Macroeconomics

The fierce political tensions we have seen for some time are intensifying rather than easing. This is not only surprising, but also frightening.

Even if there has not yet been a military conflict in the Pacific region, the provocations are increasing from week to week. One may speculate a lot about who can have an interest in the conflicts that have now arisen in two large regions of the world, but for ordinary citizens, no matter where they live, this is not a reassuring prospect.

That is why no one can be surprised if large organisations are cautious about economic development for 2023. Even if the big companies want to radiate as much normality as possible and are superficially not affected in their investments and business decisions by political tensions, consumers and especially those with limited budgets remain cautious in their spending behaviour. Life goes on, people buy what they need, they indulge in certain pleasures like holidays, but beyond that they are very careful with their money.

The second big issue that is in the headlines almost every day is inflation. Statistically, it continues to fall and, frankly, it is incomprehensible to us how anyone could have any doubts about this. Energy prices have been falling for some time, so have transport prices and many commodities are well past their peak. Many companies continue to try to profit from the price increases they have been able to push through on high inflation data and this is understandable from a business point of view, even if it is difficult to justify morally. Of course, they are also trying to protect themselves from other rising costs, especially labour costs, in order not to have to impose price increases on the markets later on.

At the moment, very little of the falling cost at producer level is reaching the consumer. Some economists believe hyperinflation will follow, others expect stagflation. There are good reasons for both opinions and it is highly likely that the trigger will lie less in the realm of economic theory than in external influences. The political climate over the next few months will certainly have a much greater influence on global economic development than economic theories.

In addition to politics, however, one must also pay very close attention to the decisions of the central banks.

The stock markets are shaking off almost all risks and concerns at the moment and are holding very steadily near their highs.

The gold price has managed to overcome the magic mark of $2,000 per ounce and in view of the crises in this world, a further rise would not be particularly surprising.

Oil-producing countries continue to try to stabilise or increase the price of crude oil. With decisions for production cuts, they have succeeded for the moment, although the influence of cheap Russian oil should not be overlooked. However, at the moment only the Russia-friendly countries benefit from this, as they not only have access to cheaper energy, but can even use the supplies to earn additional money through resale. This is another example of how narrow the scope of politics is when there is no unity.

The US dollar continues to fall as a result of falling inflation rates in the US and the feared instability of the banking system. One does not expect a sharp rise in interest rates, but rather a longer pause, possibly even a reversal later in the year. The dollar has meanwhile fallen almost 15% against the euro from its highs in 2022.

Leather Pipeline

It remains difficult to contribute anything meaningful about the Leather Pipeline. The facts have not changed for some time. For a variety of reasons, leather demand has been slowing down for several years now. As usual, it is worth pointing out that this does not apply to all sectors, especially the luxury goods sector.

It has also long been recognised that this is less about price and more about the general question of the use of the material. Of course, price always plays a role and the start of the problem a long time ago was initially to do with price and raw material availability (this seems ridiculous today). Basically, the old adage was and still is valid for most market participants: what goes down will eventually come up again.

Under these conditions, many have decided to continue as before and, if necessary, to accept that not everything they produce can be sold. This was true at all levels and was not something that worried anyone in this industry. One was used to the fact that there were always phases in which there were disruptions in sales. This was due to the seasonal nature of the business and, of course, to the fact that it was never possible to synchronise the supply of raw material as a by-product of meat production with the demand for leather. Nevertheless, there was never any doubt that every hide would be processed into leather and that the leather would be used in the end. It is now becoming apparent that, although it is not possible to say for sure at this point in time whether the old laws really no longer apply, we have to prepare for a new era.

Many things point in this direction, at least for a certain time. From our point of view, the biggest problem remains that no real initiatives can be seen, either inside or outside the directly affected parties in the chain, as to how anything can really change with the demand problem.

In the leather manufacturing industry, there is a lot of preoccupation with issues such as traceability and certifications, but real, direct contact with consumers is missing and thus it is never completely clear and confirmed whether all these initiatives and efforts have any real success in boosting the sale of leather products. To a certain extent, it is usually better to do something than nothing at all, but whether it is effective remains an open question.

If one complains about the lack of initiatives, then one is of course also called upon to describe and explain how one would fill the gap. If there were a right way, then surely others would have found and taken it long before us. It can therefore be assumed that there is probably no single solution to get consumers excited about leather as a material again. The classic and simple measures, such as advertising or brand symbols, are not enough; they have not been successful up to now and perhaps have come far too late.

Today, there is hardly a product or brand that manages to become successful without a successful social media marketing strategy or clever product placement. The really big ones have managed to achieve exclusivity, which has to be maintained and supported again and again. Many of the big brands’ iconic products are still hardly conceivable without leather. The material, its history and its uniqueness strongly contribute to the exclusivity of the final product. It is therefore no surprise that in recent years the big luxury brands have increasingly tried to take the production chain into their own hands and under their own control. 

