Macroeconomics

The economic sections of the media continue to be dominated by reports and speculation about interest rates and inflation in the coming months. The markets are divided and uncertain as to whether interest-rate hikes by the national banks are over for the time being, or whether further steps will be taken over the summer. One gets the feeling that reactions may come too late once again.

If one looks at the main drivers of inflation, such as energy costs, transport costs and, to some extent, food prices, one can come to the conclusion that the real price increases may now be of a completely different origin and could not be fought with interest rate hikes at all. In many countries, the wage-price spiral has already begun and wage settlements are for the most part well above real inflation levels. Companies, as well as state authorities, are currently making massive use of their pricing power to quickly increase their revenues disproportionately, from which they may then profit a second time, namely when the increased prices for energy and raw materials relieve their calculations, but consumers and citizens are left to pay the increased prices. The question then is whether higher interest rates actually contribute to a decline in inflation. Inflation and interest rates are the hostages of the different economic schools and the definition and interpretations of statistics.

In any case, rapidly rising interest rates harbour a great additional risk, which is already evident in the current situation in banking circles. Of course, the long period of zero interest rates was a big mistake, but that makes it all the more important to handle the situation with particular care now. At the moment, the further concentration in the banking sector to save other institutions must also be of great concern for the future. If, in addition, large investors are asked by governments to participate in the financing of distressed institutions, then the concentration of financial power will be further reinforced, which ultimately cannot be in the interest of a free-market economy.

As already mentioned, the prices of energy commodities continued to fall. In the meantime, the price of natural gas has already returned to the level of mid-2021, although this does not reach every consumer. Political decisions often prevent a significant correction for the private sector. 

The stock markets have continued to be very stable. The reporting season of the major companies for the first quarter of 2023 was mostly better than expected, although this development can hardly be continued: investors are not yet prepared to sell their shares in large quantities. Many experts see recession looming and expect a big sell-off this spring. However, the question remains, what would be the alternative investment?

The price of oil has also continued to fall and is now around the $70 level again. Here, too, the corresponding market price at the petrol stations or for heating oil in many countries is still far from reflecting this level.

The gold price was able to re-establish itself above $2,000, but as of today there is still a long way to go to reach the forecasts of $3,000.

The US dollar interrupted its downward trend and fell back below the level of $1.10 against the euro. However, it is clearly too early to speak of a real trend reversal.

Leather Pipeline

With the exception of Asia, leather supply chains will enter their quiet phase in the coming months. Production and sales are decreasing and companies are more concerned with preparations for the period after the summer holidays. There are certainly exceptions here and there, such as the automotive industry where model changes and start-up productions lead to special movements and activities.

In Asia, and especially in China, the situation is somewhat different. Those who still want to make preparations for the coming season, or even for Christmas business, do not have too much time left to make decisions about materials and production. And all this assumes that the major export customers will also supply the necessary information and orders. 

However, most of our sources confirm that weekly activity in Asia is slowly returning to normal. The great expectations that were set immediately after the end of the pandemic restrictions were by no means fulfilled, at least in the first few weeks. However, it is also true that an increase in activity is not synonymous with an improvement in the situation.

Looking at the raw material market, the basic belief of producers and suppliers that an increasing number of e-mails and calls at the same time lays the foundation for rising prices was dashed a long time. The reason, of course, is that demand has long been insufficient to absorb the entire supply of raw materials. The increased use of raw hides for the production of collagen has not changed this situation significantly. We have often pointed out the effect of the continuous weakening of demand for leather and this was only accelerated by the pandemic and the invasion of Ukraine, with the subsequent inflation.

So at the moment we are in the worst possible phase in these cycles. Leather will still have its market for a long time as a special, luxury material, but it will, naturally, only be able to absorb a fraction of the raw material produced. In sheepskins, this situation has already been in place for quite some time. We can form an idea of how many skins on this earth are already no longer collected for the leather industry and therefore either rot or are destroyed in some other way.

The current phase is indisputably problematic because, on the one hand, there is still no recovery in leather demand, on the other hand, there are still large quantities of raw and semi-finished goods without buyers and, finally, the time factor plays an important role in the leather chain. Not everything can be stored for long periods of time.

But this phase can only be overcome if it is possible to increase the demand for leather again, so that first stocks and then prices can rise again. We do not only need higher demand, but for leather production to be successful again we also need higher prices.

Those of you who read our Market Intelligence regularly will know that we have been very concerned for a long time. The concern derives from the fact that along the entire chain we simply have been unable to see how the negative trend could be reversed. Many did not want to recognise the difficulty of the situation. In so many conversations, one gets the feeling that people were happy to talk about the problems and complain about them, but basically believed that things would work out somehow. This has, after all, always been the case in the past following phases of crisis. Very few people were really prepared to discuss whether this problem was not much more profound. In the meantime, the mood has changed somewhat. Take the slaughter industry, for example, which in many countries has already created capacities for the direct use of skin in collagen production so that it no longer depends exclusively on the leather industry.

We do not want to proclaim the end of the crisis, but after a long time we can slowly develop an idea of how the situation could improve again over the next few years.

