Macroeconomics

The coronavirus continues to dominate all our lives. In most countries around the world political decisions are influencing private and commercial life. Anyone who follows the news knows everything already. In China and South Korea, the infection rate is beginning to flatten but most other countries are seeing an explosion in cases day by day. In most countries decisions to enforce a lockdown have been taken.

The financial markets have responded the way we would have expected with massive falls on stock markets, oil prices imploding and governments and banks trying to set up new finance programmes to prevent the total collapse of the global economy. This is unknown territory and the financial crisis of 2008 just a pre-taste of what can happen. The big difference today is the collapse of consumer demand, excluding the basics of life and medical products. Company after company not producing the essentials is closing down or cutting production to the minimum. The consequence of isolation means that everyone who can is working from home. Everyone in hospitals, the ones who produce and transport food and other goods, the staff filling the shelves in the supermarkets, workers in the energy plants, waste management, communication services and all that we take for granted should be given thanks whenever we meet them.

Nobody can predict the future and as no one expected the coronavirus and the consequences, nobody can know when it’s going to be over. We can only hope for a similar curve to the one we have seen in China. The Chinese economy is slowly beginning to recover with production and consumption slowly but surely getting back on track. In Europe and the US we could hope for a time window of another six to 12 weeks of almost complete shutdown. In a rough calculation it would hit and stop approximately 50% of the production and service activity. Those who were predicting less should just have a look at the interrupted supply chains and the problems in transport and then have a second thought about how realistic a more optimistic view may be.

Market Intelligence

The past two weeks in the leather pipeline have been a little bit like the fever curve of an infected patient. At the very beginning players were in a trembling expectation and hope that the evil might pass away and not knock on their doors. Everybody was ready for the worst, but even two weeks ago the big players at the end of the leather pipeline, the automotive manufacturers, the luxury brands and to a certain extent also the retailers were not talking about any real cuts in their production or budgets. The trigger was pulled at the end of the week before last. It all started with the announcement of the first automotive brands in Europe had to stop production for various reasons. Poor sales and interrupted supply chains were part of the cocktail and they didn’t want to wait any longer.

In Italy and France the shutdown announcements started to come and then, quickly, the remaining premium brands all over Europe followed. In parallel the luxury goods manufacturers in France and Italy took the same step. Almost every factory is closed and will remain closed for a period of at least one month.

Nobody should be surprised, but just three weeks there were major automotive companies trying to get written confirmation from their suppliers that their ability to maintain their service would not be affected by the virus; deliveries had to be guaranteed. Tanners had to budget for the raw material supply, their labour, chemicals and so on accordingly. The arrogance of the automotive industry, because of its sheer size and importance to many economies, will most likely be discussed and will need a different set-up after the crisis.

The shutdowns in the automotive industry triggered new decisions in the automotive tanning industry too. The problem was not just when and for how long deliveries would be suspended, but in some cases the labour force was an issue too. Some companies depend on workers who cross borders. Government decisions to restrict travel and movement and then enforce lockdowns have made it impossible for several factories along the supply chain to plan workforce and production any more. Consequently some of them quickly shifted into emergency mode.

In the luxury sector we have seen a similar situation. Luxury sales had already been hit due to the outbreak in China, in combination with the Chinese New Year festival. Less retail in China and reduced travel and tourist shopping had reduced the sales of luxury brands. By early March, declines of 30%-40 % were being recorded. The further spread in the past weeks in the US and Europe and the shutdown of shops and malls required further action, including the recently announced end to production in most of the factories of the big names. Prada, Chanel, Hermes, LV stopped manufacturing and this had consequences in the supply chain. Since many of these brands are not just buying leather, but have become tanners themselves, any decision remains ‘in the family’. The results will only in the coming weeks.

Calfskins were selling against the weaker price trend and recorded good sales in January, with even slightly rising prices. With the end of production and limited alternatives, these contracts will remain valid and shipments will eventually be taken, but for the moment a lot of this supply, much of it also planned to be in fresh, chilled condition, will be stopped for a while. This is going to become another great challenge for producers in terms of salting and storage in the coming months.

As leather production has begun to shrink, slaughter and food production remain stable. Panic and storage buying in many countries has increased supermarket sales and the slaughter numbers have been on the rise, but this situation is another new challenge for the processing and marketing of the hides. 

Running down the fact list we see presently the following.  The situation in China is only slowly easing with slowly rising clearance of containers in Chinese ports.  There are still large raw material stocks in warehouses in the main tanning centres in China. The extended shut down after the holiday in China has left the industry with approximately four-to-six weeks’ worth of extra inventory. Considering the slow and limited recovery of production in China, the inventory for standard materials will most likely last even much longer. 

There are now production cuts in the main tanning operations in Europe. Food production and demand may see a moderate downturn after the panic buying fades, but food supply is essential and this includes beef. Closed restaurants and canteens will change the demand structure with more demand for convenience food and processed beef and less for prime cuts, but the overall quantity should not suffer, with the exception of certain export lines being hindered by transport restrictions.

Supply chains are facing individual challenges and situations for the raw material market situations. Where hides are salted (cured) as a standard operation the challenge is limited to storage. Fresh hide supply chains - mainly in Europe - face more problems. The structure of the industry has changed over the past 20 years and, depending on the region, anywhere between 20% and 60% of the hides have just been trimmed, graded and chilled for immediate delivery into the tanning drums. 

We have to expect a larger contraction of this business, not only for the reason of reduced tanning demand, but also because transport is becoming increasingly difficult, in particular for such a sensitive product. Diverting the hides to contract tanners could be an option, where possible.

Many were hoping for a quick recovery of operations in China. Export orders might be late and cancelled since they will not arrive in time. Local shops in many countries are closed. Fashion is something that needs to be displayed in public and in social settings. Wearing new things in your apartment and showing them to your family in the dining room cannot really compensate. 

This leaves only the automotive sector in China as a potential bright spot. Sales were down by more than 70% in February and March, but a reopening of factories is immediately requiring the shipment of components for every single car in the production line. The leather planned has to come, no matter if the car is sold or not. This might be short-lived, but it helps for the time being.

We can skip the sections for sheepskins and split material because there is nothing specific to report. In the case of garment leather it is extremely unfortunate, because the strong recovery of leather that could be seen all over in retail and fashion magazines is now suddenly stopped by the circumstances. We will just have to wait and see if tanners in the main producing countries have the courage and confidence to continue with this when the situation improves.

We understand from some of our sources that some clients are trying to take advantage of the situation. We all know what this means: either not honouring contracts or fishing around with prices that are inadequate. Tanners should choose their best and most reliable suppliers and figure out a fair solution for both sides. Suppliers of raw material should at the same time be willing to cooperate as well. The client offering you a hand in times like these is precious.

We wish all our readers good health. We need patience and endurance and the leather business is already well trained in these.

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