Macroeconomics

The pandemic continues to dominate all our lives, directly or indirectly, and in a very negative way. If one is lucky enough to not have caught it, or know anyone who has been seriously ill, then they could well have suffered economically or emotionally due to the lockdown.

Over the past two weeks, many countries have eased lockdown restrictions. All over Europe, things are slowly operating under the “new normal”, such as physical distancing and the wearing of masks in restaurants, shops and on public transport. By mid-June governments are trying to lift travel bans, because for various reasons the holiday season has to be “rescued”. For the countries where tourism is a great part of the GNP it is necessary for the economy. The number cases are dropping in parts of Europe and without a second wave one can hope for further improvement.

Across Asia, the situation is similar. Australia and New Zealand remain fairly strict on travel. Across the Americas the situation remains much more serious. The Indian subcontinent is a bit of an unknown, because it is uncertain how of the masses of people can be tested and how many cases are properly recorded. The same applies in a way to Africa, but it seems that generally the population on the continent can handle it better.

The ‘new normal’ will require a massive change in people’s well-established habits and getting used to it may take a while. The damage coronavirus has caused to the economies is more complicated. Unemployment is shooting up and incomes have been substantially cut all over the world. Globalisation is becoming a serious challenge for products with a long supply chain.

Politics is an additional headache. Tensions are rising. Apart from the trade tensions between the big blocs such as China and America, domestic issues play a role. Everyone is following the riots and unrest in the US. Coronavirus has already weighed heavily on local consumption and the protests are not helping consumption and consumer traffic. We hope that things will quieten down and the number of infections will fall. 

The financial markets are taking very little notice of all the drama. The money offered by the governments to the national economies topped by regional ones (EU) excites investors. Stock markets are rising and in several cases they have almost reached pre-corona levels. The oil price has recovered substantially and the barrel is already trading again well above $30.00. How much all this is going to be justified by reality is yet to be seen. We hope investors and the financial markets are once again a reliable indicator for the future.

With the present problems in the US, the dollar has weakened and lost almost 3% against the Euro to finish the period around the levels of 1.12.

Market Intelligence

The world is beginning to open. Almost every country, independent of the number of cases, is lifting restrictions. People can move again, most shops are open and under certain conditions something like normal life has returned. Further big steps are going to be taken within the next two weeks. Without being a scientist, we must assume that indoor assemblies should probably be avoided. Outdoor activities and meetings are considered far less risky. In the northern hemisphere we are entering the summer and this is at least helping this part of the world in the fight against the further spread of the virus. Tracing has become much easier, testing more frequent and this means that even smaller new clusters of infections can be controlled in some areas. The handling of animal epidemics has become a pretty good reference for the handling of covid-19 in humans.

However, although it may look like we are heading back to normal, life is not going to be the same for quite some time. The initial reaction of people when the lockdown was lifted was to get out, to enjoy outdoor activities and to meet other people under the conditions allowed. Over the weekends people are rushing out and crowding every quality spot they can reach. Air travel remains restricted and although it might be theoretically possible and the low-cost airlines are adding flights to their schedules, one can feel the lack of confidence in leisure trips.

Part of these trips, at least within Europe, has always been shopping. There is always something to discover in a different country and for many travellers it was part of their excursion. Many of these ‘travel purchases’ are related to leather: shoes and leathergoods. Overseas visitors flocked to European outlet stores and boutiques in the major cities.

We all know that leather had a difficult time prior to the corona crisis and every leather-using sector has been hit. 
As you go down the supply chain it is hard to act. The only ones who can take decisions today are the brands and the retailers. However, management wants safety - safety in the knowledge that consumers will buy the products. Too many products are still sitting stranded in stores and warehouses to allow active ordering for the future. Everyone hopes that the next day will bring the wave of shoppers so they can get a realistic picture about how and when consumption will return. Managers are asking for information because they manage the cashflow, purchasing offices want information to discuss with the suppliers and senior management needs to talk with banks and investors.

This wait-and-see attitude is a problem. It is unlikely that we will see a return to the situation at the start of the year. The challenge is understanding how consumers will react. Purchasing power will be less due to reduced income and we have to accept there was a strong dynamic over the past 10 years or so that products were made without real demand. However, rising wealth made people spend for the sake of spending. Environmental organisations criticised this but that was what the consumer and the economies wanted. 

Nobody has a crystal ball to see how consumers will react and many believe attitudes are not going to change quickly. We should not forget that in the developed countries, a large number of garments and shoes for example have never really been used.

Another boom sector for the leather industry in the past has been automotive. However, over the past year there were indications that the automotive industry would slowly turn away from leather. While this was hitting leather in automotive interiors we are now faced with a very uncertain future for vehicle consumption in the next two years or so. 

In Europe, governments are discussing large subsidies to clear the backlog of cars and to trigger manufacturing lines to become active again. France has taken action while other countries are in discussions. Nations might find strong political incentives to restrict subsidies on carbonyl engines and to emphasise e-mobility. It is very difficult to predict what is going to happen. A lot of questions around electronic cars have not been answered and they remain a niche. So, for the big vehicle manufacturing countries this puts a lot of jobs at risk.

Along the general leather pipeline the problem is the same. A lot of manufacturing has been stopped and a number of popular brands have stopped for two months and this may be extended. Others are operating at between 40% and 60% and are discussing extended summer holidays. People are being laid off, machines covered up, management sent home and it will also not be possible to restart production just by a finger snap. To make things worse we are now in the low season of consumption. We are entering the summer period and with or without the disease, people are not focused on consumption. Even the simple things are missing for the leather industry: social events such as weddings or summer parties for example and the reason to buy something new. Furniture and vehicles are off season as well.

Time is running out. Raw material suppliers are sitting on stocks and the kill continues. Day by day the decision to process and store becomes harder. At manufacturing level decisions will have to be made about how to get through the slow times and how to pay staff. Laying people off might make it difficult to get them back, but not everyone will have the money to pay wages. Governments are trying to ease the pain with loans, but they have to be repaid one day and how the future is going to develop, nobody knows.
One way or another there is a future and you have to be prepared. Business plans, supply and delivery have to be planned with the necessary lead time. Waiting much longer is not an option because it will be too late soon, unless you have large stocks from last winter season and see the chance to get rid of them.

The split market is still commanded by the gelatine and collagen trends. Wet blue splits are reflecting the same as the hide market.

The skins market is also not really taking off. New season lambs in Europe are beginning to come and normally the Turkish buyers rush to grab the quality skins early. Nothing so far. India and Pakistan are slowly leaving the lockdown period and they are still suffering like Bangladesh from many of their clients having let them down due. So, the fashion was (is) favourable, the raw material prices too, but there is a lack of courage and finance to rush for quick delivery and manufacturing.

We believe that the coming two to four weeks will be pretty decisive. June is going to be the last month of full production in Europe and for overseas suppliers it is the final window to decide on orders and hope for shipment to arrive in time. Politics matter. The Chinese industry will also need to decide on their hopes for the high season production after the summer break. It is difficult to be positive with everything we know today.

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