Macroeconomics

In the financial markets, inflation and interest rates remain the defining issue. While in western markets the fight against inflation is still the focus of national banks, the Chinese National Bank has decided to lower interest rates to stimulate the economy.

After underestimating inflation for too long and fighting it too late, one might come to the conclusion that the situation is now being fought too long and too hard with interest rate hikes. The experts are outdoing each other with fears that are not necessarily shared at the moment.

It remains the case that the most important thing is how inflation is defined and what is measured statistically. Due to weak consumption and extremely high inventories, many prices for consumer goods are already falling, transport costs have already fallen sharply and energy prices have also long since returned to normal in many places. All of this is not taken into account in the statistical calculation of inflation in the short term or what you might call core inflation. Only wage costs, which have risen sharply in some cases, remain as medium-term price drivers. Whether dampening the economy through rising interest rates is still the right thing to do at the moment should be discussed intensively, at least in expert circles.

In any case, the financial markets see the problems much more clearly and the stock markets have had to accept significant reductions in recent weeks in anticipation of falling corporate profits.

Oil prices seem completely immune to the Saudis’ production cuts and thus also symbolise a rather pessimistic expectation for economic development and oil demand.

The gold price has again failed to sustain a level of $2,000 for the ounce and has retreated back to the level of $1,900 in the knowledge of the increased interest rates.

The US dollar is swinging listlessly back and forth between $1.08 and $1.10 against the euro. 

Leather Pipeline

We are at the beginning of the summer phase, when there is usually a lot of discussion and planning, but at the same time very little in the way of new orders being placed for consumer goods. It is once again time to look a little more at the raw material market. It is still the case that about 50% of the total cost of leather is due to the raw material.

With few exceptions, prices for hides and skins are not far from their historic lows. Niche products such as high-quality sheepskins, as well as top-quality calfskins are among the exceptions. Otherwise, the markets have been struggling from week to week and month to month for almost a year now. Producers and sellers are trying and doing everything they can to defend prices, while on the other hand tanners are doing everything they can to buy cheaper in view of increased costs elsewhere and weakening orders. Some of the price pressure has been alleviated by the significant increase in revenues for lime splits, but overall the markets are struggling to cope with a larger supply of raw material than is required to meet current leather demand.

We have already reported several times on the distribution of the problem across the entire spectrum of qualities and this is now common knowledge. The drop in demand, especially for cheaper leather articles, and the simultaneous decline in leather production led to a short-term shortage of material for collagen production. This was then relatively quickly compensated for by newly created capacities for collagen production from full hides. And in the meantime the balance seems to have shifted completely. We are hearing about falling prices for collagen and gelatine, while at the same time supply is still increasing.

Leather demand in has not improved sustainably in recent months, not to say it may even have declined. The hoped-for rapid recovery of the consumer goods market in China and the associated rapid return of demand for the corresponding raw materials have not emerged. Inflation, geopolitical conflicts and a relatively high level of uncertainty among private consumers have also led to a downturn in sentiment and consumption. At the same time, large stocks of consumer goods are still being reported all over the globe. None of this is particularly positive for a recovery in the commodity markets.

Global meat production has not fallen either and no global decline is expected at least for the next 24 months. With mass production in countries with medium or lower hide quality, no improved balance across qualities is to be expected either. Even though it is almost impossible to obtain reliable data and information on this, well-informed circles continue to fear that there are still significant stocks of raw and semi-finished hides all over the world.

As a result, the leather industry is in no great hurry at the moment to buy more, even at low prices, and thus build up protection for potentially rising prices with simultaneously rising demand for the coming year. On the one hand, the leather industry has no indication at the moment that demand will improve significantly in the short term, and on the other hand, it does not have the impression that producers and suppliers could consequently be put in a position to push through higher prices.

On the other hand, the meat industry and its marketing organisations, as well as the still independent traders, are doing everything they can to stop a further drop in prices. In part, this is certainly also due to the protection of possible larger stocks, but it is also a question of the basis of their business for many. Prices that are too low may no longer cover the cost of collection, sorting, preservation and distribution, taking away these players’ reason for being in the business.

So we are back to the situation we already knew in the days of covid-19, only this time it is not due to a special event, but a reflection of the real market situation. For a while in the past months, the collagen market provided some relief at the lower end of the price scale and, above all, for the meat industry, which for its part no longer saw a profitable solution in its value chain and the production of semi-finished goods for the leather industry. It therefore decided to build up collagen production very quickly. This is certainly a solution for the meat industry, as they have to utilise the by-product in some way. For the rest, this kind of utilisation is not an alternative if it does not achieve cost-covering revenues.

In the meantime, however, the problem has arisen that the demand for collagen and gelatine is not rising fast enough for this to be a decisive and long-term solution. For manufacturers who have to produce at locations with high costs, the competitive situation vis-à-vis producers who can produce under considerably better conditions has become a strategic question.

In short, we are now in a situation where there is a surplus of raw material, demand for leather is insufficient, prices for leather and raw hides do not represent sufficient added value and it is therefore essential that prices rise again if all existing structures are to be maintained. As long as no capacities are reduced or lost along the value chain, everything depends only on the demand for leather and the price that can be achieved.

In any case, conditions are very difficult at the moment. The supply chain is still highly burdened by excessive inventories and in all economic logic this will continue to deflate revenues. In plain terms: the chances of a quick price recovery are relatively small.

But we might have one trump card. We have already reported on adidas’ new collection that revives the old Samba shoe in many colours. If this is not just a short fashion flicker but sets a new trend that supports leather as a material this would indeed be able to generate the necessary volumes needed for a significant increase in demand for leather. It is also interesting to note that we are seeing the same designs and trends in smaller brands that are not as well known. The shoes have thinner soles made from natural rubber, the classic cut of the 1970s and leather as the upper material, sometimes combined with suede or split leather. With some already reporting increasing orders from the big industrial leather manufacturers producing for the big sports shoe brands, the rumours may indeed have some kernel of truth. It won’t be too long now before we know if there really is any truth to these stories.

In other sectors, there is absolutely no expectation of much change or improvement. The furniture industry is suffering from the difficult real estate market and in the automobile sector neither big changes in volume nor a strong return are to be expected in the short term.

In the split market, the brilliant bull market is coming to an end owing to demand from the collagen and gelatine sectors. We reported on the details earlier. So there is much to suggest that prices, especially in Europe, will simply return to a normal market level.

As for sheepskins, we have absolutely no news to report. In Europe, the production and supply of young lambskins is significantly reduced. This means that there may be supply problems here and there, although at the moment demand has also been somewhat dampened. Here, of course, the developments in Russia and Ukraine always play a decisive role. Russia, in particular, is still very important for demand for leather from Turkey.

We would be very surprised to see a significant change in the market situation in the next few weeks. In Asia, companies are replenishing their stocks with secured orders and a basic market optimism. Since the summer period of production is favoured for raw materials, this seasonal influence also plays a certain role. It does not seem that either buyers or sellers will see any reason to deviate from their current positions in the coming weeks; neither side seems to have strong enough arguments to hold sway at the moment.

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