Macroeconomics

Politically, the next elections in the US are already playing a decisive role. Realistically, we must assume a new contest between President Biden and Donald Trump. Mr Trump is managing to repurpose the indictments against him as indictments against his party and his voters. This strategy is proving to be quite successful. If one considers the concerns about the current president’s age and performance, all possibilities are open. Mr Trump’s re-election could be viewed as being in Russia’s interests and it is not particularly difficult to imagine what this could mean for the war in Ukraine and for the relationship between the US and China. 

In the wider economic sector, the problems that are becoming more and more evident every day in China must also be viewed with great concern. Whether internal economic problems lead to undesirable political decisions is not certain, but the economic problems alone are enough to pose a major threat, at least in global economic terms. The economic figures in China, as everyone can see from the current press, are not only worrying for the world’s second largest economy, but also because they could threaten economic stability worldwide. The Chinese economy is stuttering badly, and if the young, qualified generation can no longer find jobs in a rapidly ageing society, then it is even more cause for concern, perhaps even more of a concern than the problems now increasingly evident in the property sector. The next big developer is on the verge of insolvency and once again the question of how the Chinese central government will deal with this kind of economic problem is coming up. 

The pressure will have to be released in some direction, and the rest of the world can only hope that it will not affect them too much. However, if you look at the incredible dependencies on China that have built up in the context of globalisation you know how difficult that could be. President Xi is already preparing the population, especially the younger generation, for more difficult times with less prosperity and growth.

The stock markets are in summer mode. However, here, too, investor uncertainty and a certain disillusionment when looking at the future, which is, after all, what the stock market is trading in, is more than perceptible. If we look at the stock markets, sector by sector, things look much worse overall than a pure look at the indices shows.

On the commodity markets, and here energy prices are excluded at the moment, the problems in China are already visible. Even if one is still positive about many raw materials that are needed in electromobility and in the development of renewable energies, basic raw materials, such as those needed above all in the construction industry, have come under significant pressure. In the case of food, the changing situation in the war zone in Ukraine continues to have an impact. At the moment, the cancellation of the grain agreement, the attacks on grain storage facilities and transport routes have once again become an important factor on the markets. Here, too, China is playing a weighty role. The weather conditions in China will probably lead to a poorer harvest, which also means that China will have to import more food. Besides the fact that it has to be available, price also plays a weighty role in the current situation in China. It will be very interesting to see how this will affect China’s relationship and influence on Russia’s behaviour in the coming months. This is another area in which one has to try to square the circle.

The US dollar remains in a very narrow trading range. At the moment it is trending a little bit firmer, but this trend is not sustainable. Decisions on interest rates will have a major impact. The gold price tends to be a little weaker and thus correlates, as so often, with the development of the US dollar. The oil price remains well supported and the forecasts that, contrary to all efforts to increase the share of renewable energies, the demand for oil could fall, do not seem to come true. If anything, forecasts for oil consumption in 2024 predict a significant increase in demand despite the economy. If this were to happen, it would of course also mean that consumers would have to spend more money on energy again, which would consequently have an effect on other consumption.

Leather Pipeline

Aside from questions about production and the particular situation of the leather industry, it seems important to consider the influence on the demand for leather that could arise from the general economic situation.

There are two dimensions that have an impact on leather demand and their respective leverage is clearly different. The focus is increasingly on what affects us directly first. Leather articles, quality, market prices and technology are always seen in direct relation to demand and often have a stronger impact than the economic fluctuations in demand for consumer goods.

The industry has little influence on demand for consumer goods. Disposable income and the willingness to buy things can only be controlled to a very limited extent. In any case, things are not looking very favourable in this area at the moment. Consumer spending is not increasing significantly in any part of the world, and if it is this only affects the sectors on which leather is dependent to a very small extent. Of the really big economies, only in the US is consumption still satisfactory.

However, it should be noted that last week it was reported that credit card debt in the US has now exceeded the value of $1 trillion (and this with rising interest rates). Whether the still robust labour market and wage increases can ultimately absorb this is definitely a risky bet. If we analyse the figures for private consumption in recent months, we see that furniture and, in the broadest sense, clothing were among the sectors that experienced declines.

We have already described the situation in China and it is extremely difficult to make forecasts for a centrally controlled economy. However, from everything we know about the situation in China it is not conducive to much optimism regarding private consumption. With about 70% of private savings and investment in the real estate sector and at the same time extremely high unemployment among young people, two very strong pillars are currently fragile and no quick recovery is in sight.

Europe is showing no particularly positive signs at the moment and is thus also failing as a consumption driver. This means that there is not much positive potential left for general private consumption in the coming months. With the sales figures that are currently being published, it should also be considered that many retail sales are currently being serviced from inventories and not from new orders. The increases in sales often result from basic goods, especially food. Statistics remain a dangerous area and should be interpreted with great care.

In the sectors that are important for the leather industry, one must also approach the next months with some concerns. First of all, there is the furniture industry. The purchase of furniture is closely linked to the situation in the real estate markets. New buildings and relocations often trigger the purchase of new furniture. Leaving aside special influences such as the lockdowns during the covid-19 pandemic, the demand for furniture fluctuates to a certain extent with consumer spending. A difficult real estate market in the main markets, higher interest rates and a general reluctance to spend simply do not form a good basis for the coming months.

The automotive industry has repeatedly reported increased demand for automotive leather in China, especially in recent weeks. The Chinese automotive market is changing and Chinese manufacturers are gaining market share at a rapid pace, but overall, production is rising more than sales at the moment. The battle for market share will also see some casualties, especially among the smaller manufacturers in China. As already discussed at the beginning, without massive support from the government, a significant improvement in vehicle sales cannot be expected. How many will still be equipped with leather is an additional question.

For manufacturers outside China, with the usual exceptions, growth and rising sales do not look likely either. The German premium manufacturers in particular are struggling with a variety of problems and changes, so that here, too, increasing demand is not to be expected at the moment. However, they will also have to think quickly about whether turning away from and demonising leather in interior design was a particularly clever decision. The kitchen table of a European car manager and complaints about leather from family members may not be the ideal guide to the wishes of customers across the world. There are better and more successful ways of working out what the customer wants. 

This leaves the footwear sector, which is still the largest and most important sector in terms of total leather consumption. It cannot be assumed that consumers would suddenly expect larger increases in this sector, of all sectors, if they were generally reluctant to buy. Thus, development here is also unlikely to benefit from improved spending behaviour. Nevertheless, in our view, this sector is the only one that has the potential to turn around at the moment.

This is because the footwear sector brings us to the other parameter that influences demand for leather: the use of materials. This has also been our ongoing theme for a long time. Increased use of leather is the biggest lever for stabilising demand again. There are increasing signs that people are ready to look at leather again after a long period of concentration on plastic.

If this is confirmed and rewarded by consumers, the impact on global leather demand would be significant and have the power to be a game-changer for many. However, it must be said, being highly price sensitive, that this would almost exclusively benefit the large mass producers of leather and the mass producers of cheap and standardised raw hides.

We have deliberately left out the luxury leathergoods sector. Everything has been written and said about this; it is in a world of its own. That is good; let it stay that way. Sooner or later, one will also be confronted with various problems there, but that will be an issue for the future. At the moment, it is just unfortunate that mass producers have not been inspired by the ideas and strategies that the successful luxury brands allow us to observe.

We are concerned about the outlook for global consumption. Furniture and automobiles do not seem to be able to help leather demand. In footwear, leather as a material has to gain market share, otherwise there will not be enough volume to process all the raw material available. Without the important Chinese consumer goods market, this will be a very difficult task.

The market for splits also reports no news. From September onwards, it will also be decided here whether leather demand and uses are developing positive effects and whether the market for collagen and gelatine picks up again after the increased supply in the second quarter put pressure on prices again.

 In the case of sheepskins, end-of-days sentiment is spreading in many cases. Only the special articles such as top qualities for nappa, super fine and dense wools, light, dense skins for double-face and special types for decoration can still find a market. Otherwise, many skins today are being dumped and are adding cost instead of generating income. In the end, it is simply a shame that a naturally occurring raw material is destroyed or thrown away.

Over the next few weeks, we are slowly getting into the important phase of production. The winter half-year is traditionally the more active one and the next two months will be decisive for further development. First, the All China Leather Exhibition in Shanghai will give a first impression. It will be important as an indicator of the mood and for the international visitors it will also be a first, personal impression of how the situation in China is regarding the industry and consumers.

After that, it will be possible to see relatively quickly how production is starting after the summer holidays and then we will have Lineapelle in Milan in September, a real reference point for business in the winter half-year.

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