Macroeconomics

Confrontation remains a defining and worrying factor in many places on this planet. In the Pacific, the militaries of China, the US and Taiwan repeatedly confront each other in critical situations on an almost daily basis. There is constant provocation and in the end one does not understand why there is always a need to keep checking how far the tolerance level of the counterpart may go. One day it may be one step too far and whether a quick de-escalation is still possible remains to be seen. In any case, we must hope so.

In any case, the invasion of Ukraine by Russia was not prepared by provocations, but was just a straight invasion. Nevertheless, the spiral of escalation can now be observed very well here, too, and the further the level of cruelty is advanced, the more difficult it becomes to reach an agreement and de-escalate. The current cumulative effect of this development was the blowing up of the dam, which caused  completely unnecessary and enormous damage. These are precisely the decisions that are causing the uncertainty and fears about the way forward. 

Next to these major centres of conflict, the smaller ones may pale into insignificance. Nevertheless, the current conflicts in Kosovo and, of course, the still existing civil war in Sudan must be watched just as closely. 

In the economy and on the financial markets, there was in the end not too much of major significance in the last two weeks. The general discussion is dominated by the topic of artificial intelligence. Investors are essentially interested in what may bring the biggest economic profit, while the politicians are more interested in the risks and negative uses of this huge potential. However, the really worrying thing is that it hardly seems possible today to ensure serious global control and regulation of this technology. In particular, autocratic states and large corporations will hardly let the possibilities offered by artificial intelligence be taken out of their hands. 

The financial markets are looking back on two rather quiet weeks. Investors are slowly preparing for the summer break and are focusing on the further development of interest rates. People are now looking with great interest at the development of corporate profits, which in turn determine share prices for the near future. As a result, the markets are very much in a sideways movement and any attempt to sustainably rise above the last highs is always immediately undone by major selling. A not insignificant number of analysts therefore possibly expect a significant market correction over the summer.

Hopes that China could again support a global recovery are beginning to fade. Producer prices fell sharply and this was attributed to weak export demand, but domestic demand is also suffering.
On the oil market, the Saudis have announced further production cuts to counteract the further decline in prices. Whether this actually has an effect in the long term will depend particularly on the export of Russian oil, which in turn is influenced by the financing needs of the Russian war economy.

The price of gold is barely moving and remains in a narrow range just below $2,000 per ounce.

The US dollar did not continue its appreciation and bounced against the euro at 1.0650 several times, prompting traders to try the other direction. Basically, it will be interesting to see whether the short-term large financing needs of the American government will trigger increased demand for US dollars, as this should normally lead to higher exchange rates. The European Central Bank’s next interest rate decision will probably be of great importance for the price development. 

Leather Pipeline

Almost daily, there are discussions about developments in the leather pipeline intensify over the summer. However, there is actually not too much that is new. At least in the northern hemisphere, things are defined by the season. In summer, people move their lives more outside, enjoy the weather if they can, and plan and enjoy holidays if they can afford to. For better or worse, summer is not a particularly active time for retailers or for sales of leather products.

This year, this hits particularly hard, because for some time now, we have been burdened with too much stock along the chain. The big brands and retailers try to hide this wherever they can, but it doesn’t change the basic facts. They try to boost sales with discounts, but keeping the price reductions within limits. How successful this is will probably only be seen in the coming year. At the moment, they are trying to smooth out the problems with balance sheet cosmetics and spreading the effect over a longer period of time. At least in Europe, however, the chain of insolvencies in the retail sector is already long and it does not look as if it will come to an end in the next few months.

One thing is for sure, if you have the need or desire to buy products today and are possibly a little flexible, you have opportunities, at a time the cost of living in general has increased sharply, to buy clothing, shoes and furniture at very large discounts.

At the moment all forces should be concentrated on shaping and reviving the demand for leather. However, apart from the luxury goods industry, the resources for this are often not sufficient and, in our perception, there is also a lack of work on a common strategy across the different levels. The eternal situation in which there is always the expectation that another party will solve the problem, while so much energy continues to go into almost obsessive haggling for cheaper prices. The lack of courage to try something special is increasingly paralysing development. Without a common strategy, from manufacturer to the consumer, it will be difficult.

How difficult the situation is with consumers at the moment, and this especially in the furniture sector, can be seen in the figures from Natuzzi for the first quarter of 2023. After all, this is a name that is almost synonymous with the Italian leather furniture industry, at least in the upholstered furniture sector. In the first quarter of this year, sales fell in all markets, and by the end of the quarter there was an overall decline of almost 30%. Even though sales are not everything, declines of this magnitude are very dramatic for a manufacturer’s situation. Even if many other companies are not forced to publish their figures, the figures that do become public often correspond to those from other companies in the same sector.

The problem is not only the figure itself, but what it means for the future. The lack of turnover has certainly led to rising inventories. This in turn ties up capital and resources that could have been used to help shape the future. There are no convincing or clear indicators that the situation will improve in the short term. In almost all cases, the first thing that happens is that all is focused on reducing inventories, costs are cut and caution is urged in all departments. Only a few companies have the strength, the courage and the resources to try to counteract with full force and conviction.

We describe this only to make clear what the situation is like at the moment in large parts of the leather manufacturing and leather products industry. We have pointed out many times in the past that such a situation, combined with rising interest rates and few prospects for rapid improvement, can pose a great threat to the continued existence of many companies. For companies that are not really excellently financed, the mixture of rising interest rates, high inventories and a prolonged period of low turnover is a truly toxic mix.

The situation is also increasingly reflected in the raw material markets. No matter what the suppliers and producers of commodities try to explain. The facts are clear. Suppliers of raw hides for the bulk business have not been able to find enough buyers for quite some time. Even if the goods are buffered, this does not change the situation at all. It is still not a question of the individual situation, but only a question of timing. So far, no one has had the real courage to test which price reductions would lead to an increase in demand. So far, the system of ‘discrete sales’ to larger customers is still working relatively well, without really solving the fundamental problem of oversupply (because the volume is not enough). It will probably take a while before there is real clarity. At a certain point, a decision will have to be made at all levels as to the conditions under which supply and demand can be balanced again, and how this balance can be brought about. In the case of sheepskins, the problem is solved by throwing the material away; this has been the case for years. If the material is not needed or there is no market for it, then it is destroyed. At the moment, the conviction is fading that the use of bovine hides for collagen and gelatine could help prevent this applying to cattle hides too.

The market for splits is different in the different markets. In China, the situation has stabilised and thus the price pressure for lime split has eased somewhat. The leather industry has regained some confidence there. In Western Europe, inflationary prices for lime splits, which were triggered by the significant reduction in production in the leather industry, seem to have normalised somewhat in the subsequent months. There will not be more supply over the summer, but the pressure on prices from imported finished products can no longer be ignored. The global corporations that dominate production took their time to analyse and adjust costs and production accordingly, but there is a clear sense everywhere that production is moving to South America in particular. In addition, there is strong competition from Turkey, where production is being massively increased for a variety of reasons and where they can also offer very competitive prices.

In the case of sheepskins, business in the niches remains positive. There is not sufficient supply of raw material everywhere for special articles and high-quality products. There is also a double effect here, because the raw material needed tends to be produced in low volumes, while at the same time new producers try to establish themselves in the niche markets. This increases the demand for raw material that is simply not available. For all other skins, the situation remains extremely difficult and actually almost hopeless. Leather is not returning to mass-produced clothing.

Only the Asian markets can resolve and break the current situation in the next six or eight weeks. If we look at China as by far the largest and most important market, the latest statistical figures are not conducive to assuming a quick recovery. Chinese consumers no longer have the unconditional confidence needed to spend money quickly, easily and happily. Thus, it seems that it will take some time before the supply, demand and interest of 8 billion people move back into balance.

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