recovery.
Central banks continue to pump liquidity into the markets and interest rates are close to zero or, in some cases, even negative. This means that investors who had cash have tried to turn money into other assets of value, which has and is still creating the bubbles we see all over.
Several pundits are promoting precious metals as a safety net and another rally in the price of gold is predicted. So far the price per ounce continues to trade around the $1,500 level.
Despite all the instability and tension around the Arabian Peninsula, and the fact that many analysts are falling over each other to forecast three-digit numbers for the price of a barrel of oil very soon, it is obvious that the real physical demand for oil is not encouraging speculators to go that way. The price per barrel has fallen back almost to the lowest levels of the year.
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The leather pipeline continues to be in serious difficulties. The reason for this is much less the simple balance between supply and demand, which for several players is already frustrating enough. After the massive declines in the price of raw material, the leather pipeline should be busy now, with tanners taking the chance to develop strategies and build new markets. To do this it would be necessary to operate from the base of stability and confidence. Decisions about investments into technology, improvement of production and products, including environmental concerns, require complete faith in the future of the product. Many investments require a timeframe of five years or more to discuss and decide.
In a time of emotional debate about what is causing climate change, in a time of dirty campaigning, in a time of melodramatic speeches increasing concern but offering no solutions for the 7.5 billion global population, it is difficult to be entirely focused on the production of leather.
What is it we are dealing with? Global brands do not really know how they are going to generate growth in the midst of the global environmental debate. At this stage, it has to be said that this is mostly a debate in western, developed societies and has so far not really reached emerging markets, including China, to the same extent. However, global brands act globally and they are active and present in all markets. They will not run separate strategies. It is one strategy for the entire global market.
Their first reaction now is ‘greenwashing’ and converting the problem into a marketing campaign. If you walk the streets today in Europe you see fast fashion groups falling over each other to advertise that they are using recycled materials. We all know marketing people are clever and in their advertisements they exaggerate to deliver the impression that the recycled material message applies to the majority of their production.
It is worth mentioning that still less than 10% of global plastic production is recycled. More than 90% is either burned or simply dumped and this statistic will not dramatically change, despite all the marketing talk, in the next few years. The biggest problem is that we are now beginning to be dictated to by the end of the chain and there we have a widespread, crucial mixture of greenwashing and incompetence on the part of retailers and brands. Everyone who produces and uses leather must now be extremely careful about how to deal with this subject. No one can escape from what the consumer is being taught by the marketing machine.
The big subject on the agenda at the moment seems to be traceability. Slowly but surely agreement is emerging that traceability of raw material is essential. We fail to understand what benefit this will bring for the consumer and if it can influence buying decisions or not. That small fraction of the consumer base that has a problem with leather as such will certainly not change its opinion if it knows from which field actually the animal came. We have in most western countries existing legislation that is supervised by government veterinarians.
The simple question is do we actually believe in this supervision? Would a new traceability system actually change anything? If any of the big brands believe that the standards are insufficient in the origins from which they are sourcing (indirectly) their material, they should simply refrain from buying or demand that the standards are raised. Traceability of origin by region or country is already in place today. Traceability back to the individual animal will certainly not improve anything and will create nothing more than a monster of bureaucracy and additional costs.
If individual traceability is to be set as the standard and a barrier to dealing with global brands, we immediately exclude all kinds of small farmers and a wide range of raw materials. What are we going to do with all the sheep and goats in the Middle East? What are we going to do with farming in Africa? What are we going to do with small farmers all over who are already suffering today from all the administration they have to comply with, even when they are just looking after ten beasts in the most ethical and natural way?
It is possible that this insistence on single and individual traceability of hides and skins could see brands deliver the killer blow to leather. They could just turn away from leather if it all becomes too complicated and cultivate their business concepts on non-leather materials instead. They will not look back and see what they have left behind and destroyed. This not a prediction; it is already happening today.
