Macroeconomics

The coronavirus is the overwhelming issue at this time. It is now spreading also quickly outside China. The biggest problem is that it is unclear if anything can be done to prevent it from spreading further. Suddenly countries like South Korea, Iran and Italy are reporting a sharp increase in cases and one has to assume that many more regions in the world will suffer from more infections.

The next big question is how dangerous it is. So far one tends to believe that the mortality rate is relatively low, at least when we follow the numbers that are reported in China. If one looks at the numbers delivered from other countries it looks a bit different. There is not much else to do other than to take the necessary precautions and to hope for the best.

In many ways this has given a clear demonstration of what globalisation means. The dependency on China in so many supply chains is now reaching the daily life of corporations and humans. Time is not too far away when certain basics might be in short supply. Medication and pharmaceuticals may be mentioned as an example. If your next flatscreen or microwave oven or possibly the latest smart phone arrives a couple of months late, it is not really an essential problem. However if the drugs you need can’t be supplied or made any more it is a different story.

So far, many are just talking about manufacturing in China. The Chinese government is trying now to call more workers back to the factories because it fears a negative impact on the economy. However, it is not so easy re-establishing production and taking care of the security of the employees at the same time.

Manufacturing is only one part. We consider logistics to be potentially more influential. Many ports in China are congested, which means cargo cannot be unloaded. This is something that has to be addressed by the Chinese government. Anyone who can build hospitals in 10 days should be able to find ways to keep product flow and transportation in better shape than it is today. It is also a little cynical that shipping lines are charging extra for almost every shipment, independent of the destination; it is what they call a ‘peak season surcharge’.

Market Intelligence

We have now had a full fortnight in which normal production and normal life in China have come to a standstill because of the coronavirus. For the coming weeks the Chinese government has called for a cautious return to normal activity, but there are plenty of obstacles for the factories to deal with.

There are questions over how many workers will return to their workplaces. Many who travelled to their home provinces for the Lunar New Year holiday at the end of January are not able to travel back to their places of work yet. They would risk immediate quarantine on the way or at their destination. Theoretically everything could be back to normal in another week, but in practice this will not be the case. 

How would the authorities react if infections are detected in a factory? Some companies have been informed of serious penalties to pay if that were to happen. On the one hand, then, companies have to try to please the politicians by resuming work to support the economy. But on the other hand, they would be held responsible for any possible further outbreak of the virus.

In the tanning business, we tend to believe that a couple of weeks of interrupted inventory will not make too much difference. Usually there is sufficient raw material and chemicals. In China, we don’t expect any short-term problem in the leather pipeline. But if containers with raw hides are stuck in the ports at the moment and are not transported in the next two weeks, raw material supply could become an issue.

We understand from several tanners outside China that the one worry they have is about dyestuffs. Chemical companies confirm that the supply and production of certain colours and colour dyestuffs might become a problem if they cannot receive the materials they need from China. Most say four weeks of interruption is the maximum they could handle.
Several of our tannery contacts in China have already told us that shoe factories, in particular in the south of the country, have cancelled leather orders. In the international supply chain we hear of large retailers that are seriously afraid that the shipments of finished products such as bags and shoes will not reach their destinations in time to supply the shops for the spring and summer season.

Also here, most people define the critical period as about four weeks. In the case of overseas exports and shipments, these four weeks are almost up. Owing to the Lunar New Year holiday, the  pipeline and the supply chain have already been run down and buffer stock may not be available. Manufacturing and shipping can easily delay finished product supply by far more than four weeks, because at this stage nobody knows when the shipping lines will be able to bring the goods on a regular schedule again.

The money flow is now in danger too. The Chinese national bank is injecting big amounts of money into the system to ensure the necessary liquidity for companies missing turnover and payments. We will only find out in the weeks to come if this is going to be sufficient and if all players can and will meet their obligations. Those who believe in their business and in the future will do everything to pay and act on time. Others may consider the present problems as one of the last nails in their coffins and might not act in the same way. It would not come as a surprise if a considerable number of companies in China take the chance to shut down.

On the consumer side, the luxury brands are certain to miss all the travel, all consumption at airports and all the tourist spending by wealthy Chinese visitors on trips to Europe and the US. A number of the brands are presently thinking of a decline of between 20% and 35% for the coming three months. Maybe a consumption bonanza will compensate for everything in the second half of the year.

The second subject of interest for the leather pipeline was the Lineapelle exhibition in Milan last week. Many, including us, were concerned that the number of visitors could be way down and the exhibitors might return with sad faces. Nobody would have been surprised if this had happened. However, this business is always good for a surprise. Milan and Italy still being the centre and the core of fashion and high-quality leather production proved its resistance. From the morning of day one the aisles and booths were crowded and we couldn’t find any of the good and established names in leather production complaining about the number or the quality of their visitors. We have no idea what the coronavirus effect is going to be. However, if we just take the three days of the show we would even go as far as to say leather is back.

In leathergoods the rock solid demand for the material seems set to continue. In shoes and garments we have come to the conclusion that the amount of leather used in production is going to rise. The indications which we had seen from the catwalks in October 2019 has been confirmed and leather has become increasingly popular with designers and manufacturers again. Also in upholstery, good-quality leather is gaining some traction. The critical segment is definitely automotive, but that is really nothing one should worry about in Milan. Automotive is a different world.

We have to admit that we were surprised by comments from shoe companies in particular. We were of the impression that most had already surrendered to the plastic sneaker trend. The anti-beef campaigns and the obsession with paralysing leather as a material had left little optimism. However, fashion and design is always a bit different. We will not dive into the discussion now about how good or bad, how right or wrong certain tanning processes are, but anyone who was able to be convincing about respect for the environment has found open arms and open ears for leather and sales.
Let us hope that the coronavirus does not crash this enthusiasm.

We will skip our usual small comment about the split business and go straight to skins.

We have the courage to predict a better future for skins too. Many of the overhanging raw material stocks have slowly but surely been destroyed or used up in the past few months. Many Middle Eastern producers grabbed everything cheap that was still around. We have understood from various origins that clients have now been told very clearly that higher minimum prices must be paid now or nothing will be sold. In some cases this has increased prices substantially. A reduced offer is meeting moderately rising demand for sheep leathers. Everything points in the direction that this trend is going to persist. Leather garments are back in fashion and it will be very interesting to see how much production might shift quickly from China to the Middle East in particular.

We have to watch the consequences of the coronavirus situation around the globe. We think that business and logistics have been hit harder than most media, experts and analysts were expecting. Certainly the virus will disappear, but the implications of globalisation will prevent us from putting a short-term solution in place. We just hope that the virus and the necessary action will be taken soon. It seems naïve to think that this can happen in the next week or so. The production pipeline between Asia and the rest of the world is already seriously congested and so far the consequences on the export side have not yet fully reached us. With a lack of demand, sales and shipments, anything other then raw material prices suffering would be a surprise. The number of hides and skins now competing to be used exceeds demand and production volume. The market has only one answer to that.

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