Macroeconomics

The US President’s first trip to Europe included meetings with almost all the major players, when the G7 met in England and then at a NATO Summit in Brussels. He also met the president of Russia in Geneva. Most observers said the meetings had been positive and that diplomatic relations seemed to be returning to normal. The government in China, the third superpower, viewed these events rather critically, though. 

The pandemic remains a defining factor in the public debate. While in many countries infections are decreasing and there are further relaxations in public life, there are regions in which either the delta variant or relaxations have led to an increase in infections. The UK, Chile and, at the moment, the city of Moscow are particularly worthy of mention. Let us hope that increasing vaccinations later in the year will be able to contain the spread.

In the US, the new government is trying to contain and control the market power of the big technology companies. There has also been progress on the taxation of these companies in other countries, with an agreed minimum taxation of 15%. However, implementation remains a major problem.

The price of oil rose well above $70 per barrel and was therefore also a central topic in discussions about inflation. The announcement by the US Federal Reserve that it would consider raising interest rates from 2022 onwards, and that it was already planning to do so in 2023, caused some unrest in the financial markets. Stock markets were still able to defend their valuations quite well, but the prices of commodities came under pressure very quickly.

The discussion about inflation remains very scientific. For consumers, prices are rising very significantly at the moment, especially for essential products. Food and energy have become much more expensive, even though they are often left out of the inflation calculation. Nevertheless, inflation has already risen to between 4% and 10% in many countries and it is not clear whether the experts are right that this will only be a transitional phase. The next price increases for consumer products are just around the corner, as the increased prices for raw materials and transport will only take effect in the shops in the second half of the year. In our view, the real increase in consumer product prices is yet to come.

Global logistics is also facing another major challenge. The port in Yantai has been almost completely closed for a fortnight because of covid-19. This will cause significant delays in the supply chain, which will be another major problem in an already tense situation.

The US dollar reacted to the interest rate policy announcement and strengthened by more than two cents against the euro to a level of around $1.19.

Leather Pipeline

The situation in the leather pipeline has not changed significantly in the last two weeks. The basic parameters that have been with us since the end of the first quarter remain valid. In a nutshell this means stable production and demand in Europe, significant decline in demand in Asia, a decrease in furniture demand and an increase in shoe leather production, a decrease in slaughter in Europe and an increase in North America, logistics problems and build-up of inventories, further recovery in automobile production, factories slowly beginning to prepare for the summer holiday season in Europe.

In terms of raw material prices, the levels in Europe and North America have continued to move apart. European tanners have had to find supply at short notice in local markets. With slaughter numbers falling at the same time, the slaughter industry naturally responded accordingly and prices for cattle hides at European slaughterhouses rose.

Anyone who looks at the price increases since last summer can very quickly get an idea that this kind of change can hardly be passed on immediately in the chain. The slaughter industry, of course, points with some justification to the low prices of last year, which enabled many leather producers to widen their margins considerably; the falls in raw material prices were not passed on in full in the prices of finished leather. As is so often the case, the truth lies in the middle. First of all, the few available company results from the leather industry are determinative. The figures that are available for the 2020 financial year, and these are essentially those of the major groups, show a very positive development, as the sharp decline in sales over the summer was reversed in the last quarter and this enabled the tanners not only to recover sales quickly but also to achieve very positive margins.

In the meantime, however, it is probably fair to say that a fair balance has now been struck for all sides over the entire cycle of the pandemic and the focus is now on how development, sales and prices will progress in the coming seasons.
The cycle is mostly led by production in Asia owing to long supply chains. One can certainly discuss why Chinese tanners were still willing to support a rising price trend in March, but it is also clear that in recent months this has come to an end.

 The leather industry in China appears to be more than adequately stocked and only isolated large companies have remained active in raw material procurement. If the statistics are to be believed, however, the volume is not sufficient to absorb the amount of cattle hides being produced. European suppliers could still profit from the demand and the short-term needs of the European leather industry, but the situation in the US is not so clear.

Owing to the reduced slaughter, no significant sales pressure has yet built up for raw material in Europe. However, the two summer holiday months are now approaching, new prices for the new season still need to be discussed and it is possible that the stable and steady demand from the automotive leather sector could be affected by production cuts in the coming months. All of this, combined, could very quickly lead to a significant drop in raw material deliveries and with summer temperatures expected, this has never been something that main suppliers like very much.

