Macroeconomics

The past two weeks brought a lot of movement, but ultimately not very much news.

The war in Ukraine continues and the western world must now decide how to proceed with its support of Ukraine. There have been many meetings and talks on this, but a truly unified line with clear decisions is still missing. The top priority is still to support Ukraine as much as possible without actually intervening more actively in the conflict. How and whether this tactic can contribute to a quicker solution or end the conflict remains completely unclear.

The financial markets have not yet found their bearings for 2023. On the one hand, the danger of further exploding energy prices has been largely averted, at least for the time being, and food prices have also calmed down and levelled off. Now it is more a question of how consumer prices will develop in the coming months. The national banks are expected to consistently counteract the major problem of inflation, but opinions and views differ widely on how long and to what extent this should be done with interest-rate hikes. At least there is a consensus that something has to be done and it will what means interest rates will continue to rise.

Even if the official agencies from China are very sparing with real information and even the media publish little data, it can be seen, at least from what private contacts and direct sources say, that people have for the moment taken the government line and consider the first big wave of covid to be over. The streets are full again, as are the restaurants, and people are taking the opportunity to visit their relatives and families again for Chinese New Year. All in all, one gets the impression that people have come to terms with the new situation very quickly. The focus is almost exclusively on protecting grandparents, while everyone else has very quickly found their way back to normality.

Similar voices can be heard from the business world, and in summary it can be said that a second wave is expected after the New Year and then the official end of the pandemic, just as it has been handled in the rest of the world. Many people conclude from this that production and economic development in China will return to growth in a very short time.

Optimism is a very positive quality, especially in the economy, but in this case it is probably more advisable to observe further developments very closely. The world has not come to a standstill in the last three years, China has been reassessed as an economic partner by many countries and the geopolitical tensions also make it seem rather unlikely that everything will go back to the way it was. A lot will depend now on how the Chinese leaders play their cards.

Production has moved to other countries, investments in China are being reassessed and reconsidered, and trade relations are no longer characterised by mutual trust. However, the consequences of these decisions will only very slowly be reflected in the markets and the global economy. Whatever happens, China is still the second largest economic power and constructive solutions will probably have to be found in almost all areas. Presumably, the Chinese government will also have to return to a less dogmatic and more pragmatic path and will probably want to do so.

The financial markets were initially unable to carry forward the great momentum of the year. Corrections occurred on the stock markets and the initial enthusiasm slowly gave way to a more realistic assessment. Despite the major crises of 2022, many companies reported record profits and then the investor naturally asks whether this can be repeated or even expanded. The current factual situation makes this seem unlikely, which means that company valuations must first be put to the test again.

On the currency market, the US dollar is now moving in very narrow ranges after a sharp decline in the last quarter of 2022 and the markets are waiting for new decisions and impulses that would possibly then lead to a further revaluation.

The oil price rose, but is also still moving in quite narrow ranges around the $80 level. Fortunately, the prices for gas have fallen considerably and are thus also contributing to relief on the energy cost side.

Gold has yet to break through the $2,000 mark, but it is holding steady above $1,900, supported by the weaker US dollar.

Leather Pipeline

The month of January is now almost over and the year for the leather pipeline has still not really begun. This is because, this year, there was a very short period between the Christmas holidays and Chinese New Year. In addition, the change in the Chinese government’s pandemic policy also had to be digested and processed and it was not possible to prepare sufficiently for this situation from a business point of view. Even if the government decisions had already been made at the beginning of December, it has taken time to adjust. With the interruption in production for Chinese New Year, this was even more difficult, as activities could not simply and quickly be ramped up.

Therefore, in most cases, the decision was made for a long phase of reduced production, or even a long break. The entire supply chain in China, both for national, local consumption and for the export business, must first be readjusted. In many cases, this requires travel, personal meetings or at least intensive communication to organise the new start.

In the consumer goods business, which of course also includes leather, this is particularly difficult because the supply chains are long. In addition, for many consumer goods we are still in between big seasonal decisions and therefore little can be made up for the current season and the time has not yet really come for the next set of decisions. When there are few facts available, opinions, hopes and wishes usually form the basis of public debate. This naturally leads to a situation in which everyone tries to find an image that comes closest to their own ideas and wishes.

In such a situation, it is difficult to make realistic assessments because the unknowns are simply too numerous.

Objectively, we have already exchanged most views and alternatives at this point, and at the moment not many new parameters have emerged.

In the automotive industry, the supply situation for semiconductors and other materials has eased considerably. Many analysts see the reduced production that was caused by supply chain problems in the past years now possibly burdened by a lack of demand. At least for the moment, car buyers in many of the major markets around the world are holding back significantly and this is of course understandable, because on the one hand, significantly increased interest rates and on the other hand, lower disposable incomes are weighing on the decision to make expensive purchases. We are in a transitional phase going from combustion engines possibly to electric vehicles, but before one really makes a clear decision in favour of electromobility in 2023, there are still a large number of questions that occupy the user. Many people have the feeling that it is still too early for an electric vehicle with the corresponding usage behaviour.

This problem mainly affects the mass market, where leather does not play such a dominant role in interior design. Therefore, it can be assumed that in the upper range of vehicles and also in the luxury segment, the demand for leather will not change very much in the coming months. Perhaps this is less due to consumer wishes than to the lack of a corresponding, exclusive alternative material.

We have also discussed the furniture sector several times. Here, too, higher interest rates are weighing on the real estate business and thus on new furnishings. Inflation is also a negative factor for expensive furniture and, last but not least, furniture has just had two excellent years and at the moment expensive interior furnishing is not necessarily the focus of most consumers. From what we know so far, this will not change too much in the course of this year. Moreover, in the next few months we will be coming out of the winter season and thus entering a weaker phase of furniture demand.

In the case of shoes, we are dealing more with a pure commodity. Of course, you can buy many pairs of shoes without really needing them, but at least shoes have a much more stable basic turnover and demand with 8 billion people on earth.

The problem here continues to be the use of materials. It is simply not apparent that the manufacturers of shoes and the big fashion brands are really interested in leather as a material again. This is not officially communicated, but the big sports and casual shoe brands have decided almost to stop using leather by 2025. Leather will only remain where special requirements are made or where the most expensive lines are concerned.

To understand this, take a look at the football boot sector or golf. In football boots, leather is indispensable in the professional leagues and the top models. The advantages in comfort and performance are too great. The same applies to someone who covers many kilometres on the golf course in all weather conditions. You can also do that in a plastic shoe, but no one would really enjoy that. A high-quality baseball or golf glove made of plastic is also an option, but  no one who has the option of leather would opt to use plastic for the time being. The disadvantages are too great.

Nevertheless, the advantages of producing comfortable, sporty, cheap shoes without leather are simply too great to expect that something could be changed here without massive pressure from consumers who have a desire for leather shoes. Price does not seem to be a major stimulating factor either, because one thing is certain: the price of leather in the mass market cannot drop any lower. Cheaper raw materials and significantly falling production costs are not only unlikely, but in many respects not even possible. In the long run, leather cannot get much cheaper than it is today for mass production. 

Thus, all optimists should at least face up to one certainty. If leather does not regain market share as a material at the current price, it will take a lot of creativity and effort to turn this trend around. The price will only be able to help if alternative materials become expensive, or recycled plastic is outlawed, or the leather industry and its affiliated organisations come up with something convincing to communicate the quality and benefits of leather to consumers. It won’t be the labels and certifications; think instead of the examples we have given above.

There are many reasons to choose leather. However, this will not be achieved, at least not in the short term, and this will have little impact on the current planning for the coming seasons. Leather demand will remain disproportionately low compared to the change in overall demand and the leverage for short-term overall demand will be rather weak. If we are correct in this assessment, we can expect little impetus from this side, at least for the current year.

The only question that remains is how the situation will look along the leather pipeline and the various processing stages. Theoretically, of course, there is the possibility that contrary to all reports, the Chinese leather industry, for example, has reduced its stocks in the past year and therefore may need to restock. That in any case is a theory that could then be further supported by improved demand following the worldwide decline in consumer spending in recent years because of the pandemic. Of course, this is countered by stock levels in the major retailers that are still too high. These levels have to be significantly reduced before anyone can expect new ordering activity from them. Also, speculation should be well monitored.

What determines the rest of this year will probably only be decided after the holidays in China. One thing is certain: without a significant increase in production and consumption in China, a fundamental improvement will hardly be possible.

The split sector continues to be determined by production in the protein sector. Low hide prices, low prices for leather, high production cost for leather, reduced output of lime split and other by-products in the leather industry coinciding with rising demand for collagen, plus high added value and positive sales expectations have shifted the situation considerably for the various market participants. Today, split leather is no longer a cheap alternative to grain leather and thus the production of split in lime or wet blue is only a solution for technical reasons. As in all other sectors, only niches and special articles are economically attractive in the production of split leather. However, so much production, including directly from the hide, is now being diverted to the protein sector that there are already many discussions about whether this sector can absorb all the supply in the medium term. At the moment, however, the revenues for the raw materials for the gelatine and collagen industry are supporting the calculations of the grain leather tanners.

For sheepskin products we have seen little or no change in the market recently. High-value niches continue to use leather and at the same time there are still buyers for the selected and adequate raw materials. For all other items there has been no improvement in the situation and here too China will play a very decisive role for the markets in the future. Fortunately, we can see more and more leather garments on offer and this would at least be a positive outlook if it continues in combination with a better revenue situation for wool.

The next negotiations for raw material prices are scheduled for the coming weeks in Europe. China will probably need at least two more weeks until planning and decisions for the next months are made and can influence the markets. On the horizon there is already the next Lineapelle fair in Milan (February 21-23), which will certainly give an impression of what can be expected from and for the leather industry. We maintain that until then there may be a lot of talk and rumours along the leather pipeline, but the real further development will only be discernible from mid-February and until then individual interests and opinions will remain dominant.

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