Macroeconomics

The G7 met for their regular discussions on world politics and economics in Hiroshima, Japan. At the centre of the debates and statements was the G7’s relationship with China and Russia. The G7 are striving for more independence, especially from China, and are of course continuing to condemn Russia’s war of aggression and to make it clear that this form of military aggression, which threatens the national sovereignty of other states, is completely unacceptable to the free world.

In the end, however, the possibility of real action remains limited. It should be pointed out that Russian oil exports, despite the sanctions, have recently risen to their highest level since February 2022. One should also be very clear, despite all the big words, that many of these exports also end up finding their way back into the markets of the countries that are so intensively putting together new packages of sanctions. 

The conflict over Taiwan may have lost some of its public interest, but the great powers, the US and China, are nevertheless dangerously close to each other there on an almost daily basis. Provocations occur almost daily, demonstrating that both sides are not prepared to change their fundamental positions. The seriousness of the situation, even among international investors, can be seen in the fact that Warren Buffet sold his entire investment in TMCI, the world’s largest chip manufacturer, with the comment: “I don’t like the region.”

In terms of the global economy, the current discussion and the dispute in the US over the debt ceiling has dominated the headlines in recent weeks. A solution had to be found by the beginning of June, because if the US were, even temporarily, insolvent it would put extreme strain on the international financial markets. There is no doubt that such a development would also be in the interest of the other major powers, because it would also mean that the US would be unable to act, at least for a certain time. It would not only threaten social stability, but would also mean, in this overall very tense global situation, that the federal government there would be paralysed not only internally, but also externally. It is not difficult to understand that Russia would particularly welcome this. For China, the situation is somewhat different, since the Chinese state is also one of the biggest creditors of the US.

It is hard to imagine that the political camps in the US would provoke such a situation. However, the domestic political conflict in the US is also extremely hardened with regard to the next presidential elections, so that one could not really rely on this and the situation could still lead to surprises in the future. The financial markets saw it similarly and the stock markets reacted intensively to every new rumour about how the negotiations would proceed. Recently, hopes prevailed again and the markets were able to recover.

Surprisingly for many, the US dollar was able to benefit from this situation and was not, as many had thought, burdened by it. This is due to a peculiarity: the short-term financing needs that are now arising as a result of the negotiations will initially increase the demand for US dollars.

Oil prices remain latently under pressure and continue to hover in the mid-$70s.

Despite all the positive assessments by analysts, the gold price still cannot hold the $2,000 mark and the price for the ounce remains slightly below this level.

Leather Pipeline

We are now at the beginning of the summer period. Even though it is officially just over a month until the second quarter ends and the two main holiday months begin in the northern hemisphere, production is already being adjusted to market realities everywhere. Many of the big retailers and the big brands are now faced with the question of how they want to deal with the second half of 2023. On the one hand, there are still very, very large inventories that have to be cleared first, but on the other hand, they also have to deal with what they actually want to offer customers after the summer in terms of new and interesting products in order to revive demand.

It is a very complicated paradox in itself, because if I have little choice but to offer the unsold stocks of previous seasons at a big discount or think about destroying them, neither option is very attractive. In order not to cause any unrest and not to unsettle the consumer even more, these problems are being handled very sensitively at the moment. If one sells goods very aggressively in terms of price, one is of course also blocking the potential of selling goods at higher prices in the future. If you don’t, you will either be stuck with the goods or lose them altogether. The search for a solution to the problem is similar and equally difficult everywhere.

Breaking the current vicious cycle of buyer reluctance is certainly unlikely to be possible in the short term with the traditional tools of sales and marketing. We also believe that blaming inflation alone is more of an alibi than a reflection of reality. Of course, in many countries it is still much more expensive for many people to cover their basic needs for housing, food and energy, but in principle prices have already fallen significantly in many places and not all consumers everywhere are burdened by massive price increases. Or perhaps better said, they are no longer burdened with them.

It should also not be underestimated that in many places the labour markets are struggling with very little unemployment, and wage increases have already been implemented in many cases. In addition, there is a large amount of aid that governments have paid or granted to citizens to mitigate price increases. On a global basis, disposable free income for consumption has not been nearly as negative as it looked a year ago. What has happened, however, is a significant change in consumer behaviour and this has taken some of the pressure out of the consumption bubble. No one will deny that in the past years, during the phase of low interest rates, a lot of consumption was channelled past real needs and into a bubble, intensified and fuelled also by the rapid growth of online shopping.

