Macroeconomics

The banking crisis, which had already become apparent a few weeks ago, remained the dominant topic in the political and economic media.

Although the problem seemed to be solved relatively quickly and professionally in the US and Switzerland, questions remain about the world possibly heading for a new financial crisis. The sum of economic factors, led by the rise in interest rates, seems very worrying, but many remain convinced that the banking system is much more stable today than it was in 2008 and that states will stabilise the system. These are hypothetical assumptions. The total debt of companies and states has risen massively after a phase of extremely low interest rates. Developing countries that have borrowed in foreign currencies will be hit just as hard by rising interest rates as those that have bet on low, long-term interest rates with their investments. This is, of course, especially true for the real estate sector, on which many eyes are now turning to see if it might not be the next domino to fall.

Eyes are now on all those who will have to refinance in the coming months and years and will then be burdened with skyrocketing costs. Also, the risk assessment of highly leveraged debtors may be reassessed and lead to financing problems. So, the risks are more than obvious, and the institutions are currently handling the issue very cautiously to avoid unsettling investors and savers at all costs. Besides the actual and real economic risks, the psychology factor plays an important, if not the most important, role in connection with trust and confidence.

On the political level, there is little news. The tensions that have built up around the globe have by no means diminished in recent weeks. Everywhere national leaders are playing with fire. Everywhere small pinpricks of provocation are being used to test the reaction of the other side. It is to be hoped that the bow will not, one day, be stretched too far and this will lead to decisions that can no longer be corrected. Until then, life must go on and people must try to maintain as much normality as possible. 

The financial markets developed within the usual framework. The stock markets fell while people were remained unsure whether the banking problems could be solved in the short term, and recovered quickly after people were convinced of the stability of the financial system, at least in the short term.

Overall, corporate results and prospects remain mixed. From very successful companies to companies with considerable difficulties, everything is currently represented. What is clear, however, is that private consumption will continue to underperform in the coming months. In these difficult times, people prefer to indulge in short-term pleasures and delights rather than invest in short-lived and quickly perishable consumer goods. For the average consumer, of course, it remains unclear how inflation will develop. Many price increases, especially in the energy sector, will certainly only be reflected in consumers’ wallets with a certain time-lag.

Energy and transport prices have fallen significantly again in recent months, and the difficulties in the supply chains have also largely dissipated, which means that price competition will also increase significantly again. Taxes and levies will continue to be problematic, because the financing of state budgets has not improved at all and, as we all know, it is precisely taxes and levies that arouse the covetousness of finance ministers.

The US dollar continues to weaken slowly due to interest rate expectations. Against the euro, a level of $1.10 is expected in the short term, but this will depend very much on the comments and actions of the national banks.

The gold price is bouncing back and forth close to the magic barrier of $2,000.

Leather Pipeline

In the last two weeks, events along the leather pipeline have been marked by intense discussions about the actual situation and possible developments in the coming months. The first quarter has ended and in some ways has always been key for developments for the second and third quarters of each year. Much still depends on how the order situation in the manufacturing sector is and, above all, on the outlook and intentions of the major consumer goods brands and retailers.

Even in the last two weeks, gathering information from which to draw conclusions has been neither easy nor, in the end, particularly positive. It is only worth remembering that many companies in the clothing and footwear industry, with the exception of the luxury brands, has already announced that they would significantly reduce their production in 2023. 

There has been little reason for renewed hope in the last few weeks and there is talk behind closed doors that the reluctance among the big brands and retailers to place new orders has increased in the last few weeks. All communication and everything that comes out of the industry is characterised by caution and pessimism. Of course, managers everywhere are trying to spread confidence for their companies, but this is simply part of the game.

Of course, things will get better at some point and whether that will then apply to the leather industry too remains to be seen. At the moment, the question of timing is the most pressing. Most cannot wait too much longer and the resources and reserves that might have been built up in recent years are slowly but surely melting away.
This is worrying the raw material suppliers in particular. Despite all the assurances, it can no longer be denied that the demand and consumption of raw materials for leather production has not been sufficient to absorb the entire supply of raw materials for some time now. Again. there are well known exceptions, almost exclusively limited to the luxury market or small niches.

