Macroeconomics

The two events that dominated 2022 have remained as determining factors in the last few weeks. On the one hand, there is the war in Ukraine, which continues to increase in destruction and brutality and, regrettably, the word ‘revenge’ is heard more and more often. Revenge is a bad basis for any solution that is not brought about militarily. This is bad news, even if many expect the war to end this year. Unfortunately, it is not the case that an end to the war will heal the wounds and that a stable peace can be expected.

The second big factor remains the development of the covid-19 pandemic in China. While the rest of the world has more or less come to terms with infections and the numbers, despite an increase in the northern hemisphere this winter, are manageable, the situation in China remains difficult to assess. The government has decided that the pandemic is now a less dangerous virus and has therefore lifted all restrictions. Just a few weeks ago, our communications with China were very cautious and coy about reporting infections, precisely because the government had continued to impose its zero-covid policy. With the more recent opening up, the news has changed. All our contacts in China have told us about infections in their professional and family environment in the last few weeks. One almost got the impression that almost everyone is infected now.

It is interesting to note that most people take the official party line and speak of a controllable and now quickly ending first wave of infection. Admittedly, however, a second one is still expected in February. The official mood is that everything will be over very soon and what took two or three years in the rest of the world, they (the Chinese government) will take care of in three months. The future will show whether that will actually work.

For the moment, however, the situation is not quite so simple. From a purely tactical point of view, the timing is relatively clever. According to the politicians’ planning, the first wave has run during the rather quiet Christmas break; the next source of infection will be after the Chinese New Year in late January, with all the travel activity that will, once again, take place around the holiday. The thesis is, then, that by the end of February, a comprehensive immunity will have built up. 

But there are two important things to note here. First, covid-19 is far from defeated in other parts of the world; just look at the massive increases in infections in the last few weeks. Plus, secondary illnesses such as regular flu or other respiratory infections remain a major problem as well. The only thing that can help is to hope for better weather. In two or three months we will know how the strategy has worked out.

In the financial markets, the first week of the new year got off to a very buoyant start and investors shook off their worries and gave the markets a strong boost with the hope of falling inflation and a halt to interest rises.

The mood in the media and among experts is rather more negative, but one can nevertheless recognise optimistic developments for 2023. Despite rising interest rates, significantly higher energy costs and a cooling of consumption, the labour markets are still very robust. As long as people have jobs and can generate income, the strains are more manageable. Rising interest rates, inflation and rising unemployment at the same time would be an extremely dangerous mix. Companies that continue to look for workers and offer jobs must not assess their future so negatively, but in the western economies now labour costs need to be watched.

Energy costs and inflation are stalling and even falling, especially in Western Europe. This may not yet be clearly visible in the figures, but the weaker US dollar and the falling prices for gas, oil and transport costs are taking a lot of pressure off the price development outside the US and if nothing changes in this trend in the next few months, the inflation data should fall faster than many assume today. This would considerably reduce the pressure on the national banks to raise interest rates further in the course of the year and only wage costs would continue to have a significant inflationary impact.

The big uncertainty remains the political situation. The war in Ukraine is the biggest flashpoint, but the conflict between Kosovo and Serbia or the unresolved question of whether China is really planning to take over Taiwan in the foreseeable future are also very important, along with many other still locally active disputes. Neither in the Middle East nor in other parts of the world can one speak of a truly stable calm at the moment.

The oil price has been on a bit of a rollercoaster in recent weeks. After seeing lowered prices in mid-December, a brief rally followed OPEC and Russian decisions, pushing the price back well above $80. The subdued economic outlook for the coming months then caused the optimism to disappear again and prices fell back to levels below $80.

The price of gold also recovered significantly and rose again to values of over $1,800 per ounce.

Leather Pipeline

Normally, the months from October to April are the busiest in terms of production in the leather industry and the winter interruptions, first in the western world for Christmas and then later in China for Lunar New Year, are always seen as a welcome holiday, but not a real break in the production cycle. This time it was markedly different. In the western world, orders are already there, but they are not really big enough for the time of year and certainly not so big that the break for Christmas was in any way inconvenient or disruptive.

The situation is similar in China. Initially there were lockdowns for covid-19. In the last weeks of the year there was a more open policy from the Chinese government regarding covid, but production interruptions still took place because of labour shortages when large numbers of people tested positive for covid-19 or they went into self-isolation. In addition to the lack of production and limited transport, public life was also restricted and with it local consumption. In terms of export orders, the decline in furniture, for which the US market plays a decisive role, was particularly noticeable.

For an outsider, it is really fascinating to see how people in China, who did not want to talk about covid-19, have suddenly begun talking about either having overcome or currently suffering from infections. From a purely emotional point of view, the last few weeks of the year gave the impression that every contact we have in China was infected. 

The beginning of the year and the general paralysis of the last few weeks provided a good opportunity to look at the medium and longer term future and the possible scenarios for the coming year.

Our regular readers know of our concerns about the leather pipeline situation. With the exception of the luxury goods sector there has, unfortunately, been no positive change in the use of leather as a material in recent years. Even if this has not been so obvious to many, this trend once again intensified in 2022. Nevertheless, the trend is not uniform. In all consumer goods, including the automotive industry, leather remains the material of choice for higher-quality and more expensive items. Exactly the opposite trend is evident in the mass goods industry, which is ultimately very production-oriented and does not give much deep thought to materials. Simple production and low costs are important and as long as the consumer does not explicitly ask for leather as a material, it will not be offered. Why should it be?