The sharply rising prices of goods for basic needs not only initially drained a large amount of purchasing power, but also awakened awareness of the need for sustainable consumption. The secure business model of fast fashion, in particular, that growth is possible even beyond need has developed considerable cracks. The market is still there, of course, and there are 8 billion people who are, in principle, still willing to buy products that they need or that they want.

Leather as a material fulfils all the prerequisites to successfully assert itself in this environment. Let us forget for a moment all the problems the material has been confronted with in recent years and put ourselves in the position of material decision makers for a short time. At the moment, we have to deal with the issue of microplastics on a massive scale. At the same time, brands are trying with all available means to keep this topic out of the public discussion so as not to be associated with it as a manufacturer. Ocean plastic, recycling and the circular economy of plastic are currently being advertised as the big solution. Without wanting to discuss how much plastic is recycled and how much new plastic is being produced today only to be ‘recycled’, it does not change the fact that microplastics are released into nature every second, reaching all living creatures through the various pathways. If it is only half as bad as can already be seen in fish and birds today, then it is hardly any different from the dangers posed by radioactive waste, for example. One thing remains certain in any case, leather is a recycled product, can only be produced if there is meat production and can replace plastic if people really want alternatives. 

It is, of course, very difficult to redirect mainstream public opinion. Especially, of course, for companies that have positioned themselves as vegan and are using their withdrawal from animal products as a marketing tool. However, this only applies to very specific markets. The large consumer goods markets are not yet very strongly moving in that direction. 

Global corporations are busy at the moment healing the past and solving their current problems. They are also not known for being exceptionally quick to react. Those who have also already jumped very massively on the vegan trend naturally also have a credibility problem if they now suddenly change course. Most companies have been cautious and reserved in the way they have positioned themselves. With regard to the luxury goods industry, we believe that there are huge opportunities for them if they play their cards right with regard to the use of leather as a material.

If our information and sources are correct, these options are already being discussed intensively and very controversially in many boardrooms. The arguments are perceived as quite convincing, but there is often a lack of courage to really go down the path towards leather; vegan influence is widespread and this is making objective analysis more difficult. It is hard to convince people that, regardless of their opinions and decisions, global consumption of meat will remain stable over the next five years and is highly unlikely to decrease significantly over the next ten years, and thus the raw material will ultimately continue to be available in large quantities and should be used sensibly.

In any case, we would wish that the many organisations that want to stand up for leather according to their self-image would deal with these questions and challenges more intensively than inventing more and more documentation, certifications and regulations that are completely irrelevant. This is the task of agriculture and the meat industry, where it is of much greater importance for the marketing of their products. Having the tail wag the dog never works.

The situation in the split market stands and falls with the situation and the demand for raw material from the collagen and gelatine industry. In China, the situation has normalised and prices for lime split have recovered somewhat. In Europe, the industry fears a shortage of material at least until September, because leather production will definitely remain very low until then. According to our estimate, the utilisation of production capacity in the leather industry is certainly no higher than 60% on average in Europe at the moment. Considering the summer holidays are just around the corner, there will again be a considerable loss of supply in the third quarter. Therefore, the production of whole hides for supply remains stable. The big problems in the leather sector do not stop at the split leather sector either and therefore it is still only the niche products that allow a certain stable production.

The situation with sheepskins remains similar to that with cattle hides. Special niches continue to be successful, but procuring the appropriate raw material for these alone remains a major challenge. The slaughter of lambs has been significantly reduced in many regions of Europe this spring. In addition, the quality requirements of the leather industry are very selective and even if it is possible to achieve cost-covering prices for certain skins, the disposal of the rest is a considerable burden on the calculation. 

The order situation remains poor and the problems already described above are weighing heavily on production and activity. There are voices that claim and hope that they are overdoing it with the reduction of production at the moment and that there will therefore be a disproportionate recovery after the summer. This sounds quite plausible, but without a secure liquidation of inventories it will be very difficult to implement.

Without getting into a panic, one also has to deal with the situation that reduced production, increased costs and the insufficient turnover could possibly also bring some companies into financial difficulties. That not all of them will survive the summer, at least in Europe, is at least a possibility. On the other hand, those tanneries that manage to stay active by processing successful products, with good marketing and solid finances, should benefit from the fact that raw material prices have dropped significantly and their margins have improved as a result. As is so often the case, there are not only losers in this situation, but also isolated winners.

The behaviour and expectations in Asia will be interesting and of great importance. In Europe, the summer determines business. In Asia, due to longer delivery times and less seasonal influence, the situation is somewhat different and could already give us the first indications in the next few weeks of what we could expect worldwide in the third quarter.

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