Macroeconomics

We have long considered geopolitical tensions to be a significant threat to the global situation. It should be clear to everyone that the global political situation remains very fragile. This is certainly not the place to discuss the political implications, but it should be clear to everyone that a situation like this can change very quickly, affecting the global economy.

The situation on the border with Ukraine has made this very clear once again. On February 21, Russian president, Vladimir Putin, sent troops into two rebel-held parts of eastern Ukraine, Donetsk and Luhansk, calling it a peacekeeping operation.

The following day, Germany’s chancellor, Olaf Scholz, described this as “a serious breach of international law”. He said there would be a closely coordinated, targeted reaction from the international community to hurt Russia’s economic interests. He went on to say that this “dramatically changing situation” had led his government to decide that it will not continue with the certification of the Nord Stream 2 pipeline project for bringing natural gas from Russia to Germany.

Construction of the pipeline was completed in September 2021, but Mr Scholz said: “Certification cannot take place now.”

In parallel, the government of the UK announced sanctions against five Russian banks and three Russian billionaires with large-scale investments in London. Foreign ministers from the 27 European Union member states met in Paris to discuss similar economic sanctions.

With regard to inflation, we have been dealing with this topic here since last year. Here, too, we have a big problem in that political interests take precedence over economic expertise and therefore, unfortunately, the independence of the central banks and an appropriate treatment of economic framework conditions have been lacking for a long time.

We are only at the beginning of possible developments resulting from these situations. The hope that they will have no effect and are only temporary would really be naïve.

Inflation, above all, rising prices for everyday goods always triggers considerable social tensions. Social tensions then very quickly lead to political tensions. The small microcosm and the situation in Turkey may serve as an example for the time being.

No one can predict the future and certainly not the development of prices. Of course, it is still theoretically possible that the price of food, metals, energy and transport will fall again significantly in the coming months, but it is to be feared that even in that case the quite problematic second-round effects can no longer be completely halted. In addition to product prices, labour market problems have now become a weighty factor in many countries. In many countries, climate policy also plays a decisive role in price development and the slowly emerging trend towards globalisation and demographic problems are also a significant burden on wage and price development worldwide.

In addition to the fundamental question of whether we have a bubble forming in the financial and real estate markets, political instability and a possible military conflict represent other major risks. Further developments are unpredictable and therefore one can only hope that the world community continues to understand that prosperity and positive economic development are only possible in times of peace and cooperation.

While the stock markets jumped back and forth in line with the political situation, gold in particular was able to profit. The level of $1,800 was sustainably broken and, apart from its function as a safe haven in the crisis, inflation also played a certain role.

The oil price was on its way to the magic $100 mark and was then, temporarily, slowed again. However, at the moment it does not look as if the price of energy will fall again very quickly. It is possible that we will have to wait one or two more quarters for that. The question is whether oil-producing countries can maintain their discipline in production, in view of the very attractive price levels.

Leather Pipeline

On the international commodity markets, suppliers and especially the meat industry are trying to regain the upper hand after the significant price corrections of the last quarter of 2021. While US suppliers benefited from quite attractive prices and valuations for cattle hides and were able to command a good part of global demand, at least temporarily, suppliers in the other regions are playing the reduced-slaughter card at the moment.

As we discussed in our last issue, this, combined with the significant difficulties in transport and other associated costs, is leading to more and more local price movements. Such situations occur frequently  and they are just often coupled with completely different parameters. One thing that can be observed again and again: price differences that cannot be justified by quality and added-value conditions rarely last very long.

Therefore, it is all the more important to analyse which raw materials apply to which types of leather, and which types and origins can thus be said to compete directly with each other. Only this gives a reliable indication of whether the current price valuations are appropriate or not.

This is rarely or never the approach that the meat industry takes in valuing and pricing its raw material. The marketing of by-products is still not about analysis and determination of a possibly appropriate price, but always about the (quite understandable) economic urge to achieve the highest price. It is rarely discussed whether a successful average price could be achieved for a period, rather than just trying to secure the highest price on any given day. This is, of course, even more difficult, as one would need reliable comparative data, which does not really exist. One usually refers to gossip and rumours and is only too inclined to follow them and believe what seems to be most expedient for one’s own interests and expectations.

Even the effort and dedication that many of our colleagues put into gathering reliable market price information cannot help much. In the end, this information also comes from the same sources, which are inevitably also driven by self-interest.

This means that nothing has ever really changed and the only people who really know at what price, under what conditions and with what background a transaction was concluded are the two people who agreed it with each other. In addition, there is the problem of quantity. Individual transactions are very quickly cited as representative of the market as a whole according to their respective interests.

In a weak market - and this is what we have had for the last quarter - buyers make an honest effort to apply the scorched-earth principle and, with growing enthusiasm, spread one story after another of desperate sellers and falling prices. At the moment, the situation has turned around again and the principle is being applied by the sellers, who are only too happy to tell the story of low production and poorly stocked buyers to enforce price increases.

