Macroeconomics

The news from the world of economics and politics can be broken down to just two major and one minor event in the past two weeks.

In politics the impeachment process against Donald Trump failed, not surprisingly, and was celebrated as a great victory by Mr Trump. His opponents, the Democrats, had to suffer not only this setback, but also a problem in the vote-counting in the primary in Iowa.

On January 31, Brexit was finally executed and celebrated by its supporters but the day the United Kingdom left the European Union is still not the end of this long story. The conditions of the leave deal have still to be negotiated.

However, all this became just a footnote in the past two weeks. The coronavirus is the dominant story. Our readers will be fully informed about the facts and follow it on a daily basis anyway. The virus continues to spread and has paralysed commercial life in China. In the first week it was not felt very much because the country was celebrating Lunar New Year. In the second week the situation became far more complicated. More infections and quarantine decisions left streets empty, and shops and restaurants closed. The virus continues to spread and the world has to accept that the climax hasn’t been reached yet.

The main dilemma, in particular for the Chinese government, remains the problem of how to handle it. If the decision is to try to stop infections by keeping people at home, it means that a lot of supply chains will be disrupted. This can already be seen by production stops to car manufacturing in South Korea because of missing components and this will spread into many other production chains too. For the time being a lot of manufacturers and global brands have decided to close their outlets and production units for another week and Chinese operations will suffer from the fact that nobody knows what percentage of the labour force will return to their jobs. Travel statistics and ticket bookings could make one believe that for various reasons up to 50% of the workforce will not be available for production for another week.

Supply chain interruptions will hit the global economy. Shipping lines are using slow steaming, which will cause delays. The round-trips of container equipment will be affected. All this is going to become a serious threat if things don’t return to normal within the next two weeks, which at this stage looks unlikely.

Commodity and stock markets have reacted in a bit of the peculiar way. Stock markets dropped sharply, but recovered again. The US labour market delivered positive results. The EU economy is suffering already from a decline in exports, but all this is just a reflection of what happened in the past. International organisations are already adjusting their forecasts and the growth rate in China is set to fall well below the critical 6% level for the year 2020. For the global economy the total extent of the influence cannot be judged yet, but a drop in growth by half a percent seems likely.

Oil prices suffered most and fell back into the 50s for the barrel. Several other industrial commodities displayed a correction in view of the expected lower demand in the weeks and months to come. Most analysts were and are still expecting a weaker trend for the US dollar. However, for the moment the dollar has gained strength and against the Euro it closed the period below the magic $1.10 level.

Market Intelligence

As far as the leather pipeline is concerned the spread of the coronavirus has so far had no major consequences. However, the main reason for that has been that the international supply chain had time to watch and hold back. The Chinese New Year break was extended by a week but that is not really going to make a big difference to the industry. As time has progressed people have begun slowly to analyse and consider what the medium- and long-term consequences could be.

Until four weeks ago, the general consensus in the leather pipeline was that, slowly but surely, conditions were beginning to improve again. Despite all the negatives, the pipeline began to replenish. In particular in China, especially in the upholstery segment, inventory had gone too low versus the better-than-expected leather orders for the rest of the season. The phase-one trade agreement between the US and China relaxed some of the worries the industry had and larger tanners producing for the US market were active in the raw material market. This also stimulated the mood among the small and medium-sized tanners in Hebei province and so we saw a pretty stable business with moderately rising prices, in particular for medium- and high-end cow hides. Big players in the footwear sector displayed a similar position. The long period of concern and risk aversion had led to reduced raw material purchases until autumn 2019, but quite a bit of the blockage had been removed.

A lot is different now and the enthusiasm has taken a real hit over the past weeks. For the moment, it is only in China that private consumption is affected by the virus situation, although a lot of luxury shopping by Chinese travellers is missing in other markets. Nobody has so far made the final calculations, but it is likely that many Chinese will not spend the same amount of money on consumer and luxury products this year. We have not yet seen much comment from the luxury brands, but it would be naïve to believe that this segment is not going to be hit hard. The recovery we have seen in particular in calfskin prices could prove to be short-lived if the situation does not change soon.

Outside China we are still seeing business as usual. Coronavirus cases in various countries are still very few and normal life has barely changed. We can only hope that this is not going to change in the near future. So far, Europeans and Americans continue to be quite relaxed and at this stage one has to assume that most exhibitors and visitors will turn up as usual for the events that are going ahead, such as Micam and Lineapelle. However, this could change from one day to the next if the general situation changes or the spread of the virus accelerates. Several global companies have already declared travel bans for their employees, but as far as we understand it, this is mainly a decision of big corporations and has happened less among small and medium enterprises.

The big question now is if anybody can make forecasts for anything at the moment. A lot of factories outside China continue to run as usual. For tanners and leather product manufacturers the main duty is to analyse how much of their business is directly or indirectly coming from China. In several of our conversations over the past weeks we had unfortunately to realise that many companies do not really have a full understanding of where and how their business could be influenced. At this stage most are just worried about direct relationships, but that might not be

enough. Depending on the product you are making, the Chinese ‘factor’ could be between 10% and a 100%. It is not just about the sale and purchase of finish products, but also the components that could quickly put supply chains on hold. If supply chains are disrupted it also takes a while until the flow is reconnected. A great deal of the problem is psychology. Nobody can at this stage make any predictions or analysis about the leather pipeline without a better knowledge of what is going to happen next in our business and also in the general economy.

business activity has not been completely paralysed. The tanning industry cannot just stick its head in the sand and disappear until everything is over. Outside China in the past two weeks everything continued without much change. Also in China tanners were working from home and instead of just disappearing they were quite actively collecting opinions and even offers for raw material. This is not a surprise because there is always a tomorrow and it’s the right way to act. Nobody knows how long or to what extent the virus situation is going to affect the global economy, but there are only two options. Either the general interruption is going to last for a longer period of time and the force majeure factor applies and most activities related to China will come to a standstill. The second and more likely possibility is that, in a reasonable period of time, normal business activity is going to resume. It might be bumpy, it might not be easy, it might be influenced by everything that has happened, but the supply chain has to be filled.

All of the above applies also to the split market. Fundamentally very little has changed, but for the moment nobody knows what to plan.

The skins market is a bit different, in our opinion. Although this is not reflected in prices, activity in the Middle East in particular for garment leather is rising. If one monitors global fashion one will definitely realise that the leather jacket is back. The rising demand for skins can still be seen and tanners and manufacturers can be more than happy at finding decent volumes of extra-cheap raw material. For almost no capital investment, the prices for commodity skins mean it would be difficult to lose money.

It is useless to try to predict what the leather pipeline can expect in the coming weeks. The global spread of the coronavirus is not going to end the production of leather. It is going to have an effect and to what extent we will know in the course of the next two-to-four weeks. Having the facts will allow us to generate opinions and ideas about the future of leather business and everything that can be said at this moment is that, so far, the influence is limited. However, each day in which normal production fails to resume, the scratches are going to get deeper.

Share this story: