Macroeconomics

In most parts of the world, the Russian invasion of Ukraine and the progress of the war dominate the headlines in the media. However, it should also be noted that the further one moves away from Europe, the less prominence it has, and it would therefore be a mistake to neglect events in other parts of the world.

Nevertheless, the influences resulting from the armed conflict are so significant for the entire world that they are certainly the most important thing for global stability at this stage.

The importance of Ukraine and Russia as food and energy suppliers is already having an impact everywhere, and people can see that energy and food have become considerably more expensive. In some countries this is not yet too extreme, as governments subsidise energy and food prices, but of course this also means that this is done from national budgets and, therefore, has to be paid for some time, somehow by someone.

Apart from the economic effects, the long-term consequences must not be overlooked. While the position between West and East is relatively clearly defined, there are still some nations that are not clearly positioning themselves and they cover far more than half of the global population. China, for example, continues to play for time without taking a very clear position at the moment. The Taiwan question and the economic interests with regard to raw materials and sales markets require very precise analysis by the Chinese leadership.

The situation is somewhat different in India. The lure of access to much cheaper energy owing to sanctions in other markets is tempting for such a large country. However, this leaves the two most populous nations in an ambiguous position now, which is not particularly helpful in bringing the conflict in Ukraine to an end as quickly as possible.

In the meantime, inflation is emerging as the next big challenge. It is a major risk of social unrest. Even if no one could foresee the conflict in Ukraine and the resulting consequences, it was only an extreme accelerant for something that was already acute and threatening. The current situation only raises the fear that in many parts of the world a further extreme increase in the cost of living could lead to developments that are hardly controllable. The Arab Spring may once again serve as an example of this. In the Western nations, at least for the moment, the labour market is still very robust and the immediate consequences are still being mitigated.

In addition to the war in Ukraine, the conflict over Taiwan should also not be underestimated, and a careful observer of the news will notice that there is more and more military activity in the region, both on the mainland in China and at sea.

The development of the covid-19 pandemic in China should also be mentioned here. It is very difficult for outsiders to judge how long the virus will affect the mood and economic activity in China. From experience gained in all other countries of the world, it can at least be deduced that, despite all the restrictions and lockdowns, it is very unlikely that in China of all places it will be possible to keep the virus under control completely and, with recurring restrictions on public life, that would be very bad news, because it would mean that if the zero-covid strategy continues, we would have to reckon with recurring restrictions for a very long time to come, with consequences for the global supply chain.

The markets for oil have calmed down somewhat and the price is settling at around $110 per barrel. Gas and diesel remain very tight. Equity markets are still extremely resilient to the economic downturn risk, not to mention the expected rise in interest rates.

The US dollar continues to trade in a very narrow range against the euro, oscillating around the $1.10 level. Gold remains stable.

Leather Pipeline

The leather industry, of course, remains very strongly influenced by the developments in and around Ukraine. The influences are manifold and range from lost sales to lost procurement opportunities.

With regard to the raw materials situation, news that the Italian tanners’ association and COTANCE are considering a request that the European Commission place a temporary ban on exports of raw and semi-finished hides from the European Union came as a surprise. The supply of hides from Ukraine plays an important role for parts of the Italian leather industry and a lot of time, energy and money has been invested in building up supply chains from Ukraine. It seems unlikely that such a request, if it comes, will meet with much sympathy in Brussels. 

There have been much bigger issues in the last two weeks concerning the overall picture of the leather industry. In this context, it is important to remember that we are at the end of the winter half-year, with its high production levels. A large number of leather factories are currently having to deal with the situation that their costs have risen considerably and at the same time they still have to supply old contracts that were concluded under different conditions. This is affecting margins, but much more important is the question of how to prepare pricing for next season and how leather demand will react to the necessary price increases.

Without question, the good news is that all alternative materials will also experience upward price corrections, but at the moment no one can estimate by how much and what the consequences will be for the coming season. There is a fear that consumers will have less disposable income for other purchases because of the increased cost of food and energy. This seems very justified. The furniture industry in particular is looking at this development because, although furniture fared well in the first two years of the covid-19 pandemic, falling disposable incomes and dark clouds hanging over the real estate market in China and the US are not a very good basis for demand for the next season.

In the footwear sector, at least so far, there is no sign yet of a serious shift in material usage, but it may be too early to tell. In high-end bags and leathergoods, it remains to be seen if consumption will change. No crisis in the recent past has caused wealthy consumers to change their consumption habits in any way. However, anyone working in this sector should consider what the share, directly or indirectly, of Russian customers is. There is a chance that cutting business ties with Russia as a result of the war will result in significantly less money being spent in this sector.

The big unknown remains the automotive sector. On the one hand, big car manufacturers have very well-filled order books in front of them, but on the other hand, production is still stuttering for various reasons. Regionally it varies a lot and they are trying everything to solve the problems in the supply chains and the supply bottlenecks, but the problems persist. With regard to leather demand, there is more and more of a discrepancy between plans and announcements and actual orders.

The just-in-time production that has been cultivated so massively in the past decades is now being shown up for a variety of reasons. An infinite number of influences such as transport, raw material supply and, of course, the availability of labour play a role, reliable forecasts are hardly possible and auto leather tanners have to plan and control their production in a dense fog.

The next big unknown is certainly the further development of the corona pandemic in China and how the government will deal with it. The situation in China has developed almost in parallel to the war in Ukraine. There have been repeated massive restrictions in various regions and presently the Shanghai area is particularly affected. Despite a low number of infections, the movement of the population is so severely restricted that offices, production and especially transport are suffering considerably. Here, too, just-in-time supply chains and the existing problems in international transport have a considerable impact. If the flow of goods and production in China, by far the largest leather manufacturing country, continue to be restricted, considerable consequences can be expected over the summer months.

A foretaste of the consequences has been available for some time with the problems in US ports. Here, the coming weeks will be of decisive importance. If there is no easing of the situation in the major leather production centres in China in the next few weeks and transport is not able to run smoothly again, then quite considerable congestion effects are to be expected, which in turn would take time to resolve. At the moment, the supply problems for raw materials from the US seem to be slowly dissolving, as can be seen from the significantly increased quantities that are being shipped. However, should the containers suddenly face hold-ups upon arrival in China, the consequences, especially in the summer season, would be severe. As a reaction, however, one can already see that attempts are being made to shorten supply chains and one may be able to see this in the US, with increasing volumes of hides heading towards Mexico and, in Europe, a decline in exports to Asia.

The APLF fair in Dubai was an attempt to replicate the trade fair in Hong Kong as best it could. The number of exhibitors and visitors from east Asia was low. Since the major volume of leather production is in the Far East, this also has consequences. Nevertheless, Dubai is not a bad location for such a fair, especially if the focus shifts a little and we concentrate on the growing importance of leather production and consumption in the Middle East and Africa. As there has also been little opportunity to meet in person in the last two years, many took the opportunity for a shorter trip to Dubai, probably just to get a short personal impression of the market situation. When everyone comes with relatively low expectations, a relaxed atmosphere develops and despite all the difficulties and challenges the industry is facing, the overall atmosphere was professional and not nearly as emotionally heated as one often feels in Hong Kong. Personal meetings, unplanned and random encounters and conversations without a fixed agenda simply cannot be replaced by anything online.

There were no great illusions about uncertainties and risks in the coming months. Experienced representatives of the industry, who have already seen many crises and challenges, were clear that at the moment a steady hand is called for.

This means that it is difficult at the moment to have secure planning and expectations for the near future. Managing the current business as well as possible and avoiding any dangerous adventure is by far the most important task, while at the same time keeping a really close eye on what can be expected for the period after the summer.

The split market is roughly going its own way at the moment. Lower production and supply, increased competition between collagen and wet blue split for leather continue to lead to an undersupply and rising prices. This cycle is not new and if one looks at the price levels reached, it can be assumed that the current price development in the second quarter will come to a standstill. For the moment, however, the limited supply remains market-dominant. 

There is still very little happening in the skin sector. Even APLF in Dubai did not change this. The Russian attack on Ukraine is having a negative effect on two important markets. As so often in the last few years, one definitely sees more leather jackets and if one only looks at the fairs and the offer, one could get the impression that the retro trend towards leather jackets is developing. Material prices can support this. Unfortunately, this development is less in evidence in shops, online and offline. What is striking is the increasing share of garment leathers that are either fully or partially vegetable-tanned.

With regard to short-term market developments, one must certainly be cautious at the moment. The influence of the war and the covid-19 situation in China are clearly having a serious effect. In the medium and long term, the conditions for leather are fundamentally positive, for various reasons. On the one hand, leather is much more attractive today in terms of price and as a natural, renewable raw material it is attractive in every respect. Even inflation should support leather demand.

We will discuss the topics of sustainability and inflation more intensively in our next issue, so that our readers can perhaps form their own opinion for the coming seasons and the challenges.

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