Macroeconomics

The meeting between the presidents of North Korea and Russia was an important development. These political leaders appear to have little interest in political or diplomatic solutions and compromises, and to rely entirely on confrontation. This is an extremely difficult situation for the world, because how do you deal with people you can’t talk to? The news that North Korea now also has a submarine that can use nuclear weapons does not increase the feeling of security either.

the European Union is desperately trying to resist imports of cheap electric cars from China. One can assume that the Chinese manufacturers owe a certain part of their price advantage to subsidies, but for all the desire to defend European industry, the advantages of Chinese manufacturers lie much deeper. They lie partly in problems in Europe that are absolutely self-inflicted. At the same time, tariffs and trade restrictions would probably end in a trade war and massive protectionism on the Chinese side as well. That would be another fatal signal, especially for export-dependent industries in Europe.

Free trade, with all its problems and difficulties, has been the guarantor of an upswing in prosperity in almost all parts of the world in recent decades. It is not perfect, and anyone who delves deeply will quickly encounter to a multitude of major problems with free trade. Only one thing can be said with certainty in this context. There are no individual national decisions that do not trigger consequences. Free-economy thinking follows the idea that subsidies are never successful in the long run; better ideas, strategies and products will always win. Of course, the conditions for this must always be right, and that is what politics is supposed to ensure. Trade barriers and restrictions always indicate a failure at a political level, in the past or in the present.

The retail sales figures for August from China were encouraging and industrial production also rose more than expected, although the statistical data from China must be viewed with a certain degree of caution at the moment.

In the wake of the multi-layered interests of some oil-producing countries, we see oil prices continuing to rise. In many ways, of course, this is a growing problem again for the global economy, because rising energy prices, which are already high, are a major challenge for many nations. While on the one hand they directly and immediately limit the purchasing power of consumers before winter, they are of course also a driving factor for inflation overall. It remains completely irrelevant how one calculates the inflation rate. One thing is for sure: rising interest rates have no dampening effect on energy prices.

The stock markets did what is not often expected of them. With the raised interest rates in the Eurozone, brilliant price fireworks started on the same day. So-called experts may explain it over and over again, but the fact remains that rising interest rates are actually poison for share prices. Exactly the opposite happened this time, and if one looks at the general political and economic environment, then certainly some caution is already called for in many sectors. The hint that the cycle of interest rate hikes is now expected to come to an end does seem a little thin on the ground given the real consequences.
We have already discussed oil prices. The price of gold and other precious metals has also remained quite unmoved by the interest rate decisions.

The US dollar was also able to benefit significantly from the decision to raise interest rates in Europe, contrary to expectations, and already a few minutes after the publication of the ECB decision, the US dollar gained almost a cent and was trading well below the $1.07 level again. Of course, this is good news for European exporters, but it is equally bad news for European consumers who need to fuel their cars and heat their homes.

Leather Pipeline

Following the All China Leather Exhibition in Shanghai at the end of August, which gave companies in the leather value chain the chance to assess the situation in the consumer market in China, the same companies are now gathering in Milan for Lineapelle. The focus of the fair in Milan is different; it looks at exclusive products, fashion and further developments in the luxury goods sector.

For many who shied away from the long journey to Asia, Lineapelle also offers an opportunity to draw up an overview of the wider leather sector and to meet a large number of market participants.

Visitors from many different sectors are likely to have made their way to Milan; they do not want to miss the opportunity to collect impressions and information. The general situation remains unclear going into the most intensive phase of the year for production and consumption of leather. Seldom have opinions about the future been so different as they are this year.

Many companies, especially in the retail trade, are suffering from extremely high inventories and at the same time rather weak demand. We hear this almost daily in Europe from furniture and shoe retailers. The sale of stocks from the last two seasons was very unsatisfactory in many countries around the world and this, in combination with very optimistic orders in 2021, is still a big burden today.

In many cases, there is simply not enough space and, of course, not enough money to offer customers attractive new articles for sale. This is an extremely difficult situation to resolve, as the only lever to get rid of old stocks is price. However, if people are encouraged to buy everyday products with big discounts, the usual problem of sales arise. Nobody has been able to deliver a really satisfactory solution so far. In many cases, the principle of hope still prevails.

One cannot help thinking that this is also a reason for many to travel to Milan. Somehow, people still seem to have the hope that someone can offer a solution to the problem or, if that is not possible, that they will at least share the suffering. 

Most people have probably returned home from Shanghai with somewhat ambivalent feelings. As can be seen in all reports and publications by now, there were certain sectors that left positive impressions and there were also many who had to go home disappointed. For those who returned with a positive impression, the question then arose as to whether this was a snapshot in time or whether it would turn out to be a sustainable momentum in the post-processing. With almost two weeks to go, we stick to our rather ambivalent analysis.

