Macroeconomics

In addition to the already known areas of tension, there is now another: the coup in Niger and Russia’s growing influence in the region are further shifting the balance of power on the African continent. In particular, the former colonial power, France, continues to lose influence, which applies to Europe as a whole. In view of the refugee problem and Africa’s importance as a supplier of raw materials, this development must be viewed with great concern. China has become the largest cobalt producer in the region.

Europe has never succeeded in establishing a stable position in this region in the post-colonial period. Initially, it was the Chinese who stepped into the vacuum and now Russia too has a growing influence in various countries. This is not so much due to convincing policies, but to the skilful use and support of militias. There are now more states that have very little to do with the Western idea of democracy and orderly forms of government.

There are also many other developments in global politics and diplomacy that could be worrying. The impeachment of ex-President Trump is dividing US society, in China military and political figures are disappearing and the government is silent about the reasons. The end of the grain agreement between Russia and Ukraine is threatening food supplies and if that is not enough, the reports of multiple natural disasters in many regions are also a worry.

In the economic sphere, the dominant theme was the Federal Reserve’s interest rate hike, probably the last for some time. An increase of another 0.25% had been widely expected and now the focus turns to how interest rates will continue to fight inflation in the coming months. An exchange of blows is now developing between the experts. On the one hand, there are those who believe that core inflation has not yet been defeated and therefore consider further interest rate hikes by the national banks to be necessary. On the other hand, well known experts are of the opinion that inflation cannot be fought by the national banks in any form. 

As far as consumer prices are concerned, it is safe to say that the upward trend in prices has stopped for the moment. We pointed out here some time ago that many of the factors behind the price increases are now a thing of the past. The supply shocks and shortages from the covid era and the war in Ukraine have long since evaporated and in turn have rather given way to a problem of demand and producer prices, which are now falling. Basically, a very dangerous deflationary scenario has now built up.

Just take a look at the producer prices in China, which are having an effect on the world markets with a clear delay, or take a look at the transport costs and capacity utilisation in the logistics sector, and it should be clear that there will certainly be no price pressure from this side for some time. Add to this the high inventories along the supply chain, and one only has to follow the discount battles in Europe and the US to know that no inflationary pressure is coming from consumer goods at the moment either. Rising interest rates and increased government debt are the biggest risk for price increases at the moment.

The stock markets initially rose to new record highs, and then, as is so often the case, it became clear that the magic targets had been reached and investors were in reverse gear. Considering the global political uncertainties, this is of course no great surprise. Some of the large global companies are still benefiting from special developments and were generally able to exceed forecasts in their second-quarter results. On the stock exchanges, however, where the future is traded, decision-makers are currently more driven by the question of whether global uncertainties, intensifying price pressure and higher interest rates will have a significant negative impact on companies’ results in the near future.

The oil price continued to react to the production cuts and rose slowly but steadily. In the meantime, we have reached prices of about $85 per barrel again, and energy costs have increased again.

The gold price is changing only in very narrow ranges and at the moment remains fixed well below the $2,000 mark.

The US dollar also did not move very strongly, but it has stopped its downward trend and is trading around $1.10 against the euro.

Leather Pipeline

Business in the leather industry in Europe is currently significantly reduced and perhaps one could even say it has come to a complete standstill. This means that for a few weeks there will be very little to report on business activities. This gives us the opportunity to take a closer look at the general environment of leather as a product and to to look beyond the end of our noses. To do this, it is usually a good idea to simply take a look at the mainstream media, social networks and other sources that do not occupy us on a daily basis in normal time.

In particular, a promotional video by BMW for the new-generation 5-series caught our eye. It reveals a special view of the handling of leather as a material and the people involved in it. In a video clip, it is pointed out that the standard equipment of the new five-series model is vegan. The visual appearance of the substitute material suggests a resemblance to leather. The description of the touch also leans very heavily on terms we use about leather. What the material actually is, however, and why the carbon footprint of the new material is presented as being better than that of leather, we are not told.

We are all used to seeing ‘vegan’ as a marketing term by now. The BMW promotional video is special because it seems completely to disqualify leather. So, we can assume that BMW will completely say goodbye to leather in the foreseeable future; you would almost assume it has to after releasing this video. It presents the standard interior of a mid-range model as being far superior to leather and as having a better carbon footprint. If leather is such an inferior material, how would BMW be able to explain its use of this obviously inferior product in the interior of luxury models, and charge more money for doing so?

The video appears to denigrate leather and to seek to put off any buyer who may still prefer leather. In itself, this incident is not particularly remarkable. Every company and every supplier is of course completely free to decide on materials and marketing. These are business decisions and must be accepted as such. In the case of BMW, however, things are somewhat different. Some time ago now this automotive brand took an internal decision to move away from leather. The first clear indications of this date from 2019. 