Just as there are many things that are slowly and imperceptibly getting worse, there are just as many things that are slowly and possibly imperceptibly getting better again. One thing is for sure, any major improvement is still a long way off and it will not happen by flipping a switch from one day to the next.

Let us start with what could be possible signs. Already in our last issue we pointed out that it is very clear that the automotive industry is slowly starting to bury its big vegan adventure for interiors in the premium segment. Car brands simply haven’t been able to find a successful alternative material to leather.

One could expect something similar for parts of the shoe industry. The truth is that marketing and sales departments have let themselves be infected by vegan hype and have seen this as a means of boosting their sales activities. We all know that marketing and sales departments are not interested in whether anything is right or wrong, useful or useless, but only derive their successes and their function from sales increases and a bigger budget for next year. If everyone is doing it, then it can’t be wrong.

In the meantime, in some societies the term ‘vegan’ may still play a role, but when the sticker is stuck on every product packaging down to toilet paper, the effect wears off fast. In other societies, the term has never really played a role. So as a lever for increasing sales it may have been successful for niche suppliers, but for the masses today it plays rather a subordinate role. Of course, there is interest in media circles and those who are responsible for this see it differently, but a realistic examination of the market does not stand up to this. Outside Europe, the vegan strategy has definitely not been successful and whether it has actually had the desired positive effect in Europe is not clear. 

It is important to mention that the shoe industry in particular did not use the word ‘vegan’ with any conviction, but only to disguise the fact that cheap mass production is usually made entirely of plastic. One can be in favour of veganism, but in that case one should be against plastic. Even the massive effort now to market ‘recycled’ doesn’t make it any better. From a marketing point of view, this has created a real problem for many big brands. They can still count themselves lucky that at the moment it is still more important to the big consumer organisations to be ‘vegan’ than to avoid plastic. They are trying to buy time at this level to have more plant-based, alternative materials developed so as not to go back to leather, which is absolutely the logical material for them to turn to again. The fact remains that we have to accept that the only enemy of ‘good’ is ‘better’. Shoe brands may not believe that plastic is particularly good but they believe they are not able to source anything better. Wrong. We have leather.

Since ‘vegan’ wasn’t the big break the footwear industry was hoping for and the last few seasons weren’t exactly a big success for many companies, people have started thinking again and in many discussions the question of whether leather shouldn’t be given more space again has been at the top of the agenda. If you have been following our website news page, you will have read the news about adidas’s new Samba collection. The fact that this very traditional shoe is made of leather is actually less big news than the explicit naming of the leather supplier and the clear and direct reference to the material used. Whether it was Pharell Williams’ special wish to use leather is absolutely irrelevant, except that after the Kanye West flop adidas was probably being careful not to bring another marketing problem into their company. The clear statement: We are instilling high-quality materials and craftmanship back into footwear is definitely a strong statement and signal. However, it remains to be seen whether the colours of the collection fit a truly sustainable product, because who wears light green shoes for more than one summer? Let’s hope that this conviction is wrong.

Even though we are not authorised to mention further projects at this point, we can still say that projects of this kind do not only exist at adidas, and a return of leather at other brands is being hotly discussed.

Success will certainly depend very much on whether it can also be used to implement a new pricing strategy. A leather shoe does not necessarily have to be more expensive than a plastic shoe, but it should be. Only this demonstrates its value and anything else would be complete marketing nonsense. It is necessary, and for this reason alone: to make sure the raw material also receives a higher valuation again and so that resources can be used sensibly and economically. To achieve this, it is of course necessary to make a clear statement about leather on every shoe, to name the advantages and thus to give the buyer an understanding of the reason for a higher price.

We will continue to follow the development very closely and will certainly make it the subject of our publication from time to time. In any case, it should be clear to everyone that the real impact on the markets is by no means short-term or the immediate solution to the current problems.

The market for splits has again not been eventful in recent weeks. The great heat from the collagen and gelatine sector has in any case fizzled out for the time being. The dynamics of demand simply could not keep up with the rapidly increasing supply. The costs of production are also too different in the various regions of the world. They cannot be shifted at will, but in the medium and long term, lower raw material, energy and labour costs simply cannot be masked. In the case of the split leather production, the special articles continue to be successful in the context of the general situation. However, as a cheap material to replace grain leather, split no longer plays a weighty role.

The market for sheepskins also shows no great change. Specialities and high-quality raw material continue to be in stable demand and can achieve the prices that are needed. All other products remain a big problem and recently large quantities of lambskin from last season were sold at far below cost prices. At the moment, all eyes are on the new season in Europe, and there is talk that the first sales have already been made to China and Turkey. However, prices here are also below the levels expected a few weeks ago.

We still do not see any significant change in the overall situation in the coming weeks. The Chinese leather industry is aware of the situation, knows the problems of the raw material suppliers and is of course trying to exploit them massively to gain competitive advantage through low raw material prices. They are fully aware that they are unlikely to have to fear competition from other markets in the coming weeks and months, which is why they are not very flexible in their price negotiations. For many hide and skin categories, a further reduction in prices is also hardly conceivable or possible. Of course, it is always possible that one supplier or other has no choice but to accept what is offered just to sell the material on hand. However, this weakness cannot be detected very extensively at the moment. 

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