Macroeconomics

The geopolitical balance will be further shifted by the events in Afghanistan.

The impact of renewed flare-ups of the pandemic in many countries should not be underestimated. The situation in China, southern states of the US and also the new outbreaks in New Zealand and Australia are putting a new strain on the economic outlook, and above all on international logistics. The rising numbers in Europe, which are mainly due to travel activity during the holiday season, pale in comparison. The relatively high vaccination rate in Europe and the resulting lighter course of the disease mean that Europeans are now somewhat more relaxed about the situation. Nevertheless, there is much discussion about how things will develop in the autumn and what the extent of a fourth wave will be.

The financial markets reacted less to the political situation and the difficulties with regard to the pandemic than one might have expected. Only the fear of rising interest rates caused brief reactions in the very short term, but these were offset relatively quickly. All in all, the stock markets have moved in very narrow ranges over the past 14 days and remain close to record levels.

Inflation is another topic for discussion. It no longer seems as if the significant increase in commodity prices, the emerging shortage of goods due to transport problems and other cost increases will be short-lived. Many companies are already raising their prices, in some cases significantly. The stance of many experts and the national banks that this would only be a short-term statistical and temporary development after the covid-19 crisis can no longer be maintained in our view.

 Normally, wage increases and, thus, higher labour costs follow, which would then also accelerate the inflationary spiral in classical theory.

Commodity markets also reacted to the change in the overall situation, but many commodities have since recovered. Oil was able to exceed the $70 per barrel mark again and gold also had a brief period of weakness, but this was also only short-lived and the troy ounce reached prices of over $1,800 again.

Leather Pipeline

The holiday season is not yet completely over and most companies in Europe will only fully resume in the coming weeks. In addition, the period until the end of September is still a phase of transition between the seasons and it will take a few more weeks to ramp up production.

For many years, we have only been concerned with a few parameters on the demand side. Essentially, these were the question of how consumers would behave in the first place and what they would spend their money on, and then, increasingly in recent years, the question of what the future use of leather would look like. Much of the demand that was lost in the shoe and clothing industry was largely offset by growth in the automotive sector. The furniture industry was then something of a wild card in the game every season.

This year, however, we are dealing with a new and unprecedented scenario. Basically, producers, especially in Asia, have been betting on a quick recovery in consumer demand over the past nine months. The low commodity prices invited increased production and everything seemed to be going to plan when consumer spending, starting in Asia, recovered faster than expected. So far, so good. However, in recent months the extreme impairments of global transport and logistics and the resurgence of the pandemic have become an essential part of any analysis of the situation. 

The difficulties in international transport logistics are now well known. Either products and components do not arrive at all, or they are delayed and their prices are often no longer calculable owing to higher transport costs. Large retail chains and discounters can no longer plan their offers and marketing campaigns in the same way because seasonal products may arrive so late that they have to be stored for a long period of time. Certain demands, especially the Christmas business, may not be satisfied at all. No one knows for sure at the moment because there are almost no binding statements anywhere.

In other sectors, or as is already the case in the automotive industry, production has been temporarily reduced or even suspended altogether. An announcement from Toyota that it will have to reduce vehicle production by 40% in September may serve as just one example.

Rising infection figures have led to renewed lockdowns in many countries. At the same time, it is of course true that in large markets like Europe and the US, normality is increasingly returning. Nevertheless, uncertainty prevails and a realistic statement about supply-and-demand behaviour will only be possible in October. In the leather industry, with the exception of the automotive industry, one must always remember that planning and production are already under way for next year and, of course, many decisions are to be based on the results of the current season.

From Asia, and especially from China, voices are growing louder and louder, pointing out that the flow of liquidity is also slowing down in line with the delayed flow of goods. Exporters of finished products are experiencing delays in receiving payment, because payments only come when the container is shipped; if things go badly, the goods can even be rejected because of delay and payment denied.

At the same time, however, raw materials are slowly and surely piling up. Here it is not so important whether the goods are already sold or not, but it is important whether the goods arrive on time and can be used in production as planned. All this is inextricably linked to the question of sales of finished products in the coming months.

Even if no one really wants to hear this today, it is not completely inconceivable that the almost unlimited optimism of the last few months could very quickly be curbed or even cut short by circumstances. Fortunately, it has to be said, we are facing the production-heavy phase of the year, which ought to save us from too many negative surprises.

