Macroeconomics

 The headlines continue to be dominated by the same events in politics and economics.

We continue to see the geopolitical situation as quite dangerous. The thought of a possible military confrontation may seem extremely remote for most people in Europe, but the risk has clearly increased. At the moment, of course, we all still assume that the problem will be resolved diplomatically, and that should be everyone’s hope and aspiration.
Recent missile tests in North Korea may not seem like an immediate threat either, but it is further proof that political leaders can reach strange decisions without too much notice.

China’s position in the coming weeks will be determined by a desire to see the Winter Olympics succeed, but the basic position on Taiwan and the disagreements between the US and China have not changed at all.
Galloping inflation in Turkey, which is being handled by very unconventional methods by the government, could quickly lead to unrest and destabilisation in the region. Turkey is also a NATO member and stability there is of great importance.

The world economy is currently being affected by two particular circumstances and a third that we have been struggling with for a long time. The debate continues about the extent, duration and importance of inflation for the financial markets.

The second is, of course, the extreme rise in energy prices. Food also continues to rise in price and thus the most important core expenses of families are affected. Only a fool would retreat to an academic discussion about the definition of inflation. The European Central Bank (ECB) has once again decided to stick to its zero-interest-rate policy and has once again postponed the decision of a possible fight against inflation for at least four weeks. In the end, history will judge how the actions of the current ECB leadership work out. Finally, global logistics remains another core problem of the global economy. Increased freight prices and the difficulty of planning are weighing heavily on businesses.
In the US, the Federal Reserve has signalled that it will respond to rising prices by raising interest rates this year and probably next year as well.

The financial markets have also shown clear disquiet in the last two weeks. This anxiety increased significantly last week, and in anticipation of rising interest rates, growth stocks in particular are being sold on the financial markets and shifted as far as they can be into asset stocks. Initially, this led to significant fluctuations in share prices, both from day to day, but also within a day. In the absence of better investment opportunities, buyers are still returning to the stock markets, but the nervousness is clearly increasing.

The price of oil broke through the $90 level for the first time and the $100 level that some have been predicting for some time is not far away. On the one hand, OPEC is pleased, but on the other hand, the energy prices that have now been reached are a real burden for the global economy.

Surprisingly, the euro gained considerably in value after the ECB interest rate decision and rose to values of over $1.14 against the US dollar. As is so often the case, all kinds of explanations can be found, but they can hardly be justified objectively.

Leather Pipeline

 The situation in the markets for raw materials and leather is as complicated as it is for the general economy. Local assessments and events dominate more than any overall trends at the moment. You only have to look at the considerable price differences between the various origins to see this. 

One example is the very high meat production in the US with the simultaneous decline in production in Australia. Nevertheless, there appear to be delays in the adjustments to hide price levels that we might expect to result from this. It seems clear that the market situation is determined more by where the exports go. As we have already discussed in the past, this is particularly evident in Europe and the US. The European leather industry is currently relying more than in previous years on local supply and the quick availability of raw material on its own continent. The meat industry and suppliers also seem to rely on local sales compared rather than overseas exports.

One reason for the big difference is the impact of the pandemic. Workers who are either infected or in quarantine repeatedly affect meat production and production in the leather factories. Of course, this is only temporary and has only a limited effect on the long-term average, but the short-term influence often plays a major role. Travel restrictions have a greater influence, and this is particularly evident in the example of Australia, where a large number of work-and-travel tourists are missing from the labour market. This, in addition to the limited supply of live cattle, has also had a considerable impact on production in the slaughterhouses and processing plants.

At the moment, predictability and planning reliability have become the unspoken buzzwords and the most important factors in the leather industry. Being able to react quickly has become crucial and where there are intact local production chains, these are being used as much as possible.

China, the largest production location, is a special case. Heavily dependent on raw material imports and exports of finished products, decisions are particularly difficult to make there. On the one hand, the uncertainty of delivery times for raw materials, especially from the US, is a burden, and on the other hand, no one can be completely sure that the export goods will be finished in time to reach the export markets. This is especially true for all seasonal products, of course, and there are a lot of them in the leather market. This is why the Chinese industry in particular is forced to think in cycles, and here it is not only time cycles but also price cycles that play a role.

At the same time, this also applies to the raw materials market itself. The need to get raw materials to market as quickly as possible on the one hand, with a considerable logistical bottleneck on the other, is of course a major problem. The resulting congestion in the flow of materials has been a particular burden on exporters for a long time and there is no sign of a significant improvement in the situation in the foreseeable future.

This has resulted in a very special situation from our point of view. The time factor has always played a major role in planning raw material procurement and finished product delivery between the US and China. On the one hand, producers had to observe the time windows for the delivery of seasonal goods, but at the same time they had only very limited opportunities to react at short notice to changes in demand or disruptions in production. If you want to manage this, you have no choice but to take quantities and prices in production calculations less precisely and to think more in terms of cyclical developments. Chinese producers have always done this, but since the cycle from raw material purchase to finished product delivery has been extended by at least 60 days, with a simultaneous sharp increase in uncertainty, blind flights are almost impossible to avoid.