The problems that arise from this are always the same. It is not the individual deal that counts, but in the end the average price achieved. Everyone then tries to influence this value accordingly with the deals-of-the-day, without ever being able to prove that the resulting price increases would have favoured one side or the other accordingly.

At the moment, this process is pronounced in the European market for heavy males. Without a doubt, the kill in this category is clearly below average at the moment and this results in the firm conviction that this must be the reason for significantly rising prices. In addition, of course, all premium manufacturers in the European car industry are making astonishing and in some cases even historically high profits. There is no question that this is also seen by the suppliers of the corresponding high-quality raw materials and that one deduces from this that the share of the spoils one receives is not sufficient. Of course, the logic in economics is not that a manufacturer shares economic success proportionally with material suppliers. Moreover, there is of course no direct correlation between the profits of a car manufacturer and the supply of leather.

If one reads the quarterly reports of the car manufacturers, one stumbles over the news that the high profits have, to a large extent, resulted from the production and sales of high-priced luxury cars. The shortage of components, especially computer chips, has been used to prioritise the production of the high-yield, high-margin models, with mass-produced models going onto the back burner. The balance between the supply of raw materials and inventories and the actual demand in car production will be more decisive over the next few months in Europe than the usual market skirmishes that we are currently witnessing again.

Regardless of the fact that the order books in the automotive industry continue to be excellently filled and production is more than secured for a long period of time, it must be noted that the backlog for vehicles that are usually upholstered with leather is considerably smaller than the total number of vehicles would suggest. Of course, this also varies from region to region.

Much more significant for the overall market, however, is the further development in the footwear sector. Many are betting on this market opening up again after the last lockdowns caused by the pandemic subside. More shoppers are expected in the shops and better sales, but whether this will happen and have a positive effect on the demand for leather shoes is still very much in question. Talking to the big retailers and brands, one gets more and more the impression that it is not so much a question of volume and sales of shoes in general, but rather the big problem that leather as a material is still on the retreat, with or without the pandemic. There is absolutely no one reporting that there is a renaissance of leather as a material in mass shoe production. On the contrary, people report that the pandemic has led to the sale of even more casual and sports shoes and the classic leather street shoe has been pushed further into the background. It is very unlikely that, without the shoe sector, a significant revival of the leather business can be achieved.

There is no need to say much about the furniture sector. Business in furniture leather is much less affected than one might have feared, but no one can do anything about the seasons; a quieter season for furniture will return soon. The rather difficult real estate market in China may also have a negative influence.

Even if business and demand in China are only slowly picking up again after the holiday season, one can sense everywhere that leather manufacturers would be massively opposed to any form of price increase. In addition to the toughness in price negotiations, many suppliers report that buyers are increasingly taking refuge in cheaper types to escape higher prices. This certainly explains the relatively good business in splits as a cheaper alternative.
Possibly this also offers the opportunity, long yearned for, to market lower selections at favourable prices. This could be the logical answer to the expected strong price increases in plastic and foil.

For now, all eyes are on the Lineapelle fair in Milan (February 22-24). Everyone who can travel will meet to discuss the situation in person. Of course, the high quality and high fashion sector will dominate in Milan, as always. That’s what the fair in the land of fashion and creativity is all about. Nevertheless, it will also provide an overview of whether new trends in technology and manufacturing may open new doors for leather as a material in the coming months. The time would actually be ripe, and in the end it is in the hands of the manufacturers whether they can become enthusiastic about this material again. The conditions are not so bad, with an intensification of regional supply and manufacturing chains and the pressure to focus on higher quality and higher-priced products.

As already mentioned, we are now hearing about a significantly increased demand for splits from the leather industry, which on the one hand is down to price, but on the other hand is of course also a reaction to the constantly growing demand from the collagen sector. Here, too, we are waiting for the fair in Milan to give clear indications as to whether split leather can play a decisive role in the coming seasons.

In the sheepskin sector we are also hearing more and more about an increase in demand for extremely cheap raw materials. However, we have the impression that there is hardly any significant supply available here. The prices that potential buyers imagine, especially from the Middle East, simply cannot be met with production and transport costs at the levels they have reached. At the moment, there is no willingness to raise prices to a workable level but, here too, the next few weeks will make it clear whether leather, as a material, can regain market share. Here, too, the chances are actually not too bad, because as has been mentioned so often, this is one of the very few raw materials that has not yet seen an extreme rise in price.

We await the results of the trade fair in Milan. For the fashionable, high-quality sector, one has to have positive expectations. The demand for luxury goods and high-quality leather has not suffered during the pandemic. The wealthy have not become poorer during this time and if their social lives have suffered, consumption has provided some compensation, especially in China. Whether this can now spill over into the mass markets will be the big question of the coming months. The big problem for us is to get manufacturers back to the classic production of leather products, because leather is competitive and attractive again.

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