Macroeconomics

In the world of politics, smaller events rather than the major confrontations have demanded attention in the last two weeks.

Troops from Azerbaijan invaded Nagorno-Karabakh and a large wave of ethnic Armenian people who lived there fled as refugees.

There was also a major deployment of Serbian troops on the border with Kosovo. The Balkans remain a powder keg of confrontation between ethnic groups. The dispute in the South China Sea also remains in focus. China’s attempts to expand its territorial claims by occupying rocks and smaller islands repeatedly cause tensions with the other nations in the region.

This time, the Philippines removed floating barriers that China had laid in order to secure fishing rights and possible claims to mineral resources.

This shows how sensitive and unstable the current situation remains in many regions of the world.

While climate protection remains a dominant issue in many countries, governments seem gradually to be returning to a more pragmatic approach. A move away from fossil fuels within a very short time is not realistic given the world’s increasing energy needs, whatever the consequences in the long term. This was recently made clear again by the UK government’s approval of a new oil field on the grounds of the short medium-term need for fossil fuels.

Economically, the focus remains on the development of the global economy. With regard to interest rates and the assessment of inflation, the majority of analysts believe that an interest rate peak is imminent in the US and in Europe. Inflation figures from the US and the EU continue to point downwards and this is fuelling hopes for a pause in interest rate rises.

As often noted here, there is still a big difference between the statistical calculation of inflation and the perception and impact on household budgets. While falling transport costs, high inventories with intense price competition and moderately falling food prices are currently causing the official inflation data to fall, the problem of energy prices remains on the other side. Oil prices in combination with the firm US dollar will again weigh heavily on the disposable incomes of consumers in countries that are dependent on energy imports in the coming months.

Whether this will then also be reflected in rising prices in 2024 and thus also cause the official inflation data to rise again will only become apparent with the usual delay. However, it is very premature to assume that inflation rates will continue to fall, if only because of the geopolitical tensions and the development of energy prices.

The stock markets continued to be in correction mode. Individual sectors, such as energy, were able to escape the downward trend, but overall share prices are moving southwards.

As already mentioned, oil prices are stubbornly holding above $90, despite the fact that the flow of Russian oil has by no means dried up, despite the sanctions.

The gold price also remains rather weak and the ounce is back below $1,900. The US dollar continues to strengthen against most of the world’s currencies, which is probably due to weakness in the other currencies rather than the strength of the US currency. Higher interest rates play a role here and even the prospects of a renewed freeze of the state budget could not slow down the fortification.

Leather Pipeline

Even though the timing for this issue is a bit unfortunate, we still want to say a few words about the Lineapelle fair in Milan. Of course, attendance was much improved this September. On the one hand, the proportion of Chinese visitors and exhibitors was again significantly increased, as they were again able to travel more or less freely, but of course it was much more that Tanning Tech, Mipel and Micam as well as the Milan Fashion Week all coincided or overlapped with Lineapelle and this attracted many more people than perhaps Lineapelle alone could have achieved.

Under these circumstances, attendance was not as spectacular as many observers reported. But it remains the case that it is the quality rather than the quantity of visitors that counts. In any case, we could not find any exhibitors who complained that customers had not turned up.

Reports should never obscure the fact that Lineapelle is a special fair in that it focuses almost entirely on high-quality and special articles from Europe. Of course, there are also buyers and interested parties from overseas. It is in Milan that the trends are made, it is in Milan that they are copied, and it is also in Milan that the directions to be expected of leather for the coming fashion seasons are set. However, Milan is not where those who represent mass leather production and the products made from it put their collections on show. Apart from impressions and conversations, the fair does not play a weighty role for this sector. So, of course, the impression depends very much on which sector you belong to.

In any case, one thing could be taken away from Milan. There is still a large clientele worldwide who are not influenced by the mainstream media mood against leather. They like leather, they have decided not to condemn leather and that is why they come with an open mind to be inspired by new developments, new articles and new ideas from leather manufacturers. This worked brilliantly again in September 2023.

However, the same is not true of leather production for the mass market. If you needed new proof of this, just take a look at the new autumn-winter collection for women by fashion group H&M. Black plastic as a substitute for leather dominates; there is plastic everywhere in the collection. Coats, dresses, skirts, over-the-knee boots and almost everything in shiny black.

What does that tell us? That leather, with its dash of eroticism, is still attractive to the consumer. But unfortunately no one tells consumers that, the look and appeal of these products, they do not have the performance qualities of leather and are doing harm to the environment.