Again and again, arguments have been sought and found to predict the end of this development. The commodity producers and suppliers have been extremely disciplined for a long time and have done everything to have a stabilising effect. If there was no oversupply, no price declines could be expected. Most recently, it was the sharp rise in prices for lime splits that resulted from a mixture of hopes for an explosion in demand for gelatine and collagen products and a simultaneous decline in supply due to the drop in leather production. Ergo: the lack of split supply from the leather sector is being compensated by an increase in direct demand for hides from the collagen and gelatine sector.

If that was not enough, there was much talk that the reopening in China would lead to a certain increase in demand for consumer products from Chinese consumers. Neither has materialised as hoped to date. Although the production of collagen and gelatine is being expanded significantly, demand is not really keeping pace with the massively increased supply of raw material, at least not as far as we know. Finally, forecasts of a significant drop in the kill in the US must now be used to predict such a sharp drop in supply that tanners will run short of raw material. If the kill falls by a few percentage points and leather demand falls more sharply, the discussion would be largely useless.

This brings us to the core of the many discussions of recent weeks. It is that the rumours that have been circulating in the industry for months of significant stocks along the production chain may be true. Slaughterhouses, processors, traders, tanneries, finished product manufacturers and retailers must all be mentioned here. The big problem is that there is hardly any access to verifiable data to confirm if the rumours are true or not. This is not surprising, because in a difficult environment, who likes to admit that they urgently need to utilise and sell stocks that would otherwise put a considerable strain on finances?

So, it remains a big puzzle in which the few pieces that have been found and put together so far simply do not provide a reliable enough picture. As difficult as the situation may be, there is always time to wait for things to improve. But any improvement in the situation can only come from an increase in demand for finished leather products.

On the supply side, a fundamental global change in meat production is not to be expected (regional developments aside) in the next few years. At the earliest, a significant change could come towards the end of the decade. It can hardly happen any faster and certainly no one in the supply chain would wait that long anyway.

The all-important question is, therefore, whether there is a realistic prospect of a significant increase in demand, starting from consumers, that could trigger the necessary optimism in the general situation and the business climate to improve in the short term. First signs are definitely visible here and there. Surveys show that consumers are already noticing and acknowledging falling prices. However, it is unlikely that this will lead to an immediate change in consumer behaviour. The scars of the last few years are probably still too big for that. So, from our point of view, the time factor is clearly playing against us at the moment.

The problem lies less with consumers rather than with manufacturers. Anyone who still needs to be made aware of the seriousness of the situation only has to look at the recent announcements from Nike and Puma in recent weeks. Both companies announced that they no longer wanted to produce boots for football and rugby from kangaroo leather. They say they have a variety of reasons to do without leather as a material, but the simple truth remains that they don’t want to bother with the complicated procurement and manufacturing processes any more or run the risk of making themselves the target of certain interest groups. It is not that their high-end footwear products are cheap and bringing in poor margins, but for mass producers on this scale, leather can be a nuisance. The quality of the leather is unbeatable in this application, the athletes love it and appreciate its benefits, but the manufacturers do not care about that. Players can only buy what is offered to them. We hope other brands that still rely on kangaroo leather enjoy success with their great products.

If you need something else to put a damper on your mood, you can take a look at the drought in many parts of Europe. The leather industry in Italy is particularly affected, especially those at the foot of the Dolomites, after another winter with little snow and to date also little rain. Agriculture desperately needs water and one can imagine the impact this could have on the leather industry if the situation does not change in the short term.

In the split market, attention turned to the further development of collagen and gelatine. Rumours are slowly making the rounds that finished collagen products are being offered at prices that are hardly viable with the current prices for lime split. This situation will have to be monitored further, but it would not surprise anyone if finished products from other origins in the world were now coming into the market at favourable prices.

In the case of sheepskins, everybody is waiting for the slaughter of young lambs to begin in Europe. The demand for this special and seasonal product is undoubtedly high, but nobody can say today how much supply will come onto the market in the near future. That is why there is already a lot of discussion about prices, but without a physical offer it is not possible to hold any serious price negotiations. At least in northern Europe, it will take a few more weeks before availability can be seriously discussed.

It will certainly not surprise anyone that we cannot come to a particularly optimistic or positive conclusion at the end of this report. There is simply a lack of convincing information to know for sure if leather demand can recover significantly and sustainably in the coming months. There is no certainty about the level raw material prices would need to fall to for tanners to become convinced that additional purchases could be a good investment for the future. However, should sellers be willing to adjust their prices significantly in the coming weeks or months, it would certainly be worth taking a chance on investing. 

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