Macroeconomics

The geopolitical situation has lost none of its agitation in recent weeks. There have been no signs of rapprochement or easing of tensions in the tensions between China and Taiwan or in the war between Russia and Ukraine. Thus, the risk of a sudden and uncontrolled escalation remains very high.

The political developments also mean that many of the achievements of globalisation are now being questioned and in some cases are facing regression. In particular, the West’s relationship with China must be closely monitored here. The dependency in many areas is seen as too high and what used to be seen as a mutual dependency with benefits for both sides is now being reassessed. A reassessment of China’s influence in many regions of the world is taking place. The October party congress of the Chinese Communist Party is therefore awaited with great excitement in China, but also in the rest of the world. If the expected further concentration of power by Xi Jinping takes place, no short-term easing of tensions can be expected.

Developments in China are visible to all through its pandemic policies. The focus continues to be on surveillance, an absolute zero-covid policy and the associated international isolation of the country, although this is extremely detrimental to economic development, as can be seen from the latest statistical data. How long this can be maintained and whether the internal pressure will eventually become too great remains to be seen.

The war in Ukraine continues unabated and a realistic assessment of the situation remains very difficult owing to unreliable information from both sides. Assessing the situation from Russia’s point of view is difficult, but the leadership’s view is clear from its treatment of people on home soil who express any kind of criticism.

The continuing rise in energy costs in much of the world remains a major problem and this is exacerbated in many countries by extreme weather. While large parts of the world including parts of the Americas, China and Europe are suffering from massive drought, Pakistan was hit by an incredible and destructive wave of floods after heavy monsoon rains.

As much as people everywhere are striving for the highest possible level of normality, uncertainty is being felt by businesses and consumers in general. In some regions it is even being called fear of the future.

Overall, the economic outlook is getting gloomier and gloomier. In addition to the pandemic, the Chinese real estate market continues to suffer, inflation is eating into consumer budgets almost everywhere, supply chains continue to be unstable, and all of this is making it increasingly difficult for both businesses and people to plan.

The stable employment situation remains encouraging, at least in Europe and the US. Labour is scarce and thus unemployment is not an additional burden on consumer spending. The extent to which the resulting rising wage costs will also develop into a further inflation driver will probably become apparent in the coming months. First of all, consumer confidence in the US has improved somewhat for the first time in a long time and this is also directly linked to the stable labour market. In the US, falling oil prices have also caused the price of petrol to fall, thus easing the burden on consumers.

In the commodity markets, the prices of metals and also oil have fallen significantly. Fortunately, this applies to wheat too, which had risen to record levels in view of the harvest and supply shortfalls from Ukraine. Falling commodity prices may take a long time to reach consumers, but at least they have a dampening effect on inflation in the medium term.

The dollar exchange rate is playing ping-pong and has jumped back and forth between $0.99 and $1.01 against the euro in recent weeks.

Leather Pipeline

In the northern hemisphere, the holiday season is now almost completely over. Many people probably hoped that something would happen during the holidays that would make the situation and the outlook clearer or better.

Unfortunately, this has been in vain and we are, at the beginning of September, exactly where we were at the end of July. The political situation has not improved, inflation is still in evidence, cost increases are weighing on calculations and pricing for next season and what the reaction of consumers will be remain completely unclear.

In any case, bad news is coming from the furniture retail trade and the furniture industry. This is not surprising, considering that we have had two very strong years in this sector, with consumers in Europe and the US focusing more on their homes than on other spending. In China, the housing crisis was not yet evident and therefore there too the furniture sector was one of the best performers for leather. Things are completely different at the moment and the signs have almost completely reversed. To make matters worse, we are looking back at one of the hottest and sunniest summers, which may have delighted holidaymakers but is bad news for furniture retailing. In addition to weak sales, this of course also weighs on ordering activity for the next six months. It is still too early to draw any conclusions about the order situation or order activity, but the signs are definitely not positive. This explains the reluctance of buyers in the leather industry and the effect on the raw materials preferred for leather for furniture is also clear. Cowhides in particular have almost returned to their all-time lows and reports of rebounds sound questionable. 

In Europe, all hopes are currently pinned on stable and perhaps even rising automobile production. The manufacturers are painting a stable and, for some premium manufacturers, even better picture with regard to production for the rest of the year. However, we firmly believe that the effect on leather demand will be limited. The truth remains that the premium manufacturers have hardly reduced or had to reduce their production of expensive vehicles even in the difficult times. This means that the potential for a revival of demand for leather beyond the seasonal effect is not particularly great. It is not the case that business in this segment was exceptionally affected and therefore no particularly large increases are possible at the moment. However, it should also be noted that sales of luxury vehicles in China have been significantly reduced in recent months. This may be compensated by a significant increase in local sales and production of electric vehicles, especially of local brands, which use much more leather in China than is usual in other countries.

