Macroeconomics

There have been no big changes in the past two weeks, and almost all news is still corona-related. Certainly there are plenty of other interesting topics, but publishers and editors continue to focus on the one and only story of the day. This is understandable, because the virus is something that has direct or indirect implications on everyone on earth.

However, for some people the virus is not the top priority. Many forget that people are starving and seeing their well-being and small income seriously threatened by the present conditions. For millions, day-to-day hunger — not to mention the other challenges their bodies deal with due to conditions in which they live — is more concerning than the potential infection with this virus.

In any case, headlines are slowly beginning to change from the headcount of infections, fatalities and country rankings to the social damage and destructive effects on economies. With countries beginning to ease the lockdowns and restrictions, the first real statistics are showing the trends. GNPs are shrinking almost everywhere and unemployment is rising at frightening rates. As dangerous as the virus is, the implications of unemployment, poverty and social tensions can become just as dangerous.

Politicians have begun to realize this although for different reasons. While some have indeed kept their focus on their citizens, one can get the impression that many others are more concerned about their personal power and position. Nobody knows if, how and when the virus can be stopped and controlled completely, and several country leaders are applying dangerous strategies that don’t only impact on their own nations, but that could also seriously interfere with the global situation which so desperately needs to be under control again. 

Restoring supply chains and returning to normal travel are essential if the ship is to be turned one day. If the Covid-19 infections are not stopped, the return to orderly production and pleasure in consumption will not return quickly enough.

So far governments are spending money to boost aid to companies and people. This may look like help and possibly buy time, but will eventually be useless if time runs out before the economy gets restarted. This is being discussed by experts and economists, but publicly played down by the governments. The governments’ duty is to calm, to avoid scaring the people and to deliver the impression of having all under control; they have a clear exit strategy to the shining light at the end of the tunnel guiding their people back into the same or better future.

This is certainly adequate, but the uncomfortable truth is that working society will change. Many jobs in specific industries will be lost. It will be the individual duty of those hit to determine if and where new opportunities can be found, and to train for new qualifications. If we want to avoid a dystopia, everyone should sit back for a moment and realistically assess the situation. People in the extended travel sector, roles dependent on any kind of mass entertainment business and those in standard retail are certainly in the front row. Change can mean opportunities for those who are willing (and in the position) to adapt, but for others it is seriously difficult.

The financial market has continued to remain quite unimpressed. Stock markets fluctuate with higher daily amplitudes, but the indices are still far higher than can be justified by the earnings and outlook. Oil prices have strongly recovered, thanks to further production cuts of OPEC members. Unemployment numbers are becoming frightening in many countries under the lead of the USA, which also means sharply shrinking purchasing power. Only in China the situation is somewhat better with industry production already back to more than 90%. Car sales were the biggest positive surprise: they were more than 4% higher in April versus a year ago and are beginning to compensate for the slump in the first quarter.

With rising problems in the economies, the tone in international political dialogue is becoming rougher. In particular, the relation between China and the USA continues to deteriorate. Underlying this, one can sense, is a cocktail of competition between the political systems, the race for global and regional leadership and the emotional individual egos of the leaders — a mixture that has in all of history been dangerous. Let's hope this does not spill into the public and amplify the locally-existing xenophobia and conspiracy theories. This would become more complicated and dangerous than the virus is now. 


Market Intelligence

The situation along the leather pipeline continues to be very difficult. It’s difficult for the general circumstances everybody is facing now, but difficult also for a number of very specific situations.

All starts, once again, with the supply of raw material. Beef production continues to be irregular. In some countries the work of abattoirs is still affected by coronavirus cases. In the United States, production has not yet returned to normal levels, although beef consumption in that country is set for the seasonal and annual highs. It seems very likely that production is going to return to normal, which actually means that hide supplies are going to rise again. There is a rough estimate that approximately 1.5 million animals could not be slaughtered over the past weeks and got stuck in the supply chain. However, the beef industry is seemingly optimistic that this number can be compensated by increased production over the next two-to-three months.

Politics are dominating supply and production in Australia. Despite good export demand, China has put a ban on imports from several large slaughterhouses in Australia. Australia has said there should be an investigation into the origin of the virus and China’s initial reaction. The importance to the Australian economy of exports to China has come to the fore in the discussion that followed. For the moment this is curtailing beef exports and also slaughter activity in Australia.

In Europe the situation is influenced by two major problems. Since restaurants have been closed for so many weeks and are only beginning to slowly get back into operation, consumption of better cuts continues to be low. The balance between demand for processed beef is not sufficient and freezer plants are full, which makes the calculation of slaughterhouses extremely difficult. As restaurants are slowly allowed to reopen all over Europe, there is a glimmer of hope for somewhat better consumption soon. However, it will be awhile before the present stocks are consumed. Consumption in the second quarter is usually low, so low cattle numbers tend to be on offer from feedlots. The second big problem is covid-19 cases in slaughterhouses, and the hotspot is in Germany at the moment. Quarantine decisions and lockdown of productions have had an additional negative influence on slaughter numbers.

Generally we have to assume that cattle slaughter around the globe is going through a period of lower numbers at the moment. This does not hit the market and is simply easing the pressure on marketing the raw material. With the cattle in the pipeline and the moderately easing restrictions, beef consumption could actually rise which would also increase the volume of hides produced. This could come exactly at the wrong time of the year since leather production is entering the slow season now. The contraction of demand due to the covid-19 effect is the lethal topping.

On the demand side, the situation continues to look pretty ugly. In various countries shops have been opened for the past two weeks, but they have to follow individual rules and the normal opening with unlimited shoppers barely exists anywhere. Usually only a limited number of customers are allowed into the shop and the others have to wait outside respecting the physical distance. This might work for daily needs, but does not reflect what people consider the “shopping experience”. From wherever statistics are available, traditional retailers continue to complain. Depending on what product they sell, turnover is 30% to 60% at the moment.

The worst hit are the shops selling clothing and fashion. For example, numbers released from the United States show retail sales fell by more than 16% in April. The worst numbers came in from clothing and accessories where sales dropped by more than 89% in the period. Those who were hoping that online sales could compensate have to be disappointed. Online sales are growing by around 20% which is nowhere near the numbers needed to clear the inventories and stocks that have congested since the drama started. In the United States, large retailers have had to file for bankruptcy and nobody can be surprised if we see similar consequences in other parts around the world.

In Europe, most downtown areas see traffic down 40% to 60%, which is usually measured by counted foot traffic in the major shopping malls and shopping roads. Retailers confirm these numbers and the general average of sales reported are approximately 50%. Some may think this is better than nothing, but considering that the cost to open and run the store is hardly reduced, a lot of money is burned even before the write-offs on stock. Monitoring shopping areas, one can see all the special offers and discounts being made to attract consumer attention.

The next large sector of leather consumption, automotive, is also not taking off. Many factories were said to restart production, but very little materialised for various reasons. Technical problems, supply chain issues of parts and missing buyers have made the restart of vehicle factories in Europe very slow. The American manufacturers are hit by the same problems and their problem from the supply chain is intensified by the tight connection to Mexican suppliers. Many of them cannot restart production, because they need first to comply with government regulations which have only been published recently. Until they are implemented and approved, more valuable time will be lost.

The only remaining bright spot at the moment is China. Car sales are climbing quickly and have already reached normal levels or even exceeded them. However, a quick review around the major suppliers in China has demonstrated a limited level of confidence. Everyone confirms a regular order book and decent business, and many are even saying budgets and plans for the weeks and months to come are positive. So far, so good. But several players mentioned their concerns about the validity of the information. Many see the present car sales in China just as a flurry and the budgets and orders put into the supply chain is the attempt of the industry to comply with the expectation of the government. However, if May or June confirm the strong performance, confidence will grow and maybe China will be once again the anchor for the global economy — as seen in 2008/2009.

However, in contrast to all available information, a repeat of the last financial crisis will most likely not happen. The ‘V’ recovery of the global economy which many people had hoped for will not happen again. The best of the options at the moment is the ‘U’ which is presently what politicians and leaders are hoping for.

The big problem for the leather pipeline is certainly time. Many companies are missing the turnover and revenue from the second quarter, which they need so desperately to manage the low season of the second quarter and the first part of the third quarter. Under the present conditions we run a very high risk that many companies will not have the chance to reach the shore. How much aid hide processors, tanneries, leather manufacturers and retailers are going to get from their various governments is not known, and without a very strong recovery of sales and consumption it will not be enough for everyone anyway. We should not forget that our industry already had a crisis before the crisis. We saw shrinking leather demand before and the very little and tiny recovery that took place this winter has since been so badly destroyed.

It will be a miracle if we do not lose at least a two-digit percentage of companies and production along the supply chain in the next 12 months. The financial consequences and payment problems have not even reached us yet. Realistically only a second ‘China boom’ could ease the consequences. For the others, it will be the usual survival of the fittest; it’s true that whoever gets through the crisis will be stronger.

In the split sector, the fear of the collagen industry not being served sufficiently with raw material begins to fade, at least in Europe. In other parts of the world the situation varies, because the supply situation varies. In several regions around the world, market demand, production capacity and raw material supply potential are not very well balanced. We understand that wetblue splits are beginning to struggle again. Limited supply is preventing the worst, but demand is dropping, as are prices.

In the skin market we also do not find much new. Ramadan is limiting demand from Muslim countries and many producers are quite happy to be shut down. However, everyone has to look into the future as well and the fashion outlook has been too bad. In addition we are now beginning the new season of lamb slaughter in Europe; this is a limited supply of raw material in a limited period of time. Tanners who believe they are going to stay in business and expect sales later this year soon have to take the decision about their raw material procurement. If they don’t do it now, the goods will be gone. 

The first prices from suppliers have been thrown around to test the waters, but have not found much of a positive response so far. Tanners expect prices to be well down on last season, even if it is just for the sake of sympathy with the general raw material market trends. However, they should not forget that the prices for skins had already been massively deflated in the past years and the cost of collection, processing and global transport have massively risen. This is limiting the potential for further and extended price drops. The coming 2 to 4 weeks will offer us more information about whether and what kind of compromises can be found.

We expect in the next two weeks more temporary stagnation. Tanners are navigating from week to week or, in the case of China, have already taken voluminous decisions for raw material. This is limiting the potential for any major change on the demand side. The supply side is potentially going to be more important in the coming weeks and, as mentioned earlier, it is likely that on a global level raw material offer is going to increase. The reductions in Europe and Australia have a fair chance of being compensated for by volume rises in the Americas. 

Another important factor is going to be the demand structure in terms of quality. Tanneries around the globe, particularly in China, are now trying with limited budgets to buy the best at the cheapest price. This is shifting the spotlight on some selected and better-quality products and origins and leaving others more in the dark. The further price differences narrow, the more difficult it is going to be to agree on valuation and price.

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