This means that the suppliers of raw materials should say goodbye to the idea that the past will return in the short term. In the past, one simply fluctuated with the waves of demand and could always rely on the fact that what fell in price today and found few takers would sooner or later find its home again with the next wave. Today we are far away from that. 

It is probably correct to assume that there will be sufficient interest in leather as a product in the future for better-quality products. However, this already brings us back to the problem that for every good hide, a market must also be found for a corresponding quantity of less good hides.

Should we agree that only an increasing acceptance and demand for leather as a material could trigger a real improvement in demand within the leather pipeline, we automatically come back to the $1 million question: what must be done to make the consumer turn to leather again and demand it as a material of choice in end products?

To date, the leather industry has failed because it has never made the leap directly into consumer consciousness. All attempts to leapfrog one step in the marketing chain have failed to date. Who remembers the attempts at the beginning of the 1990s when big Italian furniture leather manufacturers tried to place their own brand names in the market and to override their clients? There was actually only once a name that made it to relatively widespread recognition and that was ‘Connolly’ leather, which was inextricably linked to the luxury of Rolls-Royce cars. With the failure of the manufacturers, there were some attempts to use the brand name, but luxury goods companies, which would certainly be enthusiastic about such an opportunity today, were not yet big and successful enough to take advantage.

The leather industry is far too fragmented for classic marketing and the necessary financial commitment could be risked by very few. Although we now have a number of organisations ostensibly concerned with promoting leather, there is no evidence that they have really penetrated with the public and the markets.

If, for whatever reason, the direct route does not lead to the goal, one has to think about indirect routes. Of course, this also has to be coordinated, because why should a single company or individual take care of it allowing everyone else to benefit? Philanthropy and altruism are probably a bit much to ask for, and that is why the interest groups in particular are called upon here. A first step is certainly what has already been started in the US. The Rewind documentaries and Real Leather, Stay Different are a start.

Those who bow to the pressure of the automotive OEMs and the big brands and think that more certifications and audits will win more customers are, in our opinion, seriously mistaken.  The only benefit lies with those who sell these services. There are no reliable statistics and of all global consumers, hardly more than a micro fraction will be guided in their decision to buy a product by a certification label. It looks nice at the bottom of an email, but how does it serve the business? As a small tip, a look at the market for organic food in Europe after the price increases in 2022 may help. Even in the bubble of prosperity in Europe, purchasing decisions are still made more by price and benefit and less by labels and certifications. The money invested into this might be better invested in something different.

If you want to make leather fashionable again, you have to reach the consumer through function and benefit. Benefit, benefit, benefit! That is the only thing that sets leather apart from its copies and alternatives. Additional benefits in relation to price is the motto: warmer, drier, more comfortable, more durable or whatever else companies may think of. Then it should be pointed out that leather is also a result of upcycling. It can even be reused after the longer period of use, if appropriate processes are used. The only alternative would be the destruction of a raw material that is available as a by-product. These facts alone could attract the new customers that we so desperately need. It remains a bad joke that low levels of recycled content and an even lower use of recycled plastic materials can be noted a huge number of end products and their packaging and are supposed to create a more positive impression on consumers than the use of a natural, widely available raw material that is a by-product of the food industry.

The leather pipeline must get out of its own bubble. It continues to allow itself to be regulated by manufacturers of end products. This does not yield any growth in the use of leather and is certainly no guarantee that leather will be used in increasing quantities or even the same quantities in the next few years. So far, in any case, none of the forced certifications and activities have led to a reversal of the negative trend in the use of leather as a material, only to additional costs.

Particularly worthy of mention here are most car manufacturers, who are imposing more and more regulations on their suppliers, while at the same time engaging in very public anti-leather propaganda. It is a very special form of corporate masochism to help one’s tormentor to beat the leather supplier up even more effectively.

There has been relatively little movement in the split market in recent weeks. The main focus today is on the question of the extent to which declining leather production can be compensated for by the direct use of raw hides. There is certainly more than enough raw material available and at the moment many are busy analysing whether it is available in the right place at the right price. In our estimation, the hopes and expectations of many stakeholders are still relatively far apart.

Despite the general difficulties, we continue to see more and more niches in the sheepskin sector where there is positive movement. In contrast to the cattle sector, discussions about the raw material and its use are surprisingly less loud. Sometimes one even gets the impression that leather from sheep or goats is something completely different from leather from cattle. On the consumer side, the products that are still produced from these raw materials are almost never given negative attributes. However, this should not hide the fact that the use of leather is completely inadequate here too and that a really unacceptable proportion of the skins that are produced are still being disposed of.

In the next few weeks, there will almost certainly be no fundamental change in the general situation. Production in the western world will slowly recover after the interruption caused by the holidays and eyes will certainly now be strongly focused on China. In general, the question is what impact the changed covid-19 policy of the Chinese government will have, but also in the leather pipeline this will give crucial clues for the coming months owing to the importance of Chinese production and consumption. First of all, the Chinese will now take their holiday break, which has already begun for many manufacturers. Before mid-February, it will probably be very difficult to get a clear picture of further developments in China and to draw conclusions about how the leather pipeline will develop in 2023. This offers time to think about better ways to promote the material.

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