Why spend a relatively large amount of time on this topic? When looking at commodity markets and price developments, there is still an assumption that planning is a reflection of demand. This would be correct if one could assume a high level of planning certainty and reliable logistics. However, for two years now, it has been possible to plan very little with certainty and decisions about the procurement and price of raw materials have been accompanied by very high inaccuracies. This means a risk that the statistical data to which we all refer so readily (and which is only available from the US in a reliable and timely form) can be completely misinterpreted. 

There is no doubt at all that the price level for cattle hides is, on paper, relatively low. At the same time, no one expects prices to fall again as much as they did in the summer of 2020, when production and the global economy came to a virtual standstill owing to the pandemic. We all remember when the price of oil turned negative and raw material for leather was destroyed or processed into collagen or gelatine in many places around the world.

Nobody expects that situation to happen again or that production will come to a standstill again. That is why the price levels of that time are not really an option for planning at the moment. Under normal conditions and taking into account the costs of conservation, storage, transport and financing, it is clear to everyone that further extreme declines in commodity prices are unlikely. Therefore, for many buyers, it is of less importance at the moment whether they actually have leather orders for the raw material they are buying at the moment. Having cheap raw material available has never proved to be a wrong strategy in leather production. However, the key question that arises, owing to the extreme pressure on sellers, is if current purchases will go towards fulfilling old contracts, or if they are for new deals. Even if it is the latter, it still does not mean that the raw material purchased at current price levels is covered by normal, seasonal leather demand. It is not possible to find a really reliable answer at the moment.

We are convinced that in Europe, with the exception of the automotive industry, supply and demand are in good balance. There are indisputably leather orders coming from overseas and, wherever possible, people are trying to revive entire local supply chains. This is certainly true in the furniture industry and, within the context of a lower overall volume, also for the footwear industry. The luxury goods industry has never moved its supply chains away from Europe very much.

In automotive, however, the situation is somewhat different. Depending on individual company decisions, some suppliers have significantly reduced their production in the past year because of the sharp drop in purchases from car manufacturers.

The production statistics in Europe for 2021 are clear. Large leather manufacturers opted for a different path and kept their production running, regardless of cancellations from their automotive customers. The declining demand inevitably led to stocks of semi-finished and finished leather that now have to be disposed of before a possible increase in demand can take effect again.

In this context, of course, we keep coming back to the question of how much leather will be used in the future. It is certainly fair to assume a normalisation of the economic cycle from the second half of 2022 onwards. What effect geopolitical tensions and inflation will have on the disposable income of normal consumers cannot be estimated now.

Optimists are betting on an increase in leather demand and production. Raw material for the leather industry is one of the very few raw materials on this earth that is at the lower end of the price-range and has not experienced the massive price increase that metals, energy and several other agricultural raw materials have. It therefore seems to make sense to stock up on the material while it is lower in price. There is just this one catch, but it should not be underestimated: will leather become attractive again as a material and therefore profitable to produce and use, even with the increased costs of manufacturing leather? This has been discussed often enough, but the doubts are by no means dispelled. What is certain, however, is that in the next few years the total amount of raw material available worldwide will not change significantly and therefore this part of the equation is reasonably certain.

We are fully aware that we do not have a conclusion to offer on this very important issue. We consider it so important that people must deal with this topic intensively and then come to their own individual decisions. Simply following the masses is usually not the right way.

The market for splits is increasingly determined by the collagen and gelatine sectors. Demand is increasing and, at the same time, there are many regions where availability is low. Thus, the prices for this raw material have been rising steadily for several months now, giving the tanners some relief in their calculations. There are many who forecast a further increase in demand for split and, should this be accompanied by rising prices, it would also be a considerable safety net for hide prices. Due to the holidays in Asia, there is not too much in the way of reliable information for this market.

For sheepskins and lambskins, the situation is changing relatively little at the moment. Special articles for high-end uses face an insufficient supply of skins, while standard articles continue to have great problems finding sufficient customers.

Remarkably, we are hearing more and more about increasing interest from the Middle East, although there are still price expectations that simply cannot be realised in the market because they do not cover the cost of collection, conservation and transport. Nevertheless, it gives the impression that the very large stocks that were looking for a buyer at almost any price are slowly running out. Here, too, there are now really only two alternatives. Either demand disappears from the low-cost sector when it is no longer possible to supply at prices that fail to cover costs, or demand is stable enough to support some price increase in the coming months for the commodity. In any case, the outlook has improved.

For the next two weeks, it seems to us that suppliers of raw material will do everything they can to raise prices again. This may be possible to a certain extent in individual regions, especially in Europe, but worldwide it will become clear very quickly whether increased asking prices can be imposed. From a purely strategic point of view, it is undoubtedly the case that most people, and this also applies to buyers, would like to see a stable or perhaps even slightly higher market price at the moment. This would require buyers to pay more; the time window for this season is already beginning to close.

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