Macroeconomics

There have been interesting developments in politics and economics over the past two weeks. In addition to the developments in Ukraine, the elections in the US and Brazil were at the forefront. In the US, a predicted Republican landslide victory failed to materialise.

In Ukraine, a quick end to the cruel war is still not to be expected and yet, behind the scenes, many are trying to explore the possibilities of a negotiated settlement. At the moment, however, the positions still seem too far apart to expect a meeting at the negotiating table in the short term.

There has been also a lot of movement and interesting developments in the economy in recent weeks.
It is difficult to put these things in order of importance, but that is hardly necessary. The lower than expected inflation figures for the month of October in the US triggered activity on the stock markets that had not been seen for a long time.

Interest rates fell, so did interest rate expectations for the future, and that was reason enough for investors to jump in again quickly and send the major stock markets shooting up between 3% and 8% in one day. A similar situation could also be seen in other markets and the hope that inflation could fall again more quickly without massive support from rising interest rates made investors hope for good returns again in addition to good corporate results and consumer spending.

In Europe, this development cannot yet be seen, but if the parameters do not change decisively, inflation is likely to fall again in the foreseeable future there as well. The main price drivers in Europe are energy and food prices, and these alone would benefit relatively quickly from the euro’s resurgence with falling import prices. At the same time, global freight costs are also starting to fall again and this should also ease the pressure on prices. The financial markets are very quick to bet positively on such prospects, but for consumers not much is likely to change for the better in the next few months. The lag effects of the last months will still be strongly felt in consumer prices in the near future.

At the moment, many companies are constantly raising their prices for every product and service possible, whether justified or not, and the price increases of the last few months have not yet been completely passed through to consumer prices. If, however, the prices for energy and food were to be significantly lower owing to the currency effects alone, it would definitely help increase the disposable income of consumers relatively quickly. However, it should be noted that at the moment we are still at the beginning of winter and the situation in Ukraine, as well as on the markets, can still change very quickly.

In China, the pandemic policy continues to weigh heavily on economic and social life. Covid-19 cases are slowly but steadily on the rise again, and even though the total number of cases is still only 11,000 per day. Nevertheless, Chinese policy-makers have decided not to change their strategy. Therefore, every additional case is a problem, even if the quarantine conditions have been relaxed somewhat in recent days. Besides the economic impact that lockdowns always have, the social consequences should not be underestimated. Problems in the Chinese economy also quickly have a negative impact on the global economy; the long-term consequences of Chinese covid-19 policy are not really foreseeable at this point.

The US dollar accelerated its depreciation considerably after the inflation figures. Just a few weeks ago it was trading well below parity against the euro and now it has risen well above parity again. As quickly as it rose in value, it has now fallen by up to 8% without this being considered a weakness.

The gold price was also able to recover significantly with the weakness of the dollar and is again moving far above the $1,700 mark.

The uncertainty of the markets and OPEC’s policy kept the oil price very stable. Even though the weaker dollar is also supportive in this market, one would probably have expected lower prices for oil again, considering that the global economy is more likely to go through a difficult phase in the coming months. Russia will continue to sell oil to finance its war activities and this will only be possible in markets that are not participating in sanctions. They will insist on significant discounts to the market price. The more oil Russia has to sell, the more global oil prices will suffer in the end. 

Leather Pipeline

The situation along the leather pipeline is slowly becoming clearer. There will be many who do not agree; it is certainly true that many of the old laws for commodities apply only to a limited extent today.

However, most will probably share our opinion that the demand for leather for use in mass-manufactured consumer products has not increased in the last few weeks. Global consumption has been considerably burdened by inflation and this particularly affects goods that are not part of basic needs. At the same time, the pandemic policy in such a large and important consumer market as China is also putting a strain on sales. We read endless statistical data every day, but in the end this is not meaningful for assessing the situation in the leather market.

All the reliable information available points to a decline in sales of leather of at least 3% and possibly by as much as 18% depending on the region worldwide. Since statistics on sales of goods made from leather can only very rarely be clearly extracted, speculation and rumour remain the main sources of the information we have on this. Based on this, a decline of between 10% and 20% is probably not too far from the truth.

However, statistical comparisons are very difficult this year because there are new influences on the data. On the one hand, price increases are affecting sales figures, and on the other hand, many large retailers have responded to overstocking with early discounts. In China, where November 11 is one of the key shopping days, consumer demand was reported to be shifting towards cheaper, domestic brands. Household appliances were the preferred goods, while clothing and footwear were among the products generating weakest demanded.

From our point of view, however, it remains the case that it is less a question of how strongly overall consumption develops, because fundamentally there are still 8 billion people on this earth who have the need and desire for various goods. They fulfil these within the limits of their financial possibilities, after satisfying basic needs. As everyone knows, the visual distribution of financial possibilities looks like a pyramid. The same pyramid can also be seen if one looks at the sales of leather products and their prices. In both pyramids, the top 10% are negligible for our discussion and analysis.