In this sense, it would be desirable if a lot of the money that is going into initiatives today were invested instead in intelligent communications solutions directed at the consumer. The current focus of the initiatives may be well-intentioned and necessary, but their emphasis on the benefits of the material and its use is far too low. There are a lot of promising ideas, but the coordination and targeted implementation is simply not happening (yet).

Apart from the specialists who use leather, we should not expect much support from the consumer goods industry. Only a small part sees the use of leather as a real support for their own businesses. Only for those where exclusivity and real function (such as in outdoor footwear for use in demanding and challenging conditions) does leather play a major role.

The material can hardly be replaced here without ultimately disappointing the customer in terms of performance. However, it is rarely the case that the customer knows and really understands that these expectations are only met because the product is made of leather.

This is also a certain paradox for many manufacturers, because who would want to let their customer know that it is the material they source, which they do not usually make themselves, that is of such great importance for the characteristics and the value of the finished product? Naturally, one wants to see one’s own brand, one’s own product in the foreground and not be simply a vehicle for others. Only a clear commitment to and understanding of the material will ultimately allow successful marketing and sales for the end products. Those who do not commit to it and use it enthusiastically cannot be a long-term customer for the leather manufacturer. To date, unfortunately, co-branding attempts have rarely been successful. 

More dark clouds have been gathering along the supply chain in recent weeks. Rumours revolved around high levels of stock. Of course, it is always very difficult to verify such things if you have not seen for yourself or have hard-fact information. Nevertheless, at least for Europe, the number of reputable sources is large enough to assume that the stocks are quite large in many places.

In the past week, there has also been an increase in information from China about stocks there and about leather factories preferring to stop production at the moment because they do not expect any improvement in their order situation in the coming months. Of course, split revenue plays a big role in this, as this was one of the big drivers of demand, at least in the first weeks of 2023, and of the slight increase in hide price at the beginning of the year.

The idea that the split revenue would cover a large part of production costs was too tempting for many tanneries, especially if they did not have enough finished leather orders to pass this opportunity up. With split prices now falling and with little prospect of a recovery in leather demand in the coming months, it is either a forced or a commercially sensible decision to cease production. Some have even gone so far as to make the decision irreversible. They are selling machines, trying to dispose of stock and, if possible, even selling their entire production facilities.

If the thesis is true that leather demand at the moment can neither cover the supply of raw materials nor the existing production capacity, it is only a logical development as the industry adapts to the current realities. In addition to pure demand, it may also play a role that some international brands are trying to reduce their sourcing and production owing to political developments in and with China. Even if it has very little to do with the leather pipeline at the moment, Apple’s strategic decision to intensively expand production in India at the expense of China may be an example. However, we are still very much at the beginning of this process. To what extent this will also play a role in the shoe and furniture sector for the international consumer goods markets cannot be said with certainty at this point in time. However, there are many indications that it will.

In any case, we are not hearing much positive news from China at the moment and the question remains whether the purchases that the Chinese leather industry is still making every week are fully covered by leather orders. In assessing the market today, it would be extremely important to get a clear picture of the percentage of production that can actually be counted against existing orders and what is left aside.

Basically, there is still the impression that in order to be able to serve current orders, one is simply forced to source more raw material to cover that part and grudgingly accept that there is simply no reliable sales potential for the rest at the moment.

None of this is much of a risk as long as the situation is carried on from month to month and no one is forced to liquidate their business. The positive news in this context is that there is no information or rumours about liquidity shortages at the moment. This means that, as long as people are willing and able to finance production, and stocks and closures do not yet trigger any noticeable disruptions, no immediate danger is in sight. However, history teaches us that, unfortunately, there are no advance warnings and one should at least consider the possibility of severe disruptions developing.

The split market has remained under pressure over the past two weeks. For lime-split, this is not yet really noticeable in the prices in Europe, in contrast to China. Here, in our region, reduced production and thus the reduced supply still determine the situation. One hears, however, that there are more and more offers of finished protein products at significantly lower prices than those of today. The logical conclusion would be that the production of proteins has simply risen too fast for the market to absorb.

As far as sheepskins are concerned, we have absolutely no news to report. In Europe, people are eagerly awaiting the start of production of new-season lamb. Only smallest numbers are being reported so far and, in many cases, it is older animals that are being slaughtered. Otherwise, there is no change in the general situation in this area either. High-quality skins from all regions of the world can find a market; all others do not, or at least not at prices that can cover the cost of collection and preservation.

For the next few weeks we must remain alert. We just don’t see any real problem-solver at the moment. We need an increase in leather demand and there seems to be no sign of that at the moment. The best-case scenario is that we get through the summer at this level of demand and the general situation around the globe improves after that and people have the necessary budget and the will to buy beautiful things made of leather again. 

Nevertheless, we want to end this issue on a positive note. From the car industry, signals are coming from more and more brands that a phase-out of the much-vaunted phase-out of leather is being prepared, albeit discreetly. It is quite obvious that leather will continue to be in demand as an exclusive feature in the upper price segment and that alternatives are not going to take over. 

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