Macroeconomics

The geopolitical situation remains the determining factor for the economy and politics. The war in Ukraine and the uncertainties surrounding Taiwan are currently the levers that influence all further developments on the markets. The aftermath of the covid-19 pandemic is slowly fading, although Chinese government policies continue to be a significant factor for the economy.

Prices for energy and food have risen sharply worldwide and, with them, inflation. The effects vary from region to region, as does the perception of consumers. In some countries, price increases alone dominate opinion, while in others, the issue of personal security may well play an extreme role in consumption. Even though many retailers show revenue growth in their second quarter results, it is important to note that this is usually not additional volume but simply the result of increased prices. Very simply, they are selling fewer products for more money.

With the exception of the luxury sector, it can also be seen in the quarterly reports that consumers have very quickly started to buy cheaper products in all sectors. People on lower incomes go to discounters and those on middle incomes deny themselves higher-quality products and return to more mainstream products instead. In sum, it can be said that consumers are already reflecting dwindling affluence in their buying behaviour. In this context, however, it must also be mentioned that the large retail groups are complaining about inventories being too high, and this is understandable insofar as the orders for the same season last year were predicated on predictions of growth; growth that has not materialised. So not only is there a lack of volume at the moment, but the shift in demand towards lower-priced products and essentials must also be taken into account for the next season.

In the meantime, people, at least in Europe, are coming to realise that we have entered a new and longer phase of economic development. The hope that had sustained most until the spring that one morning the nightmare would be over has now disappeared almost everywhere. The changes are now so profound that even a quick end to the war, and suddenly falling energy and food prices would not simply restore the state of affairs we saw before. Security considerations and the reassessment of interdependencies within globalisation have now found their way into the decisions of companies and governments to a greater extent. However, we are only at the beginning of this development and therefore it is not yet possible to theorise about the possible effects and changes in the medium and long term.

Energy prices and energy supply as well as the droughts in many regions of the world are occupying companies. Owing to different regional conditions, the concerns, problems and also the solutions are also different. However, one situation is the same in all markets at the moment, and that is a lack of labour. The explanations for this are different in the various countries, but the result is the same. Scarce availability of labour, combined with rapidly rising inflation figures, is leading to an accelerating increase in wage costs. 

The stock markets are still largely unmoved by these difficulties. Even though the last few weeks have not seen any major increase in the indices, the markets have so far been spared the sharp declines that one would expect under the given conditions. There is still enough investor money flowing in to keep share prices stable in many cases. Somewhat worrying, however, must be the news that the big hedge funds have already made large bets against the market. Keeping a close eye on investments and hedging does not seem a bad strategy now.

After a phase of moderate weakening, the US dollar has resumed its path towards parity with the euro. The markets are obviously taking a more negative view of the outlook in the Eurozone again and thus expectations of a further rapid interest rate hike by the European Central Bank are also declining.

The oil market has found a base for the moment and this means that a barrel of oil is currently relatively well protected in terms of price on a $90 basis. Oil has thus already fallen by around 30% from its peak price and is thus attractive for many as a hedge against missing gas supplies, provided they can technically switch their needs from gas to oil. For our industry we should also recognise that there are production locations that have access to massively discounted Russian oil at the moment.

Gold continues to go unnoticed. The price of an ounce remains in the range of $1,700-$1,800 and investors do not seem to want to part with large gold holdings, nor to add to it as a safety investment.

Leather Pipeline

The holiday season in the northern hemisphere left its mark on production and general activity, as it does every year. Many factories have been closed for the last few with only a skeleton staff in the offices. Otherwise, renovation and maintenance work was carried out wherever necessary and new machinery was installed.

August remains the month of low activity. This gives everyone more time to think about how business, orders and production will continue for the rest of the year. With the end of the summer holidays, a third of the year remains, which usually marks the most active period and is still crucial for the year’s results.

Concerns are mounting in the leather industry. No one can deny that the outlook for order books is not particularly rosy. We explicitly exclude the luxury goods market completely here. This is a parallel universe that has no great significance for the market as a whole and thus for the industry as such. It remains gratifying that leather continues to be a strong sales driver in this sector, which of course also benefits the image of leather. One can lament that the industry as a whole does not manage to draw more of this glamour to itself and that leather in standard consumer goods occupies less and less of a special position. So if you leave the luxury market out of it, the situation as a whole doesn’t look very good.

There is not a single sector in which one can expect a profound improvement in the business situation in the coming months. There are many reasons for this. The main reason is inflation and the fact that consumers are currently concentrating their purchases very strongly on essential products; price awareness has once again increased significantly. As already mentioned at the beginning, all major retailers and internet platforms are reporting the same buying behaviour. Less quantity and overall cheaper products. Treating oneself to anything that exceeds actual need is happening less and less.

A problem we have also discussed in the past is the long supply chains. This means that with the lessening of the pandemic impact, retailers had planned for sales increases and that meant volume increases; these were in the double-digit percentage range for this year. Orders were placed with producers and this equally led to the order books being relatively well filled until the end of the first quarter. Thus the commodity market was reasonably supported and stable. However, Russia’s invasion of Ukraine and the consequences of it have led to a clear reluctance to buy. Volume declines of up to 20% are reported for many non-essential products. The majority of non-essential products also include consumer goods made of leather. In the end, it is a simple calculation: if brands ordered 10% too much and have sold 20% too little, it means there is a high volume of stock in a lot of warehouses. This has consequences: tied-up capital, occupied storage space, possible need for devaluation and, as a result, certainly less willingness to place new orders.

There is currently still a good situation in many labour markets, but as soon as the expected weakening of the economic development in many countries takes hold, this will also be reflected in the labour markets. This would then, of course, lead to a further reduction in willingness to buy, not least because people will not have the disposable income. Just take already a look at the youth unemployment rate in China.

If we look at the leather industry, it has been no secret for a long time that we have overcapacity in the global market. This has always supported the commodity markets because companies still had sufficient liquidity to fill and use their production facilities in the hope that buyers for their finished leather would appear. However, if you look at the long-term price development for the commodity, you will see that the price trend has been showing downward fluctuations for years. If we also consider that we have not been using large quantities of sheepskin material for years, the situation becomes even clearer for leather as a product.

The question that now arises, as we all know, is how to maintain leather as a material in a market in which people have less disposable income. Of course, we have a very special trump card up our sleeve, namely the durability of the material. Unfortunately, both the industry and the retail trade have completely failed to point to this factor and use it as a selling point. Rather the opposite was the case; people everywhere were of the opinion that market potential could be better exploited if they placed their bets on non-leather products. Animal welfare and anti-meat campaigns struck a chord with some consumers, plus the technology was available to use synthetic substitutes to leather in mass-production. 

The next decisive factor will be prices. It is very likely that the consumer will be even more price conscious for a while owing to falling purchasing power; mass consumption will probably shift down one price level. At the moment, at least for us, the price calculations for leather and leather alternatives (mainly plastic) are not yet transparent and how leather will then be able to hold its own in the price competition will probably only become clear at the end of next season. In our view, the factors of energy costs and transport, as well as time and flexible demand-oriented orders, will still entail considerable changes in production chains.

In this context, it is probably one of the most important tasks now to take a close look at production, transport and energy costs in the various possible production locations, for those who have to buy leather or leather products and for those who produce them, to ensure that they are still really competitive under the changed market conditions. The analysis of large manufacturers in China and India is particularly important. Those who have to include security considerations and flexibility, as well as order volume, in their decision may need a much larger radius. The political situation also leads to special situations, as we can see in the case of Turkey, for example.

On the one hand, Turkey is struggling with a significantly depreciated currency and thus also with extreme inflation, but on the whole it has positioned itself very well economically between the two large political blocs, and is also not involved in the Western sanctions against Russia. Trade between Russia and Turkey is growing steadily (the same applies to India, by the way). This is not particularly bad news for the leather industry, even if it may not be in good taste politically. With reference to the leather industry, let us also bear in mind that in many countries in the Eastern hemisphere there is hardly any anti-meat policy and corresponding consumer behaviour to be seen in leather still enjoys a much better image; a product made from leather is viewed as a high-quality product.

Prices for raw materials are stable at best, but in most cases declining. Large producers and suppliers obviously do not see much point in lowering prices further at the moment, because they probably rightly do not expect this to stimulate demand anyway. The big producers are maintaining their production at a fairly stable level and this has to be met. Beyond that, however, there is hardly any demand; rather, there is stockpiling. Since there is hardly anyone who expects a significant improvement in the order situation, the willingness to increase stock, even at attractive price levels, is not particularly great.

The market for collagen and gelatine remains very interesting. Large meat companies are expanding capacity in this sector, which in the long term can only lead to the conclusion that they need a plan B for lower-quality hides, because it is to be feared that sufficient and economically viable sales cannot be expected here wet blue and leather. Whether the global demand for collagen and gelatine can actually absorb this increased production capacity in the end is probably the $1 million question. Most experts on the scene doubt it, and that would only lead to cut-throat competition.

There was also little movement in sheepskin raw materials. In Europe, the higher-quality lambskins can still find a market in China and Turkey, but for anything beyond that, no cost-covering prices can be obtained. This leads almost everywhere to a not insignificant part of the production going to waste. 

Over the next two weeks, Europe will slowly come out of holiday mode. However, we suspect that no significant new information will be available until well into September.

The facts are clear: most businesses need to start thinking today about what their cost situation will be like in 2023. With volatile energy prices, this is a really big challenge. The battle for workers will remain difficult and labour will presumably become much more expensive too. This means sharp increases in prices are required now.

Share this story: