Macroeconomics

The biggest events over the last two weeks have been insolvency events and rescue bids at banking institutions. First came the case of the SVB Bank in California. For the first time in a long time there was a major bankruptcy in the banking sector and memories of the 2008 banking crisis quickly came to mind. Many feared the same domino effect as with Lehman Brothers back then. The stock markets collapsed immediately and the financial world looked on with great concern at further developments.

The US government reacted relatively quickly and first tried to find a buyer for the institution as quickly as possible. This did not succeed, but with a guarantee to protect small investors, a lot of pressure was initially taken out of the system. The financial markets then recovered relatively quickly, but nervousness continues to grow overall. On the one hand, interest rate hikes continue to threaten, and on the other, the insolvency has once again shown that the banking system is perhaps somewhat more stable than in 2008, but by no means so stable that such a surprise could not happen again, and happen quickly. The relationship between the banks’ equity capital and the risks they have taken again, especially in the last low-interest phase, is still not in a healthy balance.

In Switzerland, too, a major bank failure had to be averted by a state-supported merger, with UBS acquiring Credit Suisse. The dimension of these difficulties was much greater and a failure would certainly have triggered considerable turbulence or possibly even the collapse of the global financial system owing to the size of these institutions.

Further interest rate decisions at national banks, especially the Federal Reserve in the US, are now awaited with great excitement. Although inflation in the US fell to 6% in February, it is still far from the target corridor. The central bank initially raised interest rates by another half a percentage point. The question of whether the declining energy and transport costs are sufficient to lower inflation further or whether the labour market must also be cooled to prevent further significant increases will certainly dominate the discussion in the committees in the near future. The rate hike cycle is certainly not over, and the best of all alternatives would be a pause or smaller increases in the coming months.

In China, President Xi Jinping has consolidated his position of power and had himself confirmed for a third term. He has also reshuffled his leadership and filled key positions with confidants. The Chinese government has remained vague in statements on expected economic growth for 2023. They speak of approximately 5%, which is actually rather unusual for the Chinese government. Normally, clear targets are given, which are then achieved by any means necessary.

This relative vagueness shows that even the Chinese leadership is by no means sure whether any economic recovery after a long phase of stagnation will be so stable and pronounced that the targets can be safely achieved this time. After the weaker development of the last few years, 5% is not a particularly impressive figure. This is probably one of the effects of generally weaker global economic development, but it is certainly also true that with increasing political tensions, export businesses can no longer be planned as securely as we have become used to.

The Chinese economy is currently treading a fine line; many national problems, such as the real estate crisis, still have to be resolved, and the withdrawal or reduction in production in China of many global companies will certainly leave its mark. What effects, if any, the tensions between the great powers will have can hardly be planned at present, even for the Chinese government.

In any case, one thing is certain: uncertainty is something the Chinese leadership does not like at all. First of all, the economic figures for January and February taken together were not particularly impressive. Although private consumption rose by around 5% compared to the same period last year, this was less than expected and, in addition, purchases in the real estate sector and major purchases fell quite significantly.

Corporate results in 2022 were positive, but the outlook is very uncertain in many sectors. With rising interest rates and weaker economic growth, there is a relatively high probability that corporate results in 2023 will not meet expectations. This would certainly challenge current equity market valuations. 

Overall, relatively little has happened in the commodity and equity markets in the last two weeks. The stronger swings in the wake of the bank failure were of a very short-term nature and only the oil price dropped significantly again, moving towards the $70 mark. The gold price also moved in very narrow ranges, but was able to recover to $2,000 in the wake of the banking crisis. The US dollar fluctuated more in the wake of the crisis and weakened somewhat.

Leather Pipeline

The APLF fair took place in Dubai last week and it is probably safe to say that it was a disappointment for many visitors and exhibitors. Of course, it was not clear what anyone should expect from a fair that came so soon after Lineapelle in Milan, but somehow hopes were relatively high that an event in the Middle East would trigger more interest and attract more exhibitors and visitors. Those who looked at the exhibitor list in advance could not have been surprised; those who perhaps had not were disappointed to see that the number of exhibitors was considerably smaller than the previous year.

If one wanted to take something positive away, one could say that the exhibitors with a certain international reputation had stands that were particularly well attended. The decision to return to Hong Kong, the traditional location for APLF, in 2024 did not come as a great surprise. It will be interesting to see whether it will be possible to revive the tradition and attractiveness of Hong Kong as a location after the long break.

APLF reinforced the impression that sales of raw and semi-finished products for the leather industry are perhaps not quite as good and problem-free as many would have the market believe at present. In discussions with tanners, but also with chemical suppliers, it was unanimously reported that in the shoe sector orders for the coming winter season have so far been slow to arrive or have not arrived at all. Looking at the calendar, many are of the opinion that time is now running very short and that the planned and expected quantities can hardly be ordered in time now.

The furniture leather season is slowly coming to an end and there is talk of a very poor season, with high stocks of semi-processed and finished goods left in warehouses. For automotive leather, little has changed in Europe. Production and orders are almost exclusively concentrated on high-end models. Only a few factories are working at full capacity and offers of contract work from tanners, which one would have thought completely out of the question a short time ago, are now the order of the day.

The rumours about large stockpiles of semi-finished goods in Europe that keep surfacing are also worrying. A dangerous mixture seems to be stirred up here. The decline in demand that has accompanied us for some time has triggered various decisions. All of them were triggered by the principle of hope and reinforced by increasing demand for collagen and gelatine raw material.

At first, tanners were resistant to the idea of adjusting production to match the lower demand for leather. On the other hand, there were hide suppliers who wanted to keep prices stable and therefore had more raw material processed into semi-finished products. The lure of high splitting revenues and good returns for the better assortments made the risk seem manageable, and traders who specialised in this took a risk.

Finally, new entrants came into the market, buying up hides and having them tanned to meet their split needs or trusting that they have a better solution than the full-scale leather producers. All of this led to more hides coming into drums, but they were hides for which there was and is insufficient leather demand. Hopes that the reopening of China and a decline in slaughter would improve demand and prices have, so far, resulted in disappointment. In addition, European hides and skins, with the exception of top-quality grades and ranges, are still far too expensive in a globally oversupplied market.

Nobody knows exactly how high the stocks are, but information is mounting that they are much higher than previously assumed. If reports are true that the first price wars have now broken out in the leather business for standard leathers, it does not look good for European manufacturers. Squeezed between extremely high costs and insufficient sales, they are simply no longer competitive if a large part of their production is below what the luxury and speciality segments require.

Of course, this then also applies to a large part of the raw hides and especially to the semi-finished goods stocks that have grown up in the meantime.

We hear similar things from China, although the cost problems there are not as great. Here, the small and medium-sized enterprises lack sales and thus also financing, so that the pressure has now become so strong that prices for finished furniture leather of less than $1 per square-foot have become the norm.

What should give the leather industry particular food for thought, however, is the fact that when assessing hide prices, people now almost only talk either about split and by-product prices or about the better qualities. General leather prices are of secondary importance. This is now true everywhere, and nobody sees even the slightest chance of raising leather prices.

The increases in hide prices that have been in evidence since the beginning of the year were either because of currency shifts or improved split revenues, but at no time because of shortages, improved leather demand or higher leather prices.

These circumstances, pressure on prices and margins in the face of insufficient demand, bring costs and the competitiveness of production locations back to the fore. Travelling is possible again and despite all the discussions about carbon footprint, in difficult times price plays the decisive role, not so much where the goods come from or where they are processed. Incidentally, this is not only a European problem and the differences are now so great that more and more flows of goods are being diverted and considerations about the cheapest location are once again coming to the fore.

Unfortunately, the meetings and talks in Dubai have not brought any conclusive solution either; there is still a lack of convincing ideas about what to do. In the meantime, it is clear in the talks that people are aware of the difficult situation and that it is now more a matter of getting through the storm without too much damage. But for this, at least if leather is to continue to be made from hides and skins, good ideas and their implementation are needed. At this point, however, it must always be pointed out that there are of course still very successful companies producing leather today, but the industry problem is still there.

Significantly, Leather Naturally had the largest stand at APLF. As laudable as its efforts may be, its investment would probably be better directed towards a presence at outdoor, automobile, fashion, consumer goods or sports fairs, where education and information about the material are probably more urgently needed.

The split market continues to be affected by the situation in collagen and gelatine. In China, large companies have had to stop production due to complaints from the authorities. It is still unclear whether this is only a short-term measure or whether it will last longer. In any case, the market for lime splits immediately came under pressure. According to all experiences with China, this will be solved pragmatically. If the local demand for the product is there, solutions are found.

If the politicians, for whatever reason, think that it is of secondary importance, then it may take longer or not be resolved at all. With increasing demand in China, a longer closure would be rather surprising. The rest of the market for splits remains very difficult owing to the general situation. The price for whole hides as wet blue does not leave much room for splits.

There has also been little change in sheepskins. In wool skins, light skins with dense and fine wool are still in demand. In nappa, the top qualities also continue to be sufficiently sought after and also remain an alternative to calfskins. Assuming that calf production in the Netherlands and France declines in the next few years, luxury brands will have to look for alternatives if they want to continue to grow in the leather sector. High-quality hair sheep, goats and lambs are among the most obvious options.

In Europe, people are now waiting for new-season slaughter to start. Nobody knows when that will be and what quantities can be expected. However, specialist tanners are already trying to place advance orders with their suppliers, as they are dependent on this commodity. However, pricing will be very difficult.

Since we have hardly spoken to anyone in recent weeks who is looking ahead to the second quarter with confidence, hopes are probably limited. At the moment, people are hoping that the orders for the winter season will still arrive. The problem is that the retail supply chain is still suffering from too much inventory. Last week, press reports from the US circulated in which major retailers painted a bleak picture of their expectations for 2023. Only groceries and holidays stand out positively. 

We do not foresee any positive change in the coming weeks. Current production will be maintained, but a fundamental improvement is not in sight. Eyes remain on China, where the government urgently needs to boost consumption. Maybe the solution will come from there once again as it did in 2009 and 2020. But it doesn’t look like it at the moment.

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