Another aspect that will also certainly have a positive effect is the relocation of production wherever possible. It has already been noticeable in the last few months that producers and retailers are trying everything to find more suppliers and more products in the immediate vicinity. This is certainly not possible in a hurry in all areas and for all products, but in leather production there are sufficient capacities to take over a good part of the production for the time being. Of course, it is difficult in the processing sector, because additional capacities cannot be made available quickly. Nevertheless, the market and entrepreneurs are inventive and flexible and therefore one may sometimes be surprised how quickly things can be implemented that seemed impossible yesterday.

The significant increase in the cost of transport and the sharp rise in the overall cost of production in China have made many manufacturers in Europe much more competitive. Leather production is certainly one of them. Added to this is the uncertainty of overseas supply. Not getting goods at all is much worse than paying a little more for assured availability. In any case, the price difference between Asia and Europe has narrowed considerably.

It is regrettable that commodity suppliers have simply not been willing to take their foot off the gas a bit in recent months. These developments began to emerge in the spring and a little more forward-looking caution would have reduced the risk a little more. However, it remains wishful thinking that the medium- and long-term planning in the leather industry could synchronise with the short-term thinking of the meat industry. This is why business in raw materials has been rather restrained in recent weeks.

While the tanners in Europe were on holiday and showed little interest in taking care of the raw material market from the beach, the lake or the mountains, hopes of business from China to compensate were dashed this year. There were reports here and there of sales and interest from Asia, but truth in the end was that the volume was very small, the prices not particularly inviting and the increased transport costs made the proceeds from sales to Asia less attractive. The consequence was that there was very little business in the end.

In the US, the situation was similar to that in Europe, but the problem of transportation and logistics weighs much more heavily on decisions and sales there. Other markets in Central and South America also report the great difficulty of having sufficient transport available. If the goods cannot be transported, it is of little use to make them available for sale. 

In Europe, many have claimed that the demand for raw material, especially from tanners in Italy, will remain high. We are rather sceptical. Perhaps we are talking to other sources, but those who are willing to share their assessments with us are not of the opinion that there has been a lot of raw material purchasing in Italy in recent weeks. It is true that in July and before the holidays the situation was much more positive, but we do not believe that this has led to tanners looking at their smartphones every five minutes while on holiday, trying to buy extra hides and skins at all costs, despite the lower kill.

They are very much aware of the situation globally and they will only deal with it again in the next few weeks, taking into account everything that has happened while they were on holiday.

From our point of view, the split market was hardly any different from the market for hides. The only remarkable thing is the news that the prices for wet blue splits in China are clearly under pressure. This is remarkable because production is not exceptionally high and, therefore, the supply is not particularly large either. In the case of splits for leather production, the problems are just as extreme in the area of transport logistics. Markets like China and Vietnam play an even bigger role here than they do for hides and skins. Here, too, the maxim is to wait and see in order to get more clarity about orders and logistics problems by the end of September.

For lambskins and sheepskins, demand continues to focus almost exclusively on high-quality double-face materials. Beyond that, the situation has become just as gloomy as we have already described for cowhides. The renaissance of garment leather that we thought we saw in fashion last year has unfortunately not translated into mass business. Whether this is due to the influence of covid-19 we really can’t say at the moment. We continue to see more leather clothing in the media and on offer, but unfortunately we do not see the real breakthrough we were hoping for in the market.

In the next two weeks, most market participants will probably continue to try to sound out the situation and make as few mistakes as possible. After that, the phase will probably begin in which final decisions, of whatever kind, will have to be made. It is not really conceivable that one can start the production-heavy period without decisions on the supply of raw materials. However, those who immediately see this as the start of new price increases could be disappointed.

In Europe, slaughter will increase and in the US and other countries the outflow was probably not as outstanding as many people would like us to believe. There are production difficulties in the automotive industry, many of which are expected to continue for the next few months. This could lead to a backlog of semi-finished and finished material there. The furniture industry will also have to contend with problems in the supply of materials such as wood, foams and fittings as well as dealing with lower demand after a great last season. In footwear, the issue of transport will certainly play a decisive role in the next few months.

All in all, we remain still very cautious about the restart after the summer holidays.

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