Although some market participants were still able to report follow-through activity in the week after Shanghai, the intensity declined consistently as time went on. It is now indisputable that price was the decisive driving force for the commodities and materials business. It also remains unclear whether the procurement of materials is for existing or expected orders for finished products. If one takes the suppliers of chemicals as a yardstick, then their stocks still seem to be quite high; the leather industry is more concerned with reducing than building up chemicals. The picture for raw material suppliers is also quite uniform. Low-priced raw material up to a certain price level has found buyers and this applies to suppliers and origins all over the globe. The easiest way to prove this is to look at the statistics from Brazil, which showed a significant improvement in export volumes for the month of August. In the US and Europe, business focused on female hides, which continued to be the cheapest option per square-foot. Demand in other sectors could only be generated at significant discounts, if at all.

In the public eye, the brands dealing with leather gave a very mixed picture. If you followed the media with full attention and interest, you could read a lot of things directly or indirectly connected with leather in the last few weeks. Let us start with the positive: Birkenstock is planning to go public in the US and the valuations imagined are really impressive. While the sale of the founding family’s majority stake not so long ago had a value of just over €4 billion, they are now imagining a valuation of $8 billion or even $10 billion when they go public. For investors, this would be a fantastic return if realised, but on the other hand, it would be further proof that a company that owes its name and reputation in large part to the use of high quality leather can still generate a lot of respect and financial recognition internationally. All this is in an environment that is really becoming more and more unfriendly towards leather.

This brings us to the more negative reports. At the top of the list is Apple’s decision to stop offer leather cases and wristbands. This would not necessarily be a problem if the company were not saying publicly that its decision is related to environmental concerns. The reference to using recycled materials as a substitute for buyers of its watches and iPhones and a achieving a better CO2 footprint is questionable. These recurring claims cannot be substantiated by facts.

The reasons, as in the automobile industry, lie rather in the alternative materials being cheaper and having simpler production processes. The perfidious thing is that brands are using their choice of what is cheap and easy as a marketing tool. Even that wouldn’t be too annoying, because a lot of nonsense is spread in marketing anyway in order to make products seem attractive to the customer. The problem that arises from such decisions and the way they are publicised is the impression they create in the minds of consumers.

Apple has always been more than just a brand for many. Apple disciples have always regarded themselves as ‘something special’. Hardly any other brand has been able to imbue this spirit so successfully in its customers and derive incredible economic success from it. Every respect is due for this. It becomes difficult when, as a side effect, the decision against leather suggests that the material now belongs outside the realm of ‘something special’. Apple had a completely different opinion of leather not so long ago.

It would at least have been fair if the company had decided to deal with the issue a little more honestly and explain it differently to its customers. This leaves a really bad taste in the mouth, at least for those who still think that leather is good. There are quite a few who link this decision, which is completely unusual and new for Apple, to the fact that they want to encourage customers to replace their Apple products more quickly.

This brings us to the automotive industry. The International Motor Show was held in Munich recently and anyone who was interested in the future of powertrains for cars, apart from the dominant question, had to become concerned when considering the future of leather in interiors. As often reported in our publication, leather continues to be a material with which people like to present their vehicles as particularly luxurious. However, if you look a little deeper, you will see that leather as a material certainly no longer has a lobby in mass production. The focus of the presentation is more and more on the alternatives and less and less on the supporting presentation of leather. Leather as a material simply no longer finds the same levels of support as it did until recently and, at best, is now considered almost as a ‘necessary evil’ in the luxury segment by European manufacturers.

The news that leather is gaining popularity in China in interior design, and is documented in higher demand, should also be viewed in a differentiated way. What you see of leather in Chinese vehicles will do the material and the product very little good in the long run. You decorate your description of the vehicle with the name, but what you see in the vehicles as seat covers has even less to do with leather than what we have been complaining about here in terms of quality for a long time.

In the split market, a growing problem is developing from the gelatine and collagen industry. In Europe at least, the pressure on prices is increasing and what one might have expected for some time is now happening. More and more goods from the direct production of hides are being pushed into the markets and this is leaving deep scars and rapidly growing stocks in this sector as well. Additional competition from alternative production is doing the rest. The situation for wet blue splits is more positive. The high price sensitivity is helping the product and good-quality low-price goods are in better demand. However, those who dream of significantly rising prices will probably be disappointed again.

We still do not see any change for sheepskins. Specialities and niches dominate but these are completely separate from the normal market. For mass production, many of our sources report a large number of enquiries, but in the end the impression was that buyers from the Middle East in particular had genuinely expected to get the goods for free. Of course, this is not surprising when producers can read everywhere that the skins are often disposed of and destroyed. However, they forget that the transportation and preparation of these skins for the production of leather does incur some cost, and that nobody will carry out that preparation if they are not at least reimbursed.

The next few weeks will clearly be dominated by the impression people are left with after Lineapelle in Milan. Add to that the ongoing news from the consumer goods sector and retail. Perhaps we will be lucky and the fireworks that investors set off after the interest rate decision will also spread to our sector. As much as we would like to spread optimism, it is hard for us to speak of a reversal of the current trend, or even to suggest a slight improvement. At least in Europe. We have been pushed into defensive mode by many major consumer goods brands in the battle over the use of materials, as the example of Apple, described above, shows. In addition, there are problems in the retail sector and continuing high inventories. It takes time for these things to be resolved. How much time one has and what decisions will be made on materials in the meantime is not in our hands and one cannot really take a reliable view on this. In any case, the basic parameters and the current factual situation remain very difficult. 

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