Macroeconomics

In the world of politics, apart from the permanent topics, the meeting of the BRIC countries was certainly the most significant recent event. The meeting as such would probably only have been a footnote if one had not paid attention to two things.

Firstly, the fact that Russia’s president, Vladimir Putin, did not travel to South Africa, for fear that he would be arrested for war crimes. Even more significant was the news that the BRIC countries (Brazil, Russia, India and China) want to add another six nations to their circle. If one looks at the applicants and leaves out the names Iran, Saudi Arabia and the United Arab Emirates, it becomes clear that the desire of this group of states to form a counterweight to the West is to be taken very seriously. The main argument for rallying around Russia and China is less from general political conviction than from the common demand not to interfere in the internal affairs of other states. This is something that the West is always accused of. 

There were possible signals from Ukraine last week that it would be willing to negotiate over Crimea as a condition for possible peace talks. As these are rumours, the value cannot be assessed.

Japan has announced that it will discharge radioactive wastewater from the Fukushima accident into the Pacific Ocean. This has met with great disapproval in China and further increased the tension between the two countries. In response, all fish imports from Japan to China were initially stopped.

In the financial world, all eyes turned again to the Federal Reserve’s interest-rate policy. Inflation in the US has continued to fall and is actually on its way to the desired target zone. However, the pace is not satisfactory and the extremely strong labour market is a cause for concern that the further decline might not be sufficient.

In Europe, inflation is still much higher and therefore it is assumed that the European Central Bank will not be able to avoid further interest-rate hikes. The burden on government budgets and the weakening economy will make this an unpopular choice. 

In China, the situation is completely different. The major problems in the real estate sector and a strong reluctance to consume are leading to fears that this large market is more likely to experience a deflationary trend, with generally falling consumer goods prices. Those who travelled to China for the occasion of the All China Leather Exhibition in Shanghai were able to see this possible risk for themselves. Consumer sentiment in China is poor and conversations confirm that people are saving rather than spending heavily at the moment.

The US dollar could not continue its further strengthening and even fell back a little, but remains little moved. Gold was able to recover somewhat and easily overcome the $1,900 level again.

The oil price is treading water and continues to hover around the $85 mark.

Leather Pipeline

All eyes were on China and the All China Leather Exhibition (ACLE) in Shanghai last week. Besides the fair and the direct focus on the developments in the Chinese leather industry, everyone was excited about the impressions that could be gained after almost four years without visits to China. 

What can be said about the mood there? In general, it can be stated quite clearly that there are  big contrasts in the moods of different people. Those who are close to the government come to terms with the decisions and political position of the Communist Party. For many others, however, the situation is somewhat different, and in private conversations, hope and frustration constantly alternate. For many, the government’s course since the Covid-19 pandemic and the considerable increase in surveillance, which is also noticeable to the international traveller, is unpleasant. Many report censorship of their social media accounts. People can be blocked for days or months even for expressing rather petty views about the political situation in China. 

Entrepreneurial freedom is also a recurring theme. On the one hand, people expect the central government to overturn the economic environment and cushion or solve economic problems. On the other hand, it is clear that they are not particularly satisfied with government actions. However, what Europeans would regard as nothing more than a basis for discussion, the central government in China perceives as inadmissible criticism. Of course, the situation in the real estate market in China plays a very special role. With the high proportion of private investment in houses and flats, the crisis is particularly important for many, and in some cases also painful. The Chinese government’s attempt to redirect savers’ investments into the stock market by halving the stamp duty on share transactions has had some effect, but without confidence in the general economic situation it will do little good.

What is interesting, however, is that in the private discussions there is a clear sense that the central government is considered too pragmatic to risk bringing trade and international business to a standstill. 

The high proportion of electric mobility on the roads is impressive. One has the impression that the noise level in a big city has dropped significantly and that driving behaviour has also become much more relaxed. Similarly, one gets the feeling that air purity has also increased significantly. The smog bell that one used to be used to in Chinese cities has not disappeared everywhere, but here, too, one definitely has the feeling that it has become significantly less. If you look at all the charging stations in the car parks and realise how much energy this requires, then the massive expansion of all energy production, including coal and nuclear power plants, also explains itself. If you transfer what you can observe in China at the moment to Europe, then you realise how much still needs to be done to ensure a secure charging infrastructure for electric vehicles. A secure energy supply will also certainly be a major challenge.

Life on the road also seems much more relaxed than it used to be. Cities are cleaner, there is much less hustle and bustle and, all in all, things are much calmer. Somehow you have the feeling that everything has been shifted down by a gear or two. This is very pleasant from an emotional point of view, but of course the question remains open as to whether it is not also due to the much weaker economic development.

The shopping arcades are much emptier and even at weekends people stroll through the aisles, but where there used to be crowds of people in the shops, there are now sales staff waiting for customers. What the official statistics indicate at the moment is a clear decline in private consumption in China and this can be felt and understood in daily life. Of course, these are only snapshots and personal impressions, but conversations with other travellers leave the same picture.

Let us now turn to the ACLE trade fair in Shanghai and the reports of those who have been around the fair and travelling to visit their clients.

The fair can be reported on relatively quickly. The number of halls was the same as in the time before Covid-19. However, the number of exhibitors and the amount of space occupied was significantly different. Especially in Hall One, which is usually reserved for international exhibitors, a maximum of two-thirds of the total space was occupied. Many exhibitors decided not to have a stand in Shanghai for a variety of reasons. However, this also meant that with less space, the impression of a intensive gatherings in the aisles was reinforced. Nevertheless, from the very first day, the number of visitors was much higher than had been expected in advance. In particular, many Chinese tanners, mainly from northern China, took the opportunity to visit the fair. Raw material agents were also present in large numbers, eager to meet suppliers on site, and this was of course a signal that they had not just come for pleasure.

In Hall Four, as always, the Chinese tanners exhibited and here too there was a lot of activity. However, many of the exhibitors reported that it was less a matter of interested buyers than visits, meetings and conversations, because people had not seen each other for so long. This also applies to Chinese colleagues, visitors and exhibitors among themselves. 

A big issue was also the considerable number of exhibitors showing leather substitutes. Of course, this cannot be in the spirit of a leather fair and this came up in discussions with the organisers. Particularly noticeable was the fact that almost all the billboards with advertisements in front of the fair entrance were occupied exclusively by advertisements of leather substitutes. As much as one may complain and criticise this, it must of course also be pointed out that there was probably no request for advertising from the leather sector.

International raw material suppliers came with very limited expectations. However, those who had already visited customers in China before the fair were aware of a not entirely negative mood. Tanners for shoe leather in the south and south-east were probably very pessimistic and they were also very sparsely represented at the fair. The mood among wet blue producers, furniture leather and automotive tanners was much better. This was a big surprise, especially for the furniture leather tanners, because the big problems on the real estate market led us to expect negative sentiment in this sector as well. Confidence was heard in the automotive sector, but precise questions about which Chinese models, manufacturers and markets this would be based on could not be answered. Thus, the confidence remains without facts for the time being, but we will keep an eye on it.

These moods were then also reflected in the business. All suppliers who were present at the fair and had low-priced raw materials for furniture leather production to offer were pleased with the extensive interest. We had the impression that every hide that was offered found a buyer. This lifted the mood among suppliers considerably, especially those from Europe and the US.

Questions remained over the extent to which this interest is really covered by existing demand for leather or even orders. Of course, even in difficult times, business is never zero and stocks must always be replenished, and this is especially true in the largest market in the world. Nevertheless, questions remained, at least among those who wanted to look into the situation a little more intensively. On more detailed enquiry, it first emerged that sales were initially concentrated on a relatively small group of buyers in northern China, wet blue tanners and traders who, with very sharp calculations and the expectation of rising split revenues, think they can cover their costs in mixed calculations with existing purchases and stocks. Much of this may also be explained by the usual effect of being there. We have observed this before at the Shanghai fair when visitors from northern China show up in large groups. The full-scale furniture leather tanners we spoke to at the fair could not report increasing orders for furniture leather and were even very worried by the lack of important export orders from Europe and the US.

It is certainly much too early to get an idea of the volume of the next furniture leather season and so we will have to wait a few weeks to see if it was just a flash in the pan. With regard to the further price and market development in Asia, we will probably be able to tell very soon. After the successful fair, raw material suppliers will certainly test the demand with higher price demands in the next few weeks, and the reaction will show very quickly whether we can expect a further sustainable recovery. 

Despite all the enthusiasm (and joy that there was some good news), it should not be overlooked that there was also a cold shower or two. Those who expected Shanghai to give impulses to the shoe leather sector were bitterly disappointed. Leather for the shoe sector remains a problem and anyone who still had any doubts about that only had to look at people’s feet in China. No leather, with a few exceptions, and it is no exaggeration to say that leather shoes are an exclusive, sometimes fashionable niche product and leather plays also no role in the mass market in China at all. We can only hope that fashion will help and that our hopes for the retro trend will actually prevail with the material as well.

So far, things still don’t look good and footwear still accounts for the lion’s share of leather production. The leverage is of course much greater and this then also applies to the suppliers of raw materials who are particularly dependent on this sector. The raw material market is dominated by large producers on the American continent. It is no secret that they have been suffering from weak demand for a long time and have already built up large unsold stocks. This is especially true for wet blue hides and these suffer considerably from the price differences in tanning costs.

For a long time, attempts were made to support prices and markets by limiting offers, but this was certainly not successful because demand never recovered to the necessary levels. This led to the now well-known and considerable price differences between the large buyers, who were repeatedly lured with significant price reductions in order to sell quantities. Smaller customers, on the other hand, had to pay higher prices to serve as a reference for market reports. But since this did not lead to any relaxation on the supply side, two completely separate markets have now developed, with the smaller, more expensive one drying up in the meantime and the cheaper one not taking up the entire quantities either. This did not change at the Shanghai fair and without ever receiving reliable confirmation from, rumours of sales of wet blue US steers were again doing the rounds, far, far below the reference prices for the raw material.

That leaves the automotive leather market in China, which has also been reported positively time and again. Crisis or not, the entire market is large and combustion engines are already in the minority on the streets of Shanghai. The air quality is better and the noise level on the streets is much lower. But where is the leather? There are an infinite number of brands besides the top dogs Tesla (no leather) and BYD and some try to upgrade their vehicles with leather features. But what is presented as premium nappa often has very little leather; at best there may be a residue of organic substance somewhere under a plasticised surface. It is possible that a premium market will emerge in the years ahead, but one Chinese premium vehicle will displace another as long as the market does not grow very strongly again.

In summary, then, for this first indicator after the summer: The end of the leather world has not yet come, but fundamental problems have not been eliminated either. Tanning costs have diverged even further due to the changed world situation and this continues to put massive pressure on tanners, especially in Europe, because consumer restraint leads to more price competition. Total demand continues to be insufficient.

The demand for splits has increased and splits were a topic of conversation at the fair. Here, too, price always plays the decisive role. Cheap suede and other items that allow for low prices are sought after, but it remains a price problem.

For sheepskins, the fair was almost meaningless, except for fine wool origins. Apart from discussions and isolated considerations to concentrate on the extraction of wool in view of the cheap prices, it did not lead to any movements.

Lineapelle will be next (Milan, September 19-21) and, as we know, these are two completely different worlds that can hardly be connected. Lineapelle will tell us more about fashion and the state of the European leather industry. 

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