They are not relevant to the overall situation within the leather pipeline and as pleasing as the development in luxury goods remains, it does not help to solve the fundamental problems we have in the industry at the moment.

None of this is new knowledge, but the current problem of rising production costs meeting very low value-add in many cases is toxic to the point of being lethal. The leather industry’s pricing power for its products is extremely low and this applies to all sectors outside luxury goods. This has led many tanneries trying to concentrate on the production of higher-value leathers, but the raw material necessary for this is in limited supply. The additional problem this creates is how to use and sell the poorer-grade material. Even if one tries to switch to better raw materials, there will always be a large proportion of hides or semi-finished material for which there is currently either no market at all, or only one that can command low prices. A look at the prices and the sales situation of the lower-value origins for raw goods will demonstrate this.

For us, however, this situation is only the symptom and not the cause. Leather as a material does not receive the added value it deserves and this makes the situation worse. Even brands and manufacturers for whom leather is still an important material seem to find it increasingly difficult to find a justification for its use. In Europe, there are threats of increased limitation on chemical use, increasingly difficult production conditions, rising costs, labour shortages and a negative political and media attitude towards the material. Fortunately, this has not yet spread around the globe, but massive pressure on leather prices is growing, nonetheless. If the increased costs cannot be passed on, then manufacturing becomes less and less attractive. The political trend in Europe to make the production of leather more and more difficult continues unabated.

In addition, leather’s superior technical properties no longer seem to support its use. In some cases, finished leather seems to have become a copy of the copy, imitating the synthetic materials that imitate leather. This is doing little to increase the appreciation of leather.

We do not consider it particularly helpful either that more and more energy is spent on certifications, and attempts at transparency. All consumer studies indicate that these all these labels do not influence the consumer’s decision for or against leather at all. On the contrary, it seems to be the case that the broad masses, and this is especially true for regions outside Europe, are not interested in this kind of information and do not see what there is to gain from it. The reason for deciding for or against leather will be that people see advantages and technical superiority in the material, that they consider it to be more durable and that they may also be able to achieve a certain benefit from the image of the product.

Studies in Europe that come to a different conclusion may be compared to those that deal with nutrition. The results of the studies do not correspond in any way to the actual behaviour of consumers. What they say and what they buy remain two completely different things and the purchase decision is still dependent on preferences and price. This is mostly a marketing play and does not really play any global role.

If this is confirmed, then we would need to ask why the leather industry continues to concentrate all its efforts on justifying itself and on obtaining certifications instead of putting all its efforts into putting the functionality and the superior properties that leather has in the foreground. Saying “our customer wants it that way”, which has been quoted again and again for years, cannot really be proven. Another way might be worth a try.

If we look for a moment at the general situation along the leather pipeline, we can see that the usual pick-up in production for the winter season is simply not happening. There may be various reasons for this: the war in Ukraine, record high inflation and pandemic policies in China, as well as transport and scheduling problems have led to a long chain of difficulties affecting sales. The more expensive and luxurious the product, the less the problem, and vice-versa.

This is also reflected in the commodity markets, which mirror each other. Commodities suffer the most from this basic constellation. If we miss the usual revival in this winter half-year, it will certainly be very difficult in many respects for many companies. At the moment, some market participants are betting on the expected decline in beef production in the coming year. High demand and the simultaneously high production in North and South America will possibly lead to farmers needing time to replenish their stocks next year. This would inevitably also lead to less supply of cattle hides and nourishes the hope that this would then lead to an improvement in demand, leading to a liquidation of stocks.

This is a rather vague hope in the current environment. We are now quickly heading into the Christmas break in Europe and this will be followed very quickly by the New Year holiday in China. As an optimist, one can hope for catch-up effects afterwards, but there is not much time left until the next summer calm. A lot will certainly depend on further developments in China, on how the Christmas business in the western world goes in the end and on whether car production can recover sustainably.

In the case of sheepskins, the situation in China is weighing on the markets. The current lockdowns in Hebei province are restricting production and it remains to be seen how long this will last and what effect it will have. Turkey is reporting significant declines in orders from Russia and this is due to the fact that the population has now realised that the invasion of Ukraine is not a short ‘special military operation’ and that the war and its consequences could also affect negatively the people in Russia.

We think it will continue to be a calm market in the coming weeks. Almost certainly, all manufacturers along the production chain are waiting for retail results to assess what orders can be expected in the coming year. Should retail sales remain depressed globally, then inventories along the supply chain would remain a major burden. If, contrary to expectations, global business recovers more clearly and sustainably, then we could possibly expect catch-up effects in the first quarter of 2023. For the coming weeks, however, everyone will be busy preparing for the production interruptions that the holidays will bring.

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