Macroeconomics

The last two weeks have been among the quietest in recent memory, economically and politically.

The war in Ukraine and the diplomatic struggle of the superpowers for a new political global balance continued to dominate. China’s position probably plays the most important role here at the moment. On the one hand, China is trying to push back the strength of the US, but on the other hand, of course, it also knows that without the global sales markets, it is not so easy to maintain positive economic development in its own country.

China needs political and economic success, especially after the long phase of restrictive pandemic policies. So, focusing politically on an ideological friend, Russia, would not benefit China and might even harm it. Therefore, it has not positioned itself clearly and has suggested that it would actively cooperate in a peace process between Russia and Ukraine. However, there is no clear statement of what this might look like.

On the financial markets, too, very little of note has happened. Inflation and interest rate developments remain the dominant themes. Inflation in the euro area remained well above 8% in February and above the target values. This means that further interest-rate hikes are guaranteed, and the same applies to the US. The markets have long since come to terms with rising interest rates and it is really only a question of how long and to what extent interest rates will rise.

The stock markets are reacting accordingly and have been under pressure for some time after the rally at the beginning of the year. At the end of last week, hope began to germinate again that, at least in the US, interest-rate increases in the coming months will not be as strong as generally expected. This helped the financial markets to recover somewhat.

Further support also came from corporate results. Despite the difficult environment, many listed companies are still reporting very pleasing figures.

Further support for the economic outlook came from China when the purchasing managers’ index and industrial production figures were much better than expected. For the moment, the figures point to a fast and strong recovery of the Chinese economy. However, we all know that some of the statistical figures in China are subject to a certain political influence, so we will have to watch very closely in the coming weeks and months how things develop there.

There was also little movement on the commodity markets; neither gold nor industrial metals showed much movement. Fortunately, natural gas prices in Europe remain very low. A relatively mild winter and the successful replacement of Russian gas, as well as the remarkable efforts of consumers to save, continue to ensure well-filled storage facilities and, thus, a control on prices. 

This is good news for the further development of inflation and the economists are now only concerned about the possible massive wage increases that are currently being demanded by employees and the trade unions.

Leather Pipeline

As all reports about Lineapelle in Milan have stated, the fair was relatively well attended. However, the statistics, which may excite the organisers, do not play a major role for the exhibitors. They simply look at their visitors and what counts is quality and results, not quantity. Most of the exhibitors we spoke to were satisfied. Although the first day was considered by many to be less well attended, all our interlocutors were satisfied with the results and the quality of the meetings they had. Important customers and dialogue partners came, concrete negotiations were conducted and it there were only very short rest periods during day one. For the second day, exactly the opposite was true. Clearly more people, fuller aisles and more commotion on the exhibitors’ stands, but considerably fewer results and quality. The last day, as usual, there were fewer visitors, time for gossip, opportunities to visit colleagues and competitors. Truly interesting things only took place on the last day if the appointments had already been fixed in advance for that day.

What did we take away from the fair and what particularly struck us? First of all, we were not particularly impressed by the number of visitors. Yes, there were a few more visitors from overseas and of course we also noticed, greeted and spoke to one or two Chinese visitors. But we didn’t find the number particularly high, although perhaps a little better attended than last autumn. 

The fact remains that the fair is an event that is very much about Europe and about the production and development of leather in this region for the world. From here, articles and trends go into collections and onto designers’ tables to animate consumers all over the world and encourage them to buy articles made of leather. Those involved in this chain of development and production all find their way to Milan.

Apart from that, beautiful articles were shown again, quality was improved and confirmed, and in some places new suggestions were provided. We did not really notice any major changes in the articles or fundamental changes in fashion trends. Most tanners are trying to make their production processes even more environmentally friendly, to improve colours and haptics again wherever possible, and to convince customers that leather is still a successful material.

The fair was once again proof that the deep gap between creative, product-focused manufacturing and the manufacture of industrial mass-produced leather is widening, and that the interests and paths to the goal are becoming ever more divergent. First of all, with a few exceptions, the mass producers from Asia or from the automotive industry are represented at the fair at best as visitors. Those exhibitors who feel obliged to show a presence, especially as Italian companies, are exempt from this. On the whole, these companies, some of which have grown to a significant size, actually only focus on price and certification. Computer-controlled production and objective technical results that can be precisely tested are more important than the visual, haptic and creative impression conveyed by the material, which has a subjective and emotional component.

This whole thing contrasts with the similarly positioned processing and manufacturing industry, which for its part only has objectively ascertainable, always repeatable technical values and price in the foreground. The whole thing is decorated with considerable requirements with regard to testing and certification, and it leads to a very interchangeable product that is neither itself nor in the final product essentially different from one another. Under this premise, it is understandable that the price becomes more and more decisive when the product can be exchanged almost at will. The costs to achieve these results and to meet all the certification and technical targets are rising and can hardly be reduced significantly by productivity gains or relocation of production anymore. If the processors’ target price is not reached, it is often possible with very few measures to reduce the leather input and replace it with cheaper alternatives to bring the total cost of materials in the finished product down to the target value. Looking at the decline in the use of leather, which has been visible for a long time: one has to be very concerned, especially in the current situation where the raw material is not even expensive.

Interesting discussions took place about the supply chain for luxury goods manufacturers. It is no secret that the big luxury brands are very happy with their business in leathergoods in all respects. Growth and very satisfactory margins inevitably lead to plans to grow further in this sector. There is, of course, the problem of raw material supply. Many of the items, depend for their quality and manufacture on select European calfskins. All the indications are that availability of this material will decline in the next few years. This, of course, is in extreme conflict with the industry’s growth plans. The solution is not higher prices, because more money does not buy more raw material in the end. This means that we have to discuss how a possible increase in the demand for leather can be met. There are many possibilities, because in the end it only depends on what requirements one wants to fulfil for the client.

Many of these discussions in Milan took place ‘behind closed doors’, always with an insistence on the highest confidentiality, and much was then finally described as gossip. It is understandable that such topics should not be discussed in public. Especially not if one has to switch to raw materials that do not have the unique exclusivity and quality of European calfskins. For other commodities, the stories and the strategies have to be developed first, and that certainly takes time. The facts, however, are relatively clear. The current resources are not sufficient for any further strong growth.

The commodity markets have also been extremely focused on the fair in Milan in the last two weeks. The pressure on prices came to a standstill in January and then even turned into slight price increases for various reasons. Almost all major markets recorded a reversal and for various reasons small price increases were recorded everywhere.

The reasons for this were manifold. However, probably the lower slaughter in Europe, the prospects of lower kills in the US, economic recovery in China, the rising prices for lime-split and in the end also a BSE case in Brazil and the overall relatively poor revenue situation in the meat industry made the mix what it was in the end. Certainly it was not an improved order situation in the leather industry that led to increased demand and higher prices.

The first place to push through price increases was China, but this was also the first place to face massive headwinds. The decisive trigger in China was the significant increase in prices for raw materials for the collagen and gelatine industry, which had been going on for months, but then came to a head a fortnight ago. It is not yet clear how the journey will continue, but the impression is that the big heat and the one-way street have stopped now.

The meat industry was of course delighted to see that after a long period of difficult sales and no prospect of an end, a turnaround was suddenly possible. They have tried and will continue to try to defend what they have achieved. This condition will probably lead to a very difficult market situation in the coming weeks. The leather industry sees no reason at all why it should calculate higher prices for its raw material in the current market environment. 

We have already dealt above with the split market. In the case of splits for the collagen and gelatine industry, the trend of constant price increases has definitely been broken for the moment. There are quite a few who predict a massive correction. This is connected to the supply of finished products that has risen far too quickly and a sales market that is by no means growing at the same rate. Others, however, see the current situation only as a pause and a necessary correction, but in no way as evidence that the trend has really been interrupted.

In the case of splits used for leather, the situation is completely different. The low grain prices have actually made split unattractive. The production costs, which rise for split just as they do for hides, no longer make split a significantly cheaper alternative product in the overall calculation. These fears are not new, but it always takes time for this to be realised in the market.

Specialities remain successful in sheepskins. This was also evident at the fair in Milan. This will by no means increase demand to such an extent that suddenly lamb and goat skins will experience a renaissance in clothing, but beautiful, elegant and special articles will find a home, and probably more easily than before.

For the next two weeks we expect more of a lull. Tanners have obviously covered their immediate needs again for the time being and can thus take a break in their purchasing. This is certainly true for Europe. In Asia, and especially in China, people buy according to different rules and much depends on emotion and opinion there. However, we hear that almost all manufacturers are complaining that their big customers have the brakes on at the moment. High retail inventories, high planning uncertainty and, in the end, little impetus from fashion mean that orders and purchases are placed only very slowly, in smaller quantities and for short periods. Whether this can change is hard to predict in our estimation and the facts speak against a major change in the next few months.

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