Macroeconomics

We wish our readers a healthy, happy and prosperous new year. Everyone wishes for health in these times, but nevertheless, we approach this year with more confidence and optimism. Although the Omicron variant of covid-19 is the all-dominant topic at the moment, milder cases and new drugs that significantly improve treatment provide more confidence and hope.

However, it is indisputable that we will all still need some patience. Until all the medicines and measures take effect and winter ends in the northern hemisphere, we still have at least three months in which many things will probably remain as they are now. The incredible increase in infections in the last few weeks does not seem to have come to an end and now the only question is whether the course of the disease will be mild enough to avoid overloading the hospitals. If this can be confirmed in the next few weeks, then a very big step will have been taken. If further drugs are then approved and their efficacy confirmed, then there really is a very good chance that we will be able to return to normality in the course of this year.

However, the problem of what is defined as normality in different countries remains. Ways of dealing with the pandemic vary greatly, ranging from the extremes of a zero-covid strategy, as in China, to a very tolerant and relaxed form, as in Sweden, the UK or, for lack of a better infrastructure, other parts of the world. Of course, the most important question now is whether the Omicron variant will also spread in China. This could bring the whole country to a standstill at an inopportune time, with the Olympic Games due to begin in Berlin on February 4. If there are local supply problems, as has already happened to some extent in Xian, it will be a major challenge for the Chinese government.

From a purely rational point of view, it remains a bottleneck issue. The bottleneck is the hospitals and, more specifically, the intensive care units. If this bottleneck can be successfully managed, then the pandemic is also manageable. Individual protection, through appropriate behaviour or sufficient vaccinations, is now available almost everywhere.

Besides the pandemic, politics and local tensions remain. In addition to the unresolved situation on the border between Russia and Ukraine, the unrest in Kazakhstan has now also gained importance. These local flashpoints remain a threat to world peace.

Apart from the political problem, inflation remains the dominant issue for the world economy. The US Federal Reserve has reaffirmed its willingness to raise interest rates to curb price increases. In Europe, this is still a long way off, which will increase tension in the international financial markets. On the stock markets, people have already reacted by selling technology stocks, which traditionally suffer from rising interest rates. A trend of shifting from risky, high-growth stocks to more defensive, value stocks can already be observed.

Nevertheless, the overall movement on the financial markets is still very small. The stock indices fell slightly, precious metals also moved relatively little and only oil was able to recover somewhat after the most recent OPEC decisions and relatively positive forecasts for consumption; prices rose again to values of over $80. The value of the US dollar has hardly changed at all since mid-December and has been hovering slightly above the $1.13 mark against the euro for weeks.

Leather Pipeline

As expected, the start to the New Year was very quiet. In Europe, this was to be expected, as many companies took the opportunity to close for the first week of the New Near. In many countries there were also public holidays, so the business year only really starts now.

An increase in covid-19 infections is also playing a significant role in the leather pipeline. It’s not so much that current business is affected; it’s more that it makes it very difficult plan for the weeks and months ahead. No one knows how many workers they will have available over the next few weeks, and no one knows if deliveries, inbound or outbound, will arrive or leave on time.

In some industries it is that missing computer chips hinder repairs and the punctual delivery of machines. In many other industries it is very simple things, such as a lack of packaging material that leads to short-term difficulties. If you have sufficient stocks today, you could hear tomorrow that deliveries you planned for will be considerably delayed.

In any case, this is the daily reality for anyone who depends on imports from overseas. There is hardly a ship that reaches port on time today and all companies are desperately looking for secure delivery alternatives. In many cases, parts are already being used today that do not actually meet the manufacturer’s quality standards, and behind closed doors there is more and more talk about the quality problems that result from this.

Many are also struggling with the massive price increases in procurement. Import and wholesale prices are rising massively and to an unprecedented extent. Whether and to what extent this can be passed on in sales prices is up in the air, depending on the industry.

In the leather industry, this particularly affects the chemicals sector. No manufacturer can really complain about raw material prices in the last few months, as they have fallen almost continuously since last summer. This has a dampening effect on the calculation for leather production. Of course, this is much to the displeasure of the meat industry, which would like to see much better revenues for its by-product. Nevertheless, it must be clear to everyone that this supports the sale of leather. The positive news is that the position of leather as a material has not deteriorated, at least in terms of price competition. What always makes one wonder, though, is the resistance in the clothing sector to fall back on cheap nappa leather. Sheepskins and goatskins continue to be unrivalled in their cheapness, and yet there is really no fundamental recovery in demand.