We may recommend the small video published by one of the large automotive tanners on YouTube: https://youtu.be/qsBPWO3XYBY. It is very clear and simple, just describing the facts. Many will also have seen on the internet the attack by animal rights campaigners in Chicago on the Horween tannery, blaming the leather industry for burning the rainforest. The comment by the family owned business that none of its hides comes from the Amazon region was answered by a spokesperson for the campaigners that this is irrelevant. She linked leather directly to deforestation and ignored the fact that it is first the beef and then the hide and not vice-versa. People have a right to ethical treatment too, and this should include protection against lies, ignorance and the destruction of sustainable resources.
For all who are willing to bow their heads and to appease the activists and campaigners, it should be stressed again: these guys don’t play fair, they play with fear and emotions, they have large budgets and hire very smart and competent agencies to sell their ideas, which shifted a long time ago from fighting for animal welfare to a political message through the back door, using people’s emotions. From a neutral point of view it is brilliant, but considering the interest and future of the leather industry, it is becoming dangerous in Western societies. These groups are now part of a much bigger movement which is Fridays For Futures.
The industry should really review its own strategies, if it has any. With facts and discussions or explanations it will be pretty hard to gain control of the argument again. The industry would need to have advisers who can reach the public with the correct facts and arguments we have.
If the market forecasts are right and beef production starts its descent in the second half of the next decade falling to half of what it is today, then the problem will solve itself anyway. If the artificial production of animal protein becomes competitive as quickly as some forecasters expect and the consumer is willing to buy those products, we will have much less raw material to deal with.
Under all these circumstances we come back to the uncertainty and paralysis of the leather industry at the moment. If you see on one side the supply of your raw material potentially eroding and on the other public opinion turning against your product, it is understandable that everyone is becoming extremely cautious.
We are still not completely negative. A lot of consumers still want and like leather. We still have large populations around the globe that do not share the concerns we see in some countries. The problem to solve is how to use the raw material in the volume it is available at the moment. Dumping it remains the worst option of all. To allow tanneries to continue to invest is also an environmentally friendly option and to allow them to reduce their own environmental footprint, some security to allow them to plan would be helpful. This must be constantly communicated and explained to brands and retailers so that they can proudly explain and transfer it to the consumer.
As far as general business is concerned, we can report that the seasonal rise in activity is on its way. None of the fundamental problems are resolved and the low end continues to remain in the doldrums. There are too many hides and not enough demand for commodity leather. Further up the quality ladder the situation changes and the demand for quality leather is significantly better.
There is no reason to celebrate or to believe that this is going to lift hide prices. Everyone we talk to confirms that shifting and selling product is possible at steady levels but the moment you look for more money people withdraw and the constant flow and shipment of material is quickly interrupted. After the dramas of the past, most suppliers have decided that it’s better to be on the safe side rather than to bet on the future. The coming weeks will be again decisive. Most of the exhibitions, including Lineapelle in Milan, will be over and the industry can finalise budgets for the winter season. Politics will continue to play a very important role; everything has become unpredictable.
The split market continues to be problematic. We were of the opinion that the reduced soakings in Europe would lead to a shortage of lime splits. In terms of data, this might be correct, but it has not allowed lime split products to benefit in terms of price. It is also true that many tanneries try to avoid wet blue split and lime split wherever they can.
We see a similar situation in the skin market, and have done for months. If you have a client, be happy and don’t negotiate prices. Every buyer wants to buy cheaper but we are at levels today that mean it makes no sense to lower prices any further. It will not stimulate demand anyway. Also in this section we are changing seasons and it’s going to be very interesting to see if sheep leather can find a bit more activity and demand. The catwalks at fashion week events have shown a lot of leather, which is a surprise considering all the problems around the material. As much as we would wish to see more garments made from leather, we have to admit that we have only limited that the big retailers and fast fashion brands are seriously willing to sell more garments made from the real product.
The trade is now travelling to Milan. As usual when a great number of people get together the information flow, emotions and opinions can change. We see several special and natural leather products still finding sufficient buyers. We would even go as far as to say that demand for the ‘real thing’ is rising against the trend. The volume is small and it is a niche but everything has to start somewhere.
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