There is some light and shade in the footwear sector. While on the one hand consumer spending worldwide is weighing on the footwear sector, there was also some good news to report, at least in the US. Back-to-school sales were much better than expected and at the same time many retailers reported a significant increase in leather shoe sales, which they attributed to the fact that during the pandemic period people were buying mostly comfortable, casual and athletic shoes and therefore there was some pent-up demand for formal footwear.

All eyes are now on the Lineapelle fair in Milan, which takes place from September 20-22. It has always been a reliable indicator for the trend in leather production for the winter season and it will be again. Buyers will likely travel to Italy with clear assessments and expectations and present these to the exhibitors at the fair. In addition to the volume demand, price discussions will certainly be extremely difficult. Everywhere one has to calculate with strongly increased costs and this applies not only to leather production but also to leather processing.

The retail trade, on the other hand, has very clear ideas about its sales prices and will, more than ever before, find it very difficult to raise prices. On the one hand, those who expect sales difficulties anyway due to declining disposable incomes will certainly do everything they can to avoid raising prices. However, there is only one way to avoid this problem and that would be to use cheaper and lower-quality materials, which at the same time will make the situation for leather even more difficult. Even today, cheaper leather has a hard enough time and its competitiveness decreases significantly with rising production costs.

Another question centres on how the sale of shoes went last season, because without a cleared warehouse, the quantities for new orders will be poor under the given circumstances. By the end of September, it will probably be possible to answer at least some of these questions.
While the situation for leather demand is difficult to assess and relatively few really positive indications can be found at the moment, the only thing left to do is to look at the supply situation. Here, of course, we are only dealing with the cattle hide sector for the moment.

China has imported record quantities of meat from North and South America in recent months. This explains not only local consumption but also record slaughter in the Americas. At the moment, only slight declines are expected for the rest of the year. Of course, the season plays a role and local demand in the Americas will probably decline somewhat. Nevertheless, the numbers will remain high. For Australia, the kill is expected to increase and in Europe the picture is the same. The drought and the rather sluggish meat production in large parts of the continent in the first half of the year lead us to expect a significant increase in numbers from now on, in addition to seasonal influences, for the rest of the year.

However, if overall volumes in the first eight months of 2022 are already more than sufficient to meet the demand for leathergoods, a somewhat increasing supply in the rest of the year would not bode well for prices. In our view, only a significant revival in leather demand can have a protective and supportive effect. As things stand today, this can only be possible in very limited and isolated sectors of special quality.

The raw hide business in recent weeks was still very clearly dominated by the holiday season. The official price reports do not really reflect the situation. Visually, prices appear more stable than they really are when taking a realistic look at business activity. If one also puts price and volume into the picture, then according to our analysis and the information we have, one can only come to the conclusion that the large volumes are being sold at significantly lower prices than one can officially read today. Higher prices are then only ever achieved with smaller and special sales and would thus only be representative to a limited extent. 

Even if this is lamented by many, and especially by tanners, it is fair to say that no one would really have been served by a massive, official drop in commodity market prices. In all likelihood, this would hardly stimulate demand at the moment and it would also be damaging for leather prices. The effect on existing contracts, especially with Asia, should not even be discussed in this context. Of course, it is always nice when quotations are closer to reality, but then moderate and official adjustments should have been made some time ago so that the major deviations we have today would not have arisen in the first place. 

The market for splits remains focused on uses outside the leather industry. Meanwhile, some experts are already wondering whether demand from the collagen and gelatine sector is really growing as strongly as the demand for raw material for collagen and gelatine production suggests today. On the one hand, new capacity is certainly being created to provide an alternative to use splits in leather production for cheap raw material, thus providing a plan B for the meat industry, but on the other hand, so many seem to be interested in collagen production at the moment that one gets the impression that it is being planned for expectations rather than actual market potential. It is very hard to believe just now, that growth in this sector could be strong enough to justify current demand. One possible explanation would be an expectation that leather production will fall disproportionately and with it the supply of material for processing.

There is little news to report on the market for sheepskin material. The relatively tight supply of young lambskins in Europe had a price-supporting effect for this seasonal material and, for good and reliable quality, the prices are now up to €1 higher than at the beginning of the season. The fair in Milan will then show the next direction for this segment.
It seems unlikely to us that there will be a fundamental change in the situation in the next few weeks. On the demand side for leather, it is still too early to make decisions concerning next season. Usually there is a clear picture only in the course of October, when all parties involved have their data and planning together and thus a clearer picture emerges regarding demand and production for the winter half-year. The trade fair in Milan is usually the first step in this process, because a first picture is gained there through personal meetings and discussions. In the majority of years, the market emotions detected in Milan and then implemented in one direction or another in the market the following week.

Until then, it does not seem that the raw material suppliers are ready to make any decisions. The weeks between the end of the holidays and the beginning of the fair are traditionally used to test how strong the demand is and how willing tanners are to pay higher prices for supply safety. Up to now, success in this activity has been very limited and so it can be assumed that the current situation, however it is judged, will last at least until the Lineapelle. We stand by our basic assessment that the risks definitely outweigh opportunities into the autumn.

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