Macroeconomics

The first month of 2021 has passed. We are now exactly one year on from when the pandemic started. We have had a lot of casualties, a lot of people infected and, depending on the region, the trend is not under control yet. New mutations have put governments on high alert again and lockdowns have returned. We have to contain the pandemic, but a generalised hammer on entire nations does not seem to be an adequate tool any more. However, politicians decide and administrations have to handle it.

Considering everything, some parts of the global economy have performed relatively well. Certainly the performance of China has helped the overall statistics. However, life goes on everywhere; people have to make money and go to work, they have to shop and purchase what they need, and so the contraction in various countries’ gross domestic product (GDP) is less than one might have expected.

In general, estimates for GDP growth in 2021 are quite positive. China’s performance is expected to be one of high growth once again, but the numbers for the rest of the world are looking quite optimistic. Considering that we had a contraction in 2020, these figures have to be viewed from a different angle and pre-pandemic levels will only be reached again in the following two years, if nothing goes wrong.

One of the biggest mysteries is the situation in logistics. Shipping lines are claiming that global transportation has improved and that it is now exceeding their capacities. A lack of empty containers and problems in finding sufficient freight space on vessels has become common. Freight rates have gone up sharply and carriers are making very good money. For an outsider it seems however that a lot of mismanagement, intentionally or not, is part of the truth. Transport capacities were cut by too much last spring. How quick this could be fixed will only be known to the shipping lines, however it seems that they fancy better profits and restricted capacity more than easing the situation. From a commercial point of view this might be understandable, but in view of the challenges the world has to manage it leaves a little bit of a bitter taste as well.

The new president of the US has been inaugurated. The new administration started work immediately on the domestic and international fronts. Many decisions of the previous administration have been revoked and corrected quickly. In terms of international affairs, the coming months will show us where the US is going. In particular, improving its relationship with China and an end to the trade war will certainly make a difference to the global economy.

Commodity prices in general, which are considered to be a pre-indicator, have had another relatively good run and this means that the markets are taking an optimistic position about future trends. Oil prices remain on the firm side and trade today is at $55 and up per barrel. Gold prices have recovered well in the past two weeks and the US dollar seems to be relatively frozen in a range around the $1.21 mark against the euro. The markets seem to be waiting for more insight into the policies of the national banks before taking any risks.

Leather Pipeline

In the world of hides, skins and leather (and this means the entire supply chain) we are facing trends that vary greatly in different regions. In particular, sellers of raw material have shaken off their concerns about the market and the risk the pandemic could pose for leather demand.

They have been seeing a constant rise in demand for raw material for six months now, particularly in China. In other parts of the world it took a little bit longer to get the tanning industry back on track. In particular in Europe it took an extra three months before confidence and production flow were restored to stable levels. Traditionally, the industry in Europe has its strongest production quarter at the beginning of the year, before things slow down in the second and third quarters.

The dominance of just-in-time deliveries in Europe and in particular for fresh, chilled material for the large tanning conglomerates had always created the risk of market reactions owing to variations in supply. Many meat companies and processors cannot handle an excessive number of hides in their salting facilities and so they have to do whatever is necessary to keep product flow manageable in times of high slaughter or excessively reduced tanning capacity and demand. This needs to be handled by price and we all remember the record lows of prices for premium male hides last summer. Price levels were so low that they left almost no room for any other hides to seem reasonably priced.

There were plenty of discussions at that time about whether or not it was wise to let the price for this kind of material drop by that much. However, this is how the market works. With the reopening of the automotive industry and the increase in confidence about regular product movement throughout the pipeline, the meat industry became more and more ambitious. The intention was never to analyse what a fair value for the product would be, but to compensate for what they felt they had missed out on when prices were cheap.

Levels remained reasonable until the end of last year because the kill was relatively high and the supply-demand balance was more or less intact. The situation went out of control at the beginning of the new year when slaughter fell drastically and suddenly suppliers got the impression that a shortage would allow them to ask for higher prices. In the past weeks there were some very aggressive price-tags on this premium raw material. This shocked the tanning industry. Existing contracts for the premium brands certainly offered some very attractive margins in the second half of last year, but nobody should ignore the rising costs and the falling leather prices that are the logical consequences of the pricing system in the automotive pipeline following the year 2020.

What was too cheap before quickly became too expensive and the excessive price variations have done no good to the business in general. The price for premium heavy material has almost doubled in six months and the price ideas the meat industry has put on the table for the coming months are higher than what they were prior to the crisis.

It does not require much imagination to understand that this has created massive resistance from the tanners. Many of them are now working very hard on alternative strategies to get out of this rut. There is unlikely to be any alternative that will change things from one week to the next, but it might change the balance of power in this sector in the future.

