Macroeconomics

The terrible earthquakes in Turkey and Syria with so many victims has taken centre stage in political discussions and the news in the last couple of weeks. 

There were new rumours that Russia might invade Moldova and the resignation of the prime minister of Moldova fuelled these fears even more.

At the international security conference in Munich in mid-February, discussions went ahead this year without Russia. This was hardly surprising, and it was widely accepted that the geopolitical security situation has not been as bad or as fragile as it is today for several decades.

In the economic sphere, interest rates remain the defining issue. Even though inflation rates are easing somewhat in many regions, they still remain far from the national banks’ targets. Recently, producer and wholesale prices in the US rose significantly, so one can assume that this will soon reach consumers as well.

We would be more confident about inflation, but big wage demands in some countries and the resulting rise in labour costs are significantly increasing the risk of an incipient wage-price spiral. Price increases and, thus, inflation have been fuelled considerably by energy and food prices as well as transport costs. Supply chain problems have also contributed to this, giving many sectors an opportunity to push through higher prices, pointing to reduced supply. However, many prices have been falling again for some time. One need only think of natural gas, which is now trading at prices below the levels seen before the invasion of Ukraine. Freight rates are also falling and with the normalisation of the situation in China, global competition will also increase significantly and very quickly and, thus, put pressure on product prices again.

There is no doubt that consumers have suffered from the massive price increases of the last two years and therefore the demands for compensation are understandable; it should still be noted that it would be a Pyrrhic victory to trigger further price increases or to prevent prices from falling quickly. The people who are hit hardest by inflation and who expect the most from wage increases would be the ones who would suffer the most in the long run if things were overdone now.

The stock markets oscillate up and down week by week. Owing to interest-rate risks, some of the enthusiasm of investors has evaporated and despite some excellent corporate results, the trend is pointing slightly downwards at the moment.

Energy prices are little changed and also oscillate in narrow ranges, but here too the trend continues to point downwards. 

The gold price also came under pressure again with rising interest rate expectations and was just able to hold the $1,800.
The US dollar also strengthened again because the Federal Reserve is no longer expected to cut interest rates sooner and more sharply than the European Central Bank. It is moving below the $1.07 mark against the euro.

Leather Pipeline

The rhythm of our Leatherbiz Market Intelligence publication dates has us publishing this issue just as one of the most important leather fairs in the world is opening its doors, Lineapelle in Milan (February 21-23). Therefore, we can neither report on the meetings nor discuss the results until next time. This is not necessarily a disadvantage. It is often helpful to put the emotions and excitement of the moment in the background and to deal with the real results from a somewhat greater distance. 

The last two weeks finally brought a little more activity back into the leather pipeline. This was driven by the reopening of China after the pandemic and New Year holidays and this was particularly reflected in demand for raw material. There was not a single region that supplies raw material that did not report a pick-up in demand. As usual, everyone interprets such news in a way that suits their own interests and after such a long period of below-average activity, even the smallest ray of sunshine is a welcome occasion for sellers to proclaim a turn for the better and quickly test how customers will react to it.

This time will probably be no different, and the trade fair in Milan will come just in time. In any case, the suppliers of raw materials will arrive with a great deal of confidence and initially meet the customers with a new tailwind.

Actually, not very much has changed. As we have already discussed in recent issues, it would first require a significant improvement in leather demand, triggered by an upswing in demand from Chinese consumers for there to be a real change. It remains true that we still have 8 billion inhabitants on the planet and they continue to be available as consumers at one level or another and with different needs and wants. Even the sanctions against Russia have almost completely lost their effect on the sales of many products, as these sanctions are not supported by all countries and thus only the routes to market have changed. Of course, it may not be with the same volumes as before and there may also have been changes in purchasing power, but overall the impact is nowhere near as extensive as many thought a few months ago. 

In many other markets, people are still struggling with excessively high stocks of consumer goods, and the sales expectations for 2022 in many areas, including a large proportion of products with leather content, have not been met. Just take a look at the capacity utilisation of the warehouses in the US, but also in Europe, with the resulting storage costs, and it very quickly becomes clear that it may take a while before enough space and financial resource are created again to place large new orders. In short, there are certain influences that are affecting the market in one way or another at the moment; no one can assume a real change in volume in the longer term. We maintain our view that only a renaissance of leather as a material can achieve a real improvement in demand and orders within the leather pipeline. It is important to reiterate that this refers to the mass market and explicitly excludes luxury and niche players.

Recently, the increasing demand for collagen and gelatine has also played a significant role in this sector. Raw hides below a certain price level have found a surprisingly stable and growing uptake for this use in many markets. However, it should also be noted here that the market development cannot be clearly explained. It is self-evident that this is an interesting alternative use for a slaughterhouse’s by-product if there is insufficient demand in the leather industry. Any positive return is still better than destroying the available raw material.

In gelatine and collagen, regional availability and production capacity utilisation have a much greater impact than in leather production. The decline in leather production in China, but also in Europe, has in this respect led to gaps in supply, which have been compensated for by the increased use of cheap raw hides. At the same time, there are certain sales markets for proteins that are, admittedly, growing. In addition, the value-add in this processing chain is so high that producers in some regions have been able to afford some flexibility in the price of their raw materials. However, this is a very generalised view and it does not reflect the actual distribution of supply and demand in the different regions across the different items in this sector.

If you use assumptions from reliable sources, it is hard to come to an exact conclusion, but there is reason to suspect that major adjustments in production and price could be on the way in the foreseeable future. Whether the fall in prices for lime split in China after the New Year holidays is a signal of this will become clear in the coming weeks. In conclusion, however, it can be said with certainty that lower leather production can divert hides to this alternative direct use for the foreseeable future and one can at least expect a price floor for the raw material that is above zero and above the disposal costs.

Looking again at the situation in the leather business, it can be said that without the production and consumption in China, we did not have any supply problems in the recent past and nobody got the feeling that they would not get the leather products they were looking for. So, all that was missing was clarity on how much consumption in China has fallen since export production was shifted and if there is much that could possibly increase demand in the coming months. In any case, the government is not standing in the way of any increase in consumption and is providing a boost to the economy with easily accessible credit and additional investment. If Chinese consumers are receptive to this, as they often are, China could once again become a driving force for the leather industry. Otherwise, the prospect of a significant increase in the coming months is rather moderate.

Little has changed with regard to sheepskins and all eyes are on the fair in Milan regarding this material. There is still a lot of sheepskin leather being used in haute couture and perhaps now there is a chance of a leap into the mass market. We are now waiting for the start of the new season for lambskins in Europe. If you take the enquiries and reservation requests as a yardstick, business should be very pleasing.

In the split market, everything is also focused on lime splits for the collagen and gelatine industry. New players are heating up the market and it remains unclear whether it all has a firm enough foundation. We consider the market situation here to be overheated and would not be surprised if some realities bite in the foreseeable future.

Many people in the industry will meet in Milan. Without question, it will become clear how demand and business will continue into spring and summer. We will report on our impressions.

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