Normally, the hides that cannot be delivered to the European leather industry during the holiday season are snapped up by customers in Asia. They have to buy early and they have to get the goods shipped more quickly to ensure early production and delivery of finished leather in the winter season. For the European market today, however, the problem this year is that the prices are clearly too high for the international market and, therefore, a short-term adjustment is necessary if there is to be the usual balance with Asia and summer shipments.

Suppliers from the Americas do not see any need to adjust their prices at the moment. The weaker US dollar and the higher prices in Europe have enabled them to successfully defend their price levels to date. Where this was not possible, special contracts were concluded with major customers, some of which deviated significantly from the official price levels. In this way, sufficient quantities were still moved so that, at least in public, no major changes had to be made to the prices and, sometimes, this even made certain types of hide more expensive.

This was especially true of the hides favoured in the shoe industry. Demand from tanners of furniture and automotive leather in Asia is not keeping pace and, thus, the price differences between the different product groups have been reduced.

In the next few weeks, the next steps on the raw material markets will have to be decided. It will become clear whether the market for hides and skins will follow the path of other commodities. The expectation of rising interest rates is already having a negative impact on the equity markets and on many commodities. This can be a snapshot, but it can also be a trend reversal after long months of a clear direction. It is very likely that we will get more reliable information in the coming weeks.

For the moment, logistics and supply problems are still to the fore. For all companies with any materials or business in a supply chain that goes beyond their own continent, the problem remains that delays of 30-60 days are currently the norm.

 This is only the delay caused by the transport. In addition, of course, there are also supply difficulties that can be traced back to the production of materials in the supply chain. Today, companies can only absorb this uncertainty if they are prepared to expand their stocks accordingly. Reliable sources report that, for example, chemical stocks and spare parts have basically doubled. This means additional demand that may distort the real situation. Nevertheless, in the current situation, companies have no choice but to build up these safety buffers to avoid interruptions to production.

If we look at the real situation of demand for goods related to the leather supply chain, we get different results. If we only take the automotive industry as a reference, then it is easy to see that vehicle sales have picked up strongly in the last six months, but the total number is still well below the comparative figures for 2019. We are hearing of a similar situation in the shoe and bag sectors. Sales and expectations may well be positive, but measured against the realities of the normal years 2018 and 2019, large increases in demand cannot be seen.

Consequently, this means that the replenishment of stocks and the extension of delivery times can currently still lead to increased demand, but that without a significant improvement in the image of leather and the sales of products made from leather, this effect may well be only temporary. The biggest problem here is always the different timeframes in which the various stages of the production chain operate and think, with very short cycles at the beginning of the chain and relatively long cycles at the end of the chain. These differences are extremely difficult to synchronise.

In the market for splits, there is still a great deal of calm. There seem to be no extreme imbalances in supply and demand, either from the leather processing side or from the collagen or gelatine sector. Increased production in the leather industry and, with it, increased production of the different types of splits does not seem to be a major problem for the market at the moment.

Sheepskins and lambskins have not yet been able to profit significantly from the price increases in raw materials. Certain niches and high-quality skins are exempt from this. Slowly, however, the wind is beginning to turn here, too. Rising prices for wool and the reduced supply are slowly but steadily ensuring that prices continue to recover bit by bit. Only in the case of articles that are almost exclusively dependent on the market in China does the situation remain more difficult. Despite the politically complicated situation in Turkey and the significant drop in the value of the Turkish lira, activity in Turkey has increased significantly. Certain supplier countries report strong interest and large purchases of skins that are only available seasonally.

For tanners who re-export the bulk of their production, the fall in the value of the Turkish lira naturally means a considerable cost advantage. Experience shows that this is only short-term, but for the moment it is certainly a decisive competitive advantage for many leather factories. We continue to see, especially in women’s fashion, more items using leather. Wherever it is possible to physically inspect the products, one can only be impressed by the quality on offer.

In the coming weeks, more and more people in the northern hemisphere will start planning their holidays. Holiday planning means planning production in the business sector and at the same time discussing with the family how and where to spend the holiday this year. For many, the decision may already have been made, but due to the high level of uncertainty caused by the pandemic, there will certainly still be many whose decision has not yet been made.

The holiday season will have a major impact on the development of the markets. Will there be more or less meat consumption? Will there be a return to shopping activity or will the money saved be spent in restaurants and on holiday activities? What goods, if any, will be purchased for leisure activities? What influence will the supply of raw materials have on the entire production chain? Will furniture be sold successfully for another season after the excellent 2010-2021 season? How will the luxury sector develop? What impact will the countless leather alternatives in the market have?

There are many more questions and we will try to answer them all in the coming weeks.

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