Macroeconomics

Geopolitically, one has the impression that compromise and cooperation are losing, at least for the time being, and that conflict and confrontation are the tools of the moment. Looking at increasing defence and military spending worldwide, there are concerns that overall stability may be more at risk than we might like to admit.

In the financial markets, questions about the further development of interest rates remain the dominant factor. While national banks are making it very clear that they intend to stick to fighting inflation by raising interest rates, there are increasing signs that global economic development may fall short of expectations. The post-covid recovery in China is not materialising to the extent expected and in many other countries the real problems are still being masked at the moment by the very stable situation in labour markets.

The latest unemployment figures from the US were also very positive and, in conjunction with rising wage costs, expectations that interest rate hikes have not yet reached their end have also increased. We hear similar things from the ECB in Europe. Somehow, however, the feeling is creeping in that the delayed reaction against inflation could now also be a delayed instinct for managing economic development. The wage-price spiral has regrettably gained momentum and this has always been a very complicated mix to bring back under control via the interest rate strategies of the national banks.

With consumer goods prices, it remains the case that it is always very difficult to use a reasonable and meaningful data basis. In our opinion, the classic textbooks do not help, because every phase has its own laws. Of course, at the moment there are many products that have become significantly more expensive than in 2020 and 2021, but at the same time it should not be overlooked that many suppliers are having to adjust their prices again and, above all, large stocks can only be sold at considerable discounts. This means that selective demand and the possibility to buy selectively could have the effect of relieving the inflationary impact of consumers’ budgets. In the end, part of the truth of inflation is that it is a mix of products that one needs and those that one might like to have.

Equity markets are bouncing back and forth at the moment and are extremely sensitive to the wider outlook on the interest rate front.

All other commodities tend to be under price pressure and general commodity indices have fallen in some cases by as much as 25% in recent months. The full-bodied expectations for the development of the gold price cannot be fulfilled and in the meantime the price is more likely to move in the range of $1,900 than to exceed the magic limit of $2,000.

The oil price cannot really recover either owing to the rather pessimistic expectations for the global economy. It is repeatedly supported by new announcements that Saudi Arabia in particular will cut its production further to adjust to demand and stabilise the price, but it should not be overlooked that despite all the sanctions Russia is still dependent on selling large quantities of oil and can only achieve this naturally at a significant discount to current market prices.

Moreover, there are other producers who, contrary to all protestations, need the proceeds of oil production. 

Leather Pipeline

In our opinion, despite all assurances, there are some circumstances at the moment that should lead to some concern with regard to further development along the leather pipeline.

From our point of view, the high inventories in the supply chain remain the biggest problem. Of course, on the one hand they stem from the problem of falling demand, but on the other hand they are of course also the result of the reality that leather as a material is no longer used as widely as it was in the past.

If you talk to representatives of the meat industry in many countries, you hear again and again that a growing world population, increasing prosperity and a recovery in consumer demand will solve the problem by themselves. There is a strong belief that the demand for hides and skins as a result of an increasing demand for leather is only a matter of time. However, time could be the decisive and very dangerous factor. You don’t have as much time in the leather supply chain as you might have in other commodities and supply chains.

All the information one can gather at the moment continues to point to significant stockpiles at all stages of processing. Not only raw materials, semi-finished products or finished leather, but also finished consumer products are still piling up in many warehouses. If you talk to logistics companies, they very openly report that their warehouses in Asia, but also in the countries of destination, are extremely well filled and that a real reduction in stocks is not in sight. The question that then naturally follows is, and what products are we talking about and how at risk are they of being overtaken and disqualified by fashion trends? What would you do with shoes if tastes and trends changed so much that you could hardly find a customer for them any more. Of course, no one communicates this openly. We think it is absolutely indisputable that many are very concerned that these inventories may need to be devalued considerably and in some cases, may even put an excessive strain on liquidity.

In any case, what is interesting in this context in Europe is the fact that one increasingly sees offers for consumer products along the lines of ‘buy three and pay for two’. As a rule, this technique is used when one either profits from the additional sales with additional positive contribution margins and gains market share, or when one absolutely wants to sell more than the actual demand. The northern hemisphere is slowly beginning its summer sales, and in the coming weeks and months it will show how the retail trade operates. In any case, large internet platforms are already advertising special sales in the middle of July.

In addition to the pure questions of production and sales, it increasingly raises the question of whether and to what extent production will be relocated. In the meantime, it can be assumed that China will have to expect increasing and more rapid exodus of production for both political and cost reasons. While it initially seemed that the main beneficiaries would be in south-east Asia, there are increasing indications that many large manufacturers have also decided to increasingly look for possible additional alternatives including India, Pakistan and Bangladesh. Experience has shown that a shift in production chains often leads to distortions along the supply chain. In the case of consumer goods, this often leads to major problems for producers. Also in Europe the shortage of labour, the rise in energy cost and the rising burden of bureaucracy and legislation may trigger more desire to move away from current production locations.

All statistical data in China show that the recovery after the pandemic lags far behind expectations in both production and consumption. If we now have to assume that China will lose and suffer from the relocation of production, this is not good news for the leather pipeline either. Most experts and analysts also do not expect the Beijing government to resort to increased stimulus at the moment to boost production and consumption more strongly. The recent interest rate cuts were probably the only thing that can be expected for a while. However, the political and social pressure will certainly increase if there is no improvement in the situation in the mainland in the coming months.

In the meantime, people in Europe are preparing for the summer holidays and the general weakness of demand is of course also being used to limit production wherever possible in order not to provoke further increases in stocks. In discussions with tanneries and other market participants, one hardly finds anyone at the moment who believes in a strong recovery for the rest of the year. Of course, we are now in the summer phase and the general calm and restraint is not a particularly big surprise for this time. It is just that this year we are already entering the holiday season with a not inconsiderable legacy and it would really take a significant and rapid recovery in demand right after the reopening for the problems of the past to be quickly resolved.

We are coming out of a period of low interest rates, easy access to liquidity and, of course, lower production in a number of factories has led to improved cash flow. But such trends are finite and lower production usually has the negative side effect of causing operating losses. It becomes critical when this actually starts to show up in the bank account. Nobody will make such things public at the moment, but the sector is starting to think about how long the good liquidity situation will last for companies. A next point is, of course, the question of prospects. If the outlook is positive, everyone fights to experience better times again and to profit from them. Here, too, it is noticeable at the moment that there is definitely an increasing number of pessimists. If it is not only the dampened prospects for a better order situation, then the problems of finding sufficient labour, the growing bureaucracy, the uncertainty of further developments on the energy markets and, of course, the increasing problems with regulations and bans from Brussels are also playing a significant role in Europe today. If you are faced with so many uncertainties and difficulties and combine all of this with a worrying future for business development, you will also consider alternative ideas that do not necessarily involve the long-term continuation of business activity.

Otherwise, people like to talk about the usual summer theatre behind closed doors, which is to wonder who will open their doors again after the holidays, or not start up again at all under the given circumstances. In the last few years or decades, it’s been almost unheard of and, of course, such things are always talked about enthusiastically in the rumour mill in the summer, but it can’t be completely dismissed at the moment because of the overall situation. After the last few months, it is really hard to be convinced that there is actually a solid and sustainable demand for the entire production capacity in Europe.

Either way, if the next two months are just in summer mode, for sure by the fourth quarter we will either already get results or at least indications of the truths we have to expect.

But it is certainly not wrong to use the next few weeks and the holidays to assess the individual situation more than ever. It has probably never been more important than now to make the right decisions.

For the meat industry, all this may sound irrelevant. They have their own problems, which are quite different by region around the world. If South America has to deal very quickly and seriously with questions about deforestation, European slaughterhouses have to deal more with supply, demand and capacity. Developments diverge more than ever from region to region around the world. Only one thing remains certain. Whoever produces meat must have a use or solution for the hide. The rapidly and strongly expanded productions and investments of gelatine and collagens show that the meat industry has not been sure of its sales in the leather industry for a long time. However, current developments also show that the boundless optimism regarding the absorption power of the markets for collagen and gelatine were also hopelessly exaggerated. So even if no one believes or expects it, the total use of hides for leather, collagen or gelatine is not sufficient, then other and additional solutions may have to be found. Burial is one of them in many areas, and certainly by far the worst.

We cannot report much about the split market. We have already dealt with the issue of collagen and gelatine above, and in the leather sector it remains the case that they have more of a supply problem with special products and more of a sales problem with the mass products. This will certainly not change much over the summer.

The situation is not much better for sheepskins. The last few years have brought relatively good business in decorative products. Various types of sheepskins and lambskins could also benefit from this. But in this sector, too, things are starting to get very difficult. Demand is declining and here, too, one hears of quite considerable stocks in the traditional strongholds of production. The proportion of sheepskins and lambskins that are no longer used for leather is clearly increasing again.

It is neither possible nor particularly meaningful to make any forecasts for the next eight weeks. It is the peak period of holidays, seasonal changes, renovation and maintenance and not the time of production. Everything points to the fact that decisions on how to deal with the future must and will be thought about in many cases. What conclusions will then be drawn from this is pure speculation at the present time and therefore hardly particularly purposeful. It will probably make sense to hold intensive and meaningful discussions wherever possible over the next few weeks and hope that people are willing to share their views and decisions. Otherwise, all that really remains is the principle of watch and wait. For those who can already start their holidays in July, we wish you a good and relaxing time, for the others we will save our wishes for August.

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