Even from the perspective of the leather industry, a major user turning away from the material is not in itself unheard of. In this instance, though, we should remember that BMW joined the Leather Working Group (LWG) not so long ago. LWG is a membership organisation that is supposed to support the use of leather. The new promotional video, therefore, may raise questions about how we should understand BMW’s membership of LWG. Is the automotive group looking for an alibi? Is it trying to keep all options open?

As long as its use of leather continues, it is understandable for BMW to have LWG membership. But it is less understandable for it to keep its membership without showing any real commitment to presenting leather in a positive light. We believe that it is crucial for the credibility of leather as a material for members of an important body such as LWG to have leather’s best interests at heart. Of course, it is not for us to say how the organisation should respond to members who clearly oppose the product.

This whole issue takes on even more relevance if the news is true that automotive leather production and demand for raw material in China is on the rise. Taking into account that electric mobility is much more advanced in China than in many other countries around the world, this would mean that automotive companies there are open to having battery-powered vehicles that make significant use of leather in their interiors. This would then contradict the marketing of European brands, who claim to be pushing back the use of leather for the sake of the environment. It also confirms that the belief that European manufacturers do not want to listen to the wishes and preferences of consumers in other regions of the world.

If, at the same time, the trend of Chinese car brands continuing to displace European and possibly also American brands worldwide were to continue, then the overall situation for leather in the automotive sector would completely resolve itself again. It is absolutely too early to read a clear trend here. However, there is still a lot to suggest that generally the ‘anti-leather’ trend in the automotive sector has slowed down considerably at the moment. We don’t put this down to any sudden new enthusiasm for leather in interiors, but simply that there is still a lack of acceptable alternative materials. Many things have been announced, but until now there has been no breakthrough of any material that can really replace leather in terms of performance and exclusivity.

A gamechanger in this area will, of course, come one day. In automotive leather production, the material is stripped of many of its properties and as long as leather is perforated in order to use it on car seats, it is technically not a really big problem to replace it in the end. 

Apart from this, we were pleased to receive a product description of the adidas AS 520 sports shoe. It says the shoe is inspired by retro football culture and is “made with the terraces in mind”. The product has a leather upper and leather lining. Product descriptions of this kind are popular at the moment; big brands are embracing a retro trend, inspired by the sports shoes of the 1970s and 1980s and, thankfully, using the materials that were in use back then. As a result, it seems certain that the use of leather in sneakers and casual footwear will rise again in forthcoming seasons.

What this ultimately means for the leather pipeline in the coming years will of course depend on success with consumers. But it is a clear change in direction and apart from the product descriptions, hardly a word is being said about it anywhere. Perhaps this is because it was not that long ago that the word ‘vegan’ had almost prophetic significance in footwear marketing too. But one should not be deceived. The brands are not interested in the material as such. If the story and the look sell, the trend will grow; if sales are poor, it will end as quickly as it began.

In this context, the decisions of Nike, Puma and supposedly adidas to ban kangaroo leather are even less understandable. There is no clear line and obviously these companies believe that somehow all consumers and target groups can be made happy with this market fragmentation. However, lack of clarity has rarely been successful. In this case, however, even less so, because in the end it only provides a target for those who are committed to the fight against leather anyway. For others, it is of no consequence.

You will not find any reliable statistics, but it is probably not an exaggeration to assume that at least 20% of the world’s lamb, sheep and goatskins are now simply being destroyed, and the trend is rising. A raw material that nature offers us as a by-product is being destroyed because we no longer want to use it. Why? Because it is no longer processed and offered to the consumer. This has very little to do with all the arguments for climate protection that are used.

There is not much to report from the split sector. The market for lime splits in China is said to have stabilised somewhat at the moment, but the same cannot be said for other regions. If the new fashion for retro footwear should prevail, it would, of course, also support the use of splits. Many models have split leather components and some are almost entirely made from split. 

For the next few weeks, all that remains to be done is to continue to observe general developments in politics and the economy. Beyond that, we will continue to try to gather information from the media and other sources that can support an assessment of further developments for the leather pipeline.

There is definitely a lot going on behind the scenes at the moment that will have a decisive impact on the future of leather production. This includes not only the question of material use, consumption and buying mood, but also very simple economic decisions. Location issues, especially in relation to Europe, will play an important role for production in the coming years. Political decisions on how to proceed with meat, agriculture and, of course, the use of by-products will certainly also play a major role.

There are many indications that the global monoculture of products and production that we have seen over the last decades may lose importance, with more regional supply chains and influences playing a greater role in the leather industry again.

Share this story: