Macroeconomics

Attempts of the big blocs to reposition themselves geopolitically dominate the political news. President Xi of China’s call to Ukrainian president, Volodymyr Zelenskyy, to discuss the situation in the war was interesting. There can be a lot of possible interpretations for the meaning of this phone call. The best one would be if China wants to mediate in this conflict and invest its great influence on Russia for a peaceful solution. One thing is for sure, the Chinese leadership is always thinking ahead and seems to be aware that after more than a year of war, it is time to demonstrate its interest in resolving this conflict.

One must never forget that the wellbeing of the Chinese economy and people is still very much dependent on international trade relations. If one follows Chinese activities, this is clearly noticeable. The somewhat strange recent statements of the Chinese ambassador in France, that the former Soviet republics are not necessarily to be assessed as independent states, definitely did not make a good impression on the Western world and was quickly corrected by the government in Beijing; it said this was a personal opinion and not the government position.

Economically, inflation remains the dominant issue and it is generally assumed that interest rates will continue to rise in the US and in Europe. It remains to be seen to what extent the interest-rate peak will be passed this spring. Basically, inflationary pressure is decreasing, but this can only be determined if one looks at the inflation rate from different angles.

In any case, energy prices are falling and so are transport costs. For many products and services, these have not only been the inflation drivers, but will also be reflected in the other direction only with a delay. At the moment, many companies are taking advantage of the official mood to push through further price increases, but with increasing competition for consumers and market shares, many prices will certainly fall again. The potential for price reductions will certainly be dampened by higher wages and salaries and, in some sectors, in markets with less competition and a strong dependence on labour, prices will not come under extreme pressure. In other sectors, however, things may move quite quickly down again.

The capital markets are all looking at the reporting season and companies’ first-quarter results at the moment. Overall, companies are closing the first quarter much more positively than one might have expected after negative reports and fears. The stronger the market power, the more the companies were able to push through higher prices and expand their profit margins. This partly compensated for stagnating and declining sales. Many experts now expect a significantly worse development for the second and third quarters and therefore assume declining corporate profits. As a result, most people are very negative about the stock markets and short positions have reached record levels. It is never easy to make any forecasts for the stock markets, but the expectation and the news situation promise a very exciting and interesting phase for the next quarters. At the moment, the positive results of the tech companies are at least having a positive effect on the stock markets.

The oil price fell and has moved back below the $80 mark. The weaker US dollar has also had a significant effect and has therefore led to a rapid and significant reduction in energy costs in many countries. The same applies to gas and other commodities have also left their crisis levels.

Gold has not been able to sustainably overcome the $2,000 mark and has been continuously hovering around this magic mark for the last two weeks.

The US dollar is not finding a new direction at the moment, and investors seem to be waiting for the interest rate decision of the national banks. With a rate of $1.10 against the euro, the US dollar has moved into a waiting position. The majority of analysts are assuming a further weakening of the dollar.

Leather Pipeline

It is perhaps time to think about the future of leather in general. The known problems have all been discussed exhaustively and all kinds of efforts, such as the recent World Leather Day on April 26, are welcome, but questions remain about the extent to which this can influence consumers and the use of the material.

We have certain megatrends that are not all negative. Luxury leathergoods aside, one only has to look at the European car industry, which is trying, as discreetly as possible, to get out of the general demonisation of the product. In the last few months, one brand after the other has joined multi-stakeholder body the Leather Working Group; they are now trying to bring the sustainability of the material to the fore in order to be able to use it more without losing face.

Is this really a real change of heart? Hardly; it is a simple economic necessity. European premium brands are increasingly coming under pressure from their Chinese competitors. In the decisive export markets, leather interiors are still irreplaceable in the premium segment. We don’t want to talk about the functional properties of leather again. The European car manufacturers are increasingly withdrawing from the mass market, where they are losing more and more market share, especially in e-mobility. It does not look at the moment as if it will be possible to reverse this trend in the short term with current model strategies. Brands are, instead, trying to maintain their position in the high-price segment, putting margin before volume, and it is obvious that they are taking their cue from the large luxury groups with this strategy.

Returns on sales of 30%-40% are tempting, especially when there is obviously a sufficiently large clientele that is prepared to pay the appropriate premiums for brand and image. Where entire corporations are not already being led in this direction by their chief executives, group sub-brands definitely are. The realisation that exclusivity paired with production in Europe can earn so much money is seen by the car companies as an answer to the pressing problems caused by the new competition from China. A very interesting question will be whether the concept of handbags can be transferred to technical products like cars. Here, it will certainly also play a big role how big the lead of brands and image in mobility is compared to fashion. For example, can a Hermès bag on four wheels be created and be successful?

The next interesting question focuses on the strategy of the Chinese car companies. They are not content with just being competitive in the mass market and gaining market shares, but at the same time they are trying just as hard to develop their own vehicles for the luxury markets and of course they are also using the brands that they have already bought in Europe in recent years.

Korean and Japanese car manufacturers have already tried to do this. To date, however, their success in the premium segment is still modest, even after many years, and is limited to individual markets if at all, although technically they have no reason to feel inferior. However, the transition from the combustion engine to e-mobility and autonomous driving is a completely different challenge; the generational change in consumers also plays an important role here. Decisions that will be made in this context for the interior design of vehicles in the next ten years will certainly also be of decisive importance for the use of leather. 

However, one thing can already be said today. The rapid trend to fully replace leather in the car segment, which we all feared, over for the time being owing to the lack of substitute materials with the same quality, image and functionality. The belief that a ‘vegan’ label on its own would be enough to replace leather in the interior of premium cars has not been realised. This does not necessarily mean that the trend has been stopped for ever, but in any case, time has been gained and many premium brands are having to row back at the moment.

This still leaves us with the problem of the mass markets. What position will leather take here in the future? Price, production costs and speed in the production and procurement of materials are of dominant importance here. The incentive to use leather can thus only be set via higher returns. In the mass market, the price advantage that leather products often still had ten years ago has melted away and is now limited to an ever smaller market of the last remaining completely convinced users of leather.

Unfortunately, economies of scale also take effect very quickly here, because if the units that are supposed to use leather become too small in terms of production runs, the production processes become increasingly unattractive and expensive, which means that the prices would rise rather than fall. Today, however, we already have a situation in which leather is already reaching its price limits on the downside. As in 2020, there are already many raw material categories that can no longer be processed in a cost-covering way for leather production. Building leather’s long-term competitiveness on low raw material prices is doomed to failure. Only higher added-value and better returns on sales can keep the material in mass production. Short-term recovery phases in the markets will not help if the fundamental problem is not solved.

The higher value of leather as a material must start coming across to consumers. If they cannot justify, to themselves, a higher price for products made using leather, there is no real reason why they should decide to buy those products. The focus of public relations work in the past years, which has been concentrated exclusively on sustainability, will have had little effect on the consumer’s decision to buy. This should be recognised especially by those who are concerned about this issue in Europe. In other regions of the world, the effort and investment to put sustainability marketing in the foreground mostly goes into the void. Even in Europe, the effect is more of an apology than a sales-promoting tool. This is not easy to hear after all the money and time invested in this topic in recent years, but unfortunately the results speak for themselves.

At the moment, at least, the fear is coming more and more to the fore that we could go the same way with cattle hides as we have been for so long with sheepskins and lambskins. Luxury, yes, but in the end large quantities of material discarded and a clearly shrinking leather industry in the next few years.

There is not much that is new in the supply chain. Business is dragging itself along and everyone is trying to turn the situation in a way that benefits them the most. It is safe to say that we are entering the quieter, more difficult season and only the leather industry in China can be a really significant factor in the coming weeks and months because of its much longer lead times. In Europe, May and June will be difficult months because of low slaughter numbers and subdued demand; a difficult basis for negotiations. If there have been price changes in recent weeks, they have been downward rather than upward and the problem for tanners that leather demand is not evenly spread across all ranges remains dominant. The large stocks of semi-finished goods, which additionally burden the market, have also not yet found a home. 

The split market remains burdened. For leather production, split is not attractive except for a few special items. Regional influences play a major role in lime splits for collagen and gelatine. In Europe, for example, there is still not a sufficient amount of lime split to fill productions at the moment. On the other hand, more and more finished products are coming onto the international markets that have been produced at origin or at a much lower production cost. In this market, too, a fundamental decision about the future is approaching with increasing speed.

For sheepskin raw materials, the situation also remains difficult. Large quantities of stock from previous seasons have come onto the market recently just to clear space in the warehouses. In particular, some of this older material has gone to Turkey and China, but one has the impression that the price was more of a driver than the prospect of selling the finished leather tanners will produce from it. The temptation and the prospect of increasing sales to Russia have probably made some people go for it without already having secured leather sales.

In the next two weeks, we will pay special attention to the Chinese market. If the Chinese industry is to replenish its stocks following the long pause in activity there, it will have to act over the next few months. What is sold today will probably not be shipped from the Americas or Europe until the second half of May and will not arrive at its destination until July.

This would be enough to ensure that stocks are available for production from September onwards. Whether local Chinese consumption will improve significantly and whether export orders will justify the investment will become clear in the next six or eight weeks.

The water problem in Italy and the generally depressed leather demand in Europe, in combination with high inventory, could lead to a difficult summer, at least in Europe, if there are no possibilities to process the current raw material production during the holiday period. 

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