The increased uncertainty caused by the pandemic has understandably also led to a wait-and-see attitude in Asia. While interest in raw materials from China was quite stable until the turn of the year, this has weakened as infection figures have risen. By the end of last week, most reported that customers in Asia had almost completely returned to waiting. Only suppliers from the US thought they could see some revival.

Looking at the commodity market, we are disturbed by many discrepancies that harm confidence that the market situation can be stable and reliable. From our point of view, tensions are building up at the moment and the resolution of them is very difficult to predict. We continue to believe that the reported sale of raw material does not reflect the actual demand for leather. Prices have fallen and the low levels that have now been reached naturally invite every tannery that has the financial resources to secure material at these levels. The only question they face is whether sufficient leather orders will then come in to allow the tanners to use those hides. This may seem irrelevant in the long run, because low-priced stocks have never hurt anyone in the leather industry. Therefore, the idea of taking advantage of low raw material prices to keep production running as stably as possible is not at all far-fetched.

A critical factor is the volume of raw material that has not yet been loaded and shipped. There should be no problem as long as outstanding contracts can all be transported within a reasonable time. At the moment, however, one cannot help but get the impression that strategic buying is definitely taking place, especially from Asia. This means that raw material is being bought in all regions of the world as a hedge against possible further delays in delivery across the Pacific. What good are contracts that end up being shipped months late?

It should also be borne in mind that leather production and demand usually start to decline again in the second quarter. Theoretically, a situation would be conceivable in which transport capacities return to more normal at the end of the first quarter and thus many of the backlogged contracts can be shipped from the US, while at the same time leather demand declines.

All this is remains theoretical, of course, but it is worth considering, especially if one takes into account that the pandemic in China could still cause surprises in the coming months. Close observation of the situation seems very advisable to us in the coming weeks.

Overall, the leather pipeline has not had much in the way of facts and information to absorb in recent weeks. The furniture and footwear sectors are largely back to normal, eyes are now turning more and more to the automotive sector again. We mentioned last year that global vehicle production in the last quarter was far below expectations. The reasons for this are largely irrelevant now. The market for new vehicles continues to dry up because the vehicles are not being built and the demand for leather for production has thus been far below normal levels. This, of course, conversely means that we are looking at a wave of backlogged production and this gives many people hope that there is pent up leather demand there that could affect the market, at least for raw hides, in the near future.

It’s a difficult discussion, because no one but the parties themselves can say at the moment exactly how much stock has already built up in the pipeline that first has to be reduced. Here too, close observation is necessary, because developments in this sector will certainly be of great importance for the whole of 2022.

The split market had a quiet time too over the turn of the year. We only saw continued good demand for splits from the gelatine industry. In China, there is talk of fluctuating prices, while in Europe the price level increased slightly. Nevertheless, we are of the opinion that the market in this sector can be assessed positively for the near future.

There was not much movement in lamb and sheepskin. However, we note that there is now very good demand for the fine types, suitable for lining and some clothing items. Despite the economic turmoil in Turkey, the leather industry seems to be benefiting from the fall in value of the Turkish lira. Many tanners seem to be surprised that they no longer have easy, cheap access to any amount of high-quality skins worldwide. Of course, raw materials for lining items are not arbitrarily interchangeable, but it is still surprising that many tanners did not expect that the raw material would simply no longer be available, regardless of the price. Regrettably, however, this situation has not yet been reflected in demand for nappa articles.

No profound change in the market situation can be expected for the next few weeks. Of course, activity will return to normal, especially in Europe. In Asia we are now facing the Lunar New Year holidays and, in China, the Winter Olympics in Beijing. There are many theories about how much this will affect the production of the leather industry there, but none of these theories is very convincing. No one would be surprised if the leather industry, especially in northern China, were to take a longer New Year break than normal. It’s just that this is what everyone has already calculated for anyway. So, it would really be the opposite that would come as a big surprise. It is more likely that we will have to look at the situation day to day and that it will probably take a few more weeks before we can think about market developments in the medium and long term again.

 In any case the situation remains somewhat concerning.

Share this story: