Macroeconomics

We followed the National People’s Congress in China with great interest. The five-year plan has been always quite important. In China, plans are set to be followed and executed and this means the government means what it says and does everything to make plans happen. China is looking for greater independence from the global markets. Countries serving China’s almost endless appetite for raw materials, in particular the strategic ones, might look on this in a relaxed way. For those relying on cheap manufacturing in China, it might be time to look for alternatives. The tremendous problems of logistics and significantly rising prices which have to be expected should trigger new ideas about where and what to produce in the future.

The big stimulus package in the United States with a total amount of $1.9 trillion has triggered more optimism about the global economy again. In an economy in which private consumption accounts to more than two-thirds of GDP, direct stimulus plays a very important role.

Oil prices continued their rise. Most analysts and pundits see oil prices reaching a peak by mid-year at the latest and expect rising production and falling prices for the second half. This could be quite important because, otherwise, the disposable income of consumers globally will be badly hit by any rise in prices for petrol and heating oil or energy in general.

Gold prices continue to slide, causing those who were predicting new records some months ago to reconsider their positions.

The US dollar continues to trade in very narrow ranges. The markets seem to be undecided about how to value the dollar; there are strongly divergent opinions about inflation and interest rates on either side of the Atlantic.

Leather Pipeline

The leather pipeline is in a difficult phase now. Sometimes the situation along the supply chain is a little bit like in the stock market: facts don’t count, numbers do not play an important role and it’s all psychology and sentiment. The moment the majority begins to ignore the facts, we enter dangerous territory. Those who are in possession of raw material feel comfortable and see new commercial benefit. Those who are short of product suffer and regret not having bought in time; they are beginning to count the losses they will incur if raw material has to be delivered to satisfy production needs.

This is what a bull market is made of. Only when the last buyer has left the market and the fish starts to smell will the seller think about sales promotions. At the moment we are in a situation of hardly anybody thinking about the quality of the fish yet.

Of course, buyers and sellers are completely take different views of what constitutes an adequate price level, but in general it is hard to find anyone presently who is not convinced that raw material is in limited, if not in short, supply; this argument is strong enough to justify the constant rise of asking prices for hides and, in some cases, for skins too.

Talking to several of regular sources and pundits, we have found very few with any serious concerns about the market trend for the time being. Almost everyone reports continuous and regular demand. They see the pipeline as under-supplied and everyone is betting on a strong recovery of global consumer spending when the effects of the pandemic begin to fade. For the leather pipeline, that is something that has to be planned at least six, and maybe nine, months ahead. 

This winter, the market was driven by strong demand for upholstery leather, followed by a stable recovery in demand from automotive and the hope that shoes and leathergoods will recover too. So far, so good. There is very little room for any scepticism in the trade at the moment. No matter who you talk to, from raw materials to chemicals, everyone is reporting record levels of sales and shipments beginning in November and continuing until today.

So, why worry? Because the real picture is about what is happening at the beginning and at the very end of the pipeline. These are the two determining spots where the long-term trends are set. Everything else in between is just a shift of product up and down the supply chain.

As regards the supply of raw material, the question is if there is a shortage. Is there a shortage if, for a short time, purchases have exceeded production, or can it only be called a shortage if the demand for finished leather products consistently outstrips the available supply of raw material? Beef producers who receive more enquiries for hides than they are going to produce in the next months will say there is a shortage. With the exception of the US, there is a decline in cattle slaughter, for various reasons. This supports the argument that there is a shortage situation.

However, a shoe manufacturer or brand who is producing for a season of retail sales starting in six or nine months with no idea of what the sales results will be will have a completely different opinion. We had a fantastic winter season for upholstery leather, because the price of leather was very competitive at the beginning of the season and around the globe, under the lead of China, people focused on their homes and were spending a good part of their disposable income on new furniture and home appliances because they couldn’t spend on holidays and travel. It’s possible that upholstery leather production and consumption was 20% higher than in the previous winter season.  So far so good again.

Automotive, a high-flyer in the past, was on hold in the second and third quarters of 2020, apart from in China. It is a just-in-time dominated industry and inventories were adjusted accordingly. Since then, automotive manufacturers have been ramping up production again and have returned to reasonably stable levels of car production, similar to those of three year ago. It would be tempting to think this would mean the same volumes of automotive leather would be required now as three years ago, but it’s not as simple as that. With the exception of China, vehicle sales do not match those of a year ago. There are additional questions about the kinds of vehicles being produced and sold.

In the side leather sector, once again, it is all about China. Chinese consumption is stable and strong and online sales are helping to compensate for earlier losses. However, this is not the case in the rest of the world. Shoe and bag sales are definitely down elsewhere. Retailers, wherever possible, are now trying to clear older stocks and they will have to restock for the seasons to come. A high volume of shoes come from Asia and logistics have become very difficult, far more expensive and much delayed. This is toxic for leather shoes. In the mass market for shoes and bags, it is difficult to find any real convincing argument to say that demand for leather is keeping pace with the rise of sales.

This might not apply to high-end dress and fashion shoes. All the social events that had to be cancelled or held in a different way will come back when the pandemic is over. Weddings, parties and other social events that require smart dressing will have a positive impact on shopping activity. However, the volumes in this part of the market are too small to have any serious effect on the whole. 

When everything came to a stop last year, production declined and the flow of product slowed, creating congestion at the starting point of the pipeline and the collapse of prices. The pipeline began to get back up to speed last October, but the consumption of finished products made from leather is still lagging. This should be a warning sign. It will not prevent any seller to lowest prices in the short term and it will not help any buyer who has to secure raw material in the short term.

Tanners now have to discuss new leather prices on basis of the present raw material market. Fortunately, in the terms of prices, they are lucky that the prices of potential alternatives to leather are having to be adjusted too.
In the split market demand is rising, but so far it has not yet converted into a strong recovery of prices. However we would not be surprised if split prices were to benefit soon from the situation in the cattle hide market.

In the sheepskin section too demand is rising, partly because wool prices are going up. However, the prices of sheepskins and lambskins have not yet really increased substantially and there are still reports of plenty of sales for skins at around $2 per piece. We still have decent potential for more demand and better prices in the months to come. If we look at the behaviour of buyers in the Middle East in particular, they could become frustrated by being too late to the party once again.

For the coming weeks we do not expect any fundamental change. There might not be very many new leather contracts going into the order books, partly because we are coming into the low season, but many productions still have to be filled. With the general mood in the pipeline, it might be a good idea to spend more time now collecting information and planning inventory needs with great care. This applies to everyone, sellers and buyers.

Share this story: