Macroeconomics

It’s hard to remember any Chinese New Year holiday period as quiet as this year’s. Immediately afterwards, though, it became clear that all eyes are on developments in China. Economically, it is in everyone’s interest that the Chinese economy recovers quickly and thus supports the recovery of the global economy. Rapid normality is urgently needed in supply chains, in the buying activity of Chinese consumers and in economic stability.

In addition, the business world kept a close watch on the latest interest rate decisions from the Federal Reserve in the US and the European Central Bank. The effect of these on the economy, on the development of inflation and on the financial markets is of great importance. The decisions were unsurprising. The Fed raised rates by 0.25% and the ECB by 0.5%. The financial markets were more than satisfied with this and assume that the interest rate increase curve in the US will come to an end in the foreseeable future, while in Europe we will probably have to fight inflation for a little longer.

Recent easing of inflation rates a little has already give some hope, even if the values themselves are still relatively high. Nevertheless, we are now a little further away from a double-digit figure. Falling prices for energy, partly for food and of course for transport lead us to expect a further slowdown, even without the intervention of national banks. However, it will still take a while to reach the target of 2%. Nevertheless, the future is being traded on the financial markets, and it looks somewhat brighter at the moment.

The stock markets have continued the strong upward trend that began in January. Of course, it is a bold bet on the future, but basically the markets have still proven to be a relatively reliable indicator. In any case, more reliable than national banks and politicians.

Gold had its sights on the level of $2,000 per ounce in the short term but has failed to clear this magical hurdle. On the contrary, the gold price fell back into the region of $1,900 per ounce. The price of oil, and with it the cost of energy, also fell and is hovering around the $80 per barrel mark.

Leather Pipeline

With the pandemic and the holidays for Christmas and then Lunar New Year, we have had almost eight weeks of exceptionally reduced activity. This is equal to almost one-sixth of the whole year. This may make it clear how much the global leather sector has been affected by this, and how urgent a quick recovery is.

The next few weeks and especially the mood at the Lineapelle trade fair in Milan (February 21-23) will make it easier to make forecasts for the leather pipeline for the rest of the year. 

The political changes triggered by the Russian invasion of Ukraine a year ago are having a strong impact on the global economy. For the leather industry, this is of elementary importance. 

What does this mean in detail? The leather industry has always been very dependent on certain location factors. These have changed considerably in recent years. Since the Russian invasion of Ukraine and the resulting distortions in the energy markets, in combination with sanctions, these locations are of crucial importance. The availability and cost of labour in the next significant part, followed by legal requirements and regulations, especially within the EU.

The availability of raw materials and supplies has changed, as has the development of sales markets. The wish and conviction of many Western, democratic states that they should be joined in the sanctions policy against Russia has not been realised. Important countries such as Turkey, South Africa, Brazil, India and many others view their relationships with Russia in a completely different light. This has historical and, in many cases, cultural reasons. In any case, the leather industry in some countries now has access to much cheaper energy, is struggling with fewer regulations and bureaucracy and, above all, has the opportunity to take over market share in Russia.

Lower regulations and legal restrictions play an important role and many of these countries have sufficient and relatively cheap labour. None of this is new, but the conditions have become even more divergent. The EU administration and many countries in Europe are afraid of these competitive disadvantages, but a small industry like leather plays absolutely no role in these discussions. Smaller industries are perceived as insignificant. Some in the political world would even be quite happy if an ‘undesirable’ branch of industry were to fall by the wayside in this way.

Things have definitely become difficult for the part of the leather industry in Europe that does not belong to the sectors with high added value. The chain in the luxury goods industry has more than sufficient added value and can therefore successfully deal with the many problems that exist today. Leather and ‘Made in France’ or ‘Made in Italy’ play a weighty role in marketing and are so successful that high raw material prices and increased costs, although seen as extremely annoying, are not really a big problem. Just look at the results of the leather divisions in the luxury conglomerates.

The situation is, of course, quite different for the less privileged manufacturers of standard articles. The massive rise in costs, lack of qualified employees, bureaucracy, certifications and sales difficulties are putting an extreme strain on medium-sized companies in Europe. Even an extremely low price for raw materials cannot help much if the demand for leather as a material does not develop positively in terms of volume and price. The added value that can be achieved today from the raw hide to the finished product in Europe for standard products is simply not enough to cover the costs along the chain. This is not necessarily new. In recent decades, industry in Europe has repeatedly succeeded in withstanding pressure through productivity gains and creativity, but the massively deteriorating location conditions and the uncompetitive energy costs in many countries are tearing deeper and deeper wounds every day. This particularly affects those who do not have a public focus or who cannot successfully hold their own in the market with niche productions.

The biggest problem is that the clock is now ticking relatively fast. Financing costs are rising and if demand and the price of leather do not change for the better quickly, one must at least reckon with the possibility of a rapid shift in production. Europe is no longer the centre of the world anyway, even if one can sometimes get the impression that not everyone is fully aware of this yet. In our view, the year 2023 must either bring a quick, positive change or the issue of capacity closures will come to the fore.

Along the leather pipeline, it has been very quiet again in the last two weeks. China took a long break and it was only at the end of last week that the first activities began again. However, this was initially more in the form of testing the waters than a return to significant activity. The situation in Europe was similar. Companies are working within the bounds of what they have to do or can do and are now waiting for the upcoming trade fairs and the question of whether the possible easing of inflation and better weather in a few weeks will lead to a brightening of the mood among consumers and possibly arouse more interest in leather among consumers.

All other eyes are now, of course, on further developments in China. Anything other than a fast and strong recovery of production and consumption would be a big disappointment and also a burden for the leather industry. If the stock markets are again a good indicator, then we can perhaps look forward to a significant brightening of the situation from the second quarter onwards. But everyone is still waiting in the wings: the starting signal has not yet been given and politics remain a big concern.

In the split market, the use of the material in the collagen and gelatine sectors remains the decisive factor. Everywhere, discussions are taking place on whether the considerably increased prices for lime splits are really sustainable, and whether the higher prices are because of considerably increased demand or simply because of reduced output caused by reduced production in the leather industry. Today, the use of lower-quality bovine hides in this sector is clear and now presents competition to tanners. It is a situation that one really needs to get used to.

For sheepskins, a lot will depend on how the global economy and consumption develop in the near future. We remain impressed by the fact that leather plays a major role in almost all luxury fashion brands. There is hardly a fashion magazine or fashion show that does not feature many products made of leather. Again, it is fascinating to see that especially in the fashion sector there is always opposition to meat and leather, but at the same time designers are always happy to fall back on the material. Maybe it is just hope, but we have the impression that more leather garments are being seen on the street again, too. Vintage is a term you hear frequently, and obviously many leather jackets from the 1980s and 1990s have survived somewhere. To have a real impact on production and on the commodity markets, though, these fashion ideas would have to make the big leap into the mass markets. It can no longer be down to price; now it is up to buyers from the big fashion houses and the retail trade to have the courage to make these really attractive possibilities available to their customers.

In the next two weeks, further developments in China will dominate. We do not expect any major movement in the other regions of the world because most people are waiting for Lineapelle in Milan. In the last few years, there have been few opportunities to travel, which has meant that personal meetings and the development of new articles and products have been limited. This is now slowly improving and the fair in Milan could be a first step towards recovery.

We need new and attractive products to animate and stimulate the consumer again. In the last few years, the development of anything new was reduced owing to the restrictions imposed by the pandemic. However, it would be unreasonable to believe that the lifting of those restrictions immediately translates into consumption and demand. It takes time to develop new things again and test them on the market. Let’s hope that spring 2023 will be the starting signal for fundamental changes in production and demand.

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