For regular hides at the commodity end of the business the situation is completely different. China, once again, had the courage to take full advantage of the extraordinarily cheap raw material prices in the middle of last year. With the help of the government and its successful management of the pandemic, Chinese companies returned much more quickly to normal production and consumption than the rest of the world. This offered them the chance to grab all the cheap raw material and to become very competitive with leather prices in the domestic and, later on, also the international market.

The market share of leather in material consumption grew sharply, under the lead of the upholstery sector. Upholstery leather was being made profitably thanks to the cost of raw material. However, by the end of December the raw material prices in the low- and average-quality range had reached levels that made back-to-back calculations difficult. The industry in China began to reduce its purchasing, which had an effect on the markets in Europe and the US.

In Europe inventories have been nicely cleaned up and shipments moved, with delays, but regularly. The physical stocks have been reduced in central and western Europe to almost normal levels. The falling kill numbers and the problems of transport out of the UK have quickly created a very comfortable position for sellers in January. This always provokes the same reflex: higher price demands from the meat industry. Quite a number of processors joined the party for various reasons. Either they were very optimistic about their sales in the coming months or they were still in possession of stocks of semi-finished material, which is obviously much easier to sell when raw material prices are high.

The situation in Europe now is not in keeping with the international situation. Some other regions are reporting reductions in the kill, such as Australia for example. However packers in the Americas continue to produce good, stable volumes of beef and the raw material supply is steady. While South America has also pushed prices up and had a good clearance of stocks of cheap wet blue, the situation in North America a bit more complicated and different.

Everyone can read the USDA weekly statistics. The fundamentals are relatively clear. For many weeks sales from the US are not really matching production any more. Statistics may misguide one for a week or two, but not for eight or 10 weeks. Secondly, the numbers of physical shipments are pretty accurate. The conclusion is relatively simple. With substantially rising prices, sales are going down, buyers are looking for bargains rather than for volume.

With the reduced production in Hebei province and rising risk of lockdowns in other areas, the tanning industry has become much more cautious about projected production volumes for the coming weeks. Very soon now the main players in China and other parts of Asia will close down for the Lunar New Year celebrations. To cut a long story short, with the holidays and the reduced soakings in previous weeks, the demand for raw material is certainly reduced.

What concerns people who have been in the trade for a long time already is the fact that no one has any major complaint about shipping delays. From Europe vessels are not departing on schedule and, on average, the delays are somewhere between seven and 10 days. Usually at this time of the year buyers are very sensitive about the arrival of goods into China but we have not heard anyone express concern about this this year. This suggests there is no longer any major shortage of material.

There are also interesting reports that tanners in China are shifting their interest from salted material to wet blue. Conclusion one: there are quite a number of very attractive offers of wet blue on the market that are cheaper than the official price lists in salted. Conclusion two: there are stocks in the hands of Chinese importers; traders are happily taking a quick profit now by reselling the material locally instead of betting on better margins and profits by turning the product into leather after the Chinese New Year break.

When we study the situation in the US now, we see a massive congestion of hides that are waiting for shipment and a market that has become pretty stagnant. Except for the people involved, nobody knows exactly what is happening at the moment. Many people are talking about aggressive attempts by sellers to find customers with sufficient cash and to find destinations where product can be moved quickly. If you look at the market logic, we have dropping demand from the main driving market, China, and we still have a good number of hides under contract and in need of being shipped. We have no knowledge of any tanner who is screaming for shipments or has insufficient stock to cover production in the coming weeks.

 The split market remains really uneventful. Standard products continue to move, cheap splits find their markets and the niches require to be served. In China we understand that the gelatine demand remains very stable and producers are still looking for consistent supply domestic as well as overseas.

We receive various reports from the skins market that enquiries are being placed. Nothing special, nothing exciting, but buyers from the Middle East and China are at least beginning to inform themselves about prices and availability. Quality skins for linings and high-end double-face productions receive good interest, and prices are stable or moderately firmer. If one looks at the massive spread between prices for skins usable for nappa in various finished products and the trend in the bovine cattle hide market, nobody can be surprised that very attractive alternatives are being put on the table. If leather has any attraction as a material, the demand and the potential for skins remains very positive. When and how this is going to be triggered nobody knows, because these types of productions and leather are mainly for the mass market and require decisions by big brands and retail groups.

The next four to six weeks will be decisive for the trend in the coming months. There are many good arguments to explain why the run of the past months could now reach its climax and we are close already to the peak of the season. This does not necessarily mean that any new drama is on the horizon, but the normal and regular cycle could also apply this year.

Usually things start to ease at the end of the quarter, but owing to the conditions, there is at least a fair risk that this is happening a little earlier this time. In the coming weeks Asia will be in holiday mode and this may also mean that producers will take a little bit of a rest to review the situation. We do not like the big spread between present raw material price levels and leather prices. When leather demand rises and manufacturers become willing to pay because consumers appreciate leather and are willing to pay for it, we will review our position.

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