Macroeconomics

In the affairs of the global economy, the subject of inflation is increasingly coming to the fore. Inflation rates in the US have already reached 4% and rising figures in Europe are raising questions too. National banks and politicians are sticking to their convictions that these rises will only be of a short-term nature. The political intention is to protect national deficits from higher interest rates and to maintain the policy of cheap money. This is understandable, but not necessarily good for the macroeconomic situation in the future.

The post-crisis recovery in many countries is continuing. The labour market in the US and the growth figures there are developing positively. The global economy is now expected to grow by almost 6% this year. However, it remains unclear whether this takes into account possible interruptions caused by supply bottlenecks for various materials.

The equity commodity markets remain on firm ground. Momentum has certainly slowed and the possibility of interest rate hikes have unsettled investors somewhat. However, to date, this has not translated into any correction in the markets.

The euro is resisting any possible weakness and the exchange rate against the dollar continues to move in very narrow ranges between $1.21 and $1.22. Gold is again showing itself to be a good indicator of inflation expectations and has, meanwhile, reached rates of $1,900 per ounce again. The oil price has meanwhile reached $70 per barrel again and investors are betting on consumption rising again owing to increasing travel activity this summer and further expansion in industrial production.

Leather Pipeline

Although the topic of sustainability has been with us for some time, the impact and scope of the discussion has increased significantly in recent months. Global brands and media started it, but by now it has reached almost every aspect of life.

Today there is hardly any service or product that is not described as sustainable. Each enterprise uses it in its public representation or to the praise its own achievements. The term sustainability now appears more as a routine than a statement. It has now turned into a race to outdo the competition and there is more focus on the use of the term than on any presentation of the facts.

From corporate philosophies, to advertising, to the behaviour of management and employees, the use of this term knows no bounds. One has the impression that everything from underpants to banking services, from food to clothing, from mobility to education, from vacation and wellness to simply doing nothing must be declared ‘sustainable’ in principle. The problem, which apparently no one sees, is the fact that there is no single definition or calculation of sustainability.

 Everyone builds their own story to document that whatever they do or make is sustainable. The term has become so widespread in its use that consumers now almost don’t care what it means, but expect it to be guaranteed, no matter what. 
A similar inflation has occurred in many areas of food, where the term ‘organic’ now adorns many products without definition of what it means. Something similar is happening with the term ‘long-lasting’.

The leather pipeline seems to lack the courage to do what everyone else is doing. While there are people who use the topic of sustainability to attack leather, and even go so far as to declare the destruction of hides and skins more sustainable than processing them, the leather industry continues to fail to make its own sustainability credentials clear. If this is not done quickly and successfully, it will be very difficult for leather to withstand attacks from anti-meat activists. Leather remains a central target for these movements. Fortunately, consumers in China and the US are still willing to buy good products made of leather. Proof of this can be seen by examining the leather pipeline over the last nine months.

If we take a quick look at the market activities of the last two weeks, we can see a typical seasonal development, but on the other hand we can also see that the market situations in Europe and Asia are moving further apart. Momentum in Asia has already slowed considerably with the start of the second quarter. Buyers, especially in China, are now doing everything they can to bring raw material prices down again before the start of the next production season. Sufficient stockpiling of material they bought when prices were low means they have time on their side. In Europe, the leather industry still has to secure enough supply of raw material to last until the summer holiday. In combination with a reduced supply, the corresponding price pressure in Europe has not yet materialised.

That is why price levels are diverging and we are seeing a reversal of the situation we had in the last quarter of last year. At that time, the price ideas of the European tanners were significantly lower than what the Asian customers were willing to pay. At that time, the flow of goods went mainly to Asia. Today, though, suppliers are trying to sell to European tanners if they possibly can. This is certainly also because of the problems in logistics.

Overall, the raw material prices are moving relatively little at the moment. High-quality raw hides, which are seasonally available in smaller quantities, can still book surcharges here and there, but at the same time discounts must already be accepted for standard articles. So far, suppliers are defending their price levels quite successfully and are refusing, at least officially, the price reductions demanded by customers.

We see little movement in the split market. Again, there is currently no major mismatch between supply and demand, either in the leather sector or for use in the collagen and gelatin industries.

For sheep, lamb and goat skins, the situation is similar, but with one exception. We are currently in the slaughter season for new season lambskins in northern Europe. This usually starts at the end of the first quarter. As this commodity is only available intermittently, tanners have to stock up on this raw material into the summer to ensure supply for certain items. The season started quite well in terms of demand and price development. However, in recent weeks the situation has clouded over significantly and demand is not meeting expectations at the moment.

The main markets in China and Turkey could not or did not want to pay the suggested prices, although these were still at a relatively low level. As a result, the pressure on suppliers is increasing at the moment and we are already hearing that if there is no lasting change in the situation in the next few weeks, corresponding price adjustments may be necessary. However, it is not clear whether lower prices will stimulate more demand.

The main sales markets for the finished products are in China and Russia. Manufacturing is very much concentrated in Turkey and China. Logistics costs to China are a problem while the political situation in Turkey and the associated risks in the currency market play a decisive role there. We will continue to monitor the situation intensively in the coming weeks and at the moment there is still enough time to solve this season’s problem.

For the coming weeks, we must assume that the markets are currently in the usual phase of reorientation. The old season is coming to an end in many sectors and the holiday season is starting in the northern hemisphere. The latest developments with the pandemic are, on the one hand, positive, but on the other hand we have learned that things can change quickly. 

In the US we are in the peak season for meat production, while in Europe we are entering the period of lowest production. At the moment, we do not see any willingness in the meat industry to give up what has been achieved after the strong price developments of the last nine months. However, within the leather pipeline, some caution is developing as to whether the increased raw material and production costs can really be passed on to the market next season. At the same time, the problems in the supply chain have obviously also led to higher inventories being built up overall.

 So if demand in the coming months does not meet expectations, the hopes of raw material suppliers could quickly be dashed again. Whatever happens, market risk has certainly increased significantly in the meantime.

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