If you look at the price tags and compare them with those of the few articles that are still offered in leather, then the story is already over. If you look at the price of a square-foot of leather in the quality in which it is processed for this sector and compare that with the corresponding price for plastic, then there is a considerable difference. The price differences for the finished products exaggerate this further. This pricing policy may even be a way of moving even more consumers away from leather. The longer mainstream consumers become accustomed to plastic and are alienated from the qualities of leather, the less they will miss the original and the less likely it becomes that they will demand leather again.

What other information and events have moved us in the last two weeks? First of all, there is an extremely big difference between developments in Europe and in most other parts of the world. This applies to many areas, but has its common origin in the extremely divergent production costs and the general relationship to leather as a whole. Added to this, of course, is consumer confidence and the general situation in the retail sector. Even if the influences vary from sector to sector, they all ultimately lead to the same result. In Europe, both the production and the marketing of leather are extremely problematic at the moment.

However, it is true in all other sectors such as footwear, furniture, clothing and to a large extent now also in the automotive industry. In Europe, pressure is increasing from all sides and conditions are deteriorating almost daily. Even an icon, the production of automotive leather is now struggling. More and more automotive leather manufacturers are reducing their production because of a decrease in the offtake by the automotive industry. Let us not forget that automotive leather was the price leader in Europe for decades. Today, more and more articles can be substituted from other raw materials and with other production costs, and thus the production of leather is slowly but steadily concentrating more and more on special niche products here too. The industrial-scale production of the large manufacturers is not designed for this. Both automobile production and the leathers used are shifting, whether one likes it or not. This is a trend that forced the structures of shoes and furniture to undergo major changes decades ago.

If the production of automotive leathers in Europe were to shrink because of all this, and if this were to be accompanied by a reduction in the use of furniture leather, then the structure of the chain in the leather industry would be faced with significant changes. A reduction of capacities could hardly be avoided. Until today, tanners, especially in Italy, have always found answers, either in their articles, their production processes or simply in the ups and downs of the economy. This is also possible now, but somehow one gets the impression more and more that the ground for the production location, consumer sentiment, governments, public opinion, energy costs, the availability of labour, and the regional prospects for chemical suppliers are simply no longer positive for industrial leather production in Europe and that this will result in major changes. What is so regrettable and negative on the one hand, naturally leads to corresponding positive developments on the other.

Even if the general mood for the winter half-year was rather sceptical, there is no denying that there has been a clear improvement in selected raw material demand from overseas markets (mainly China) in recent weeks. The question now is no longer whether this improvement would come, but really only whether it is driven by leather demand or on an exclusively speculative basis. Speculative because commodity prices have been attractive again in recent months. Especially in the case of China, we know that as long as the industry is still there, one is not only forced to make purchasing decisions in good time owing to the long delivery times, but one can also hardly resist cheap prices most of the time.

As much as the raw material suppliers are happy about the improved prices, the question is of course whether this is the beginning of a new, longer cycle or whether it is just a short flash in the pan. It is hardly possible to give a really well-founded answer to this now. It is indeed difficult to believe that in the current economic situation in China and the situation on the export markets there can be a real sustainable improvement in leather demand. After the long phase of lock-downs and uncertainty in China, stocks have certainly been reduced in many cases. Speculation and hopes of further support for increasing consumer goods demand by the government may also play a decisive role. There is not much to be said for this, but we are dealing with a huge market here and many things are possible.

Those who are less confident of fundamental improvement tend to assume that at the moment large producers are buying speculatively cheap stocks of semi-finished products that have been building up for months, which they can sell locally in the coming months at a profit as the raw material prices rise. It won’t take too long to know the answer.

The market for lime splits is developing in very different ways. Here, too, the situation in Europe is quite different from that of the rest of the world. Internationally, the demand for wet blue split in certain qualities is good and the reduced leather production of the last few months has also led to a limited supply. Of course, prices are a problem, as the prices for whole hides are still quite low. However, the situation in Europe is much more difficult for the lime sector.

The demand for finished products has decreased significantly, the raw materials for gelatine and collagen have also become much cheaper, the production costs in Europe are relatively high and finished products from countries that have become competitors in the meantime with cheaper raw materials and a massive expansion of capacity are now pushing into the market. High stocks of finished collagen and gelatine products are weighing on the market and the hopelessly overpriced raw material prices of the winter are now a major problem in the valuation of finished products. At the same time, if one looks at the prospects for the leather industry in Europe, the question arises whether the capacities are still correctly dimensioned. If they are filled, there will probably not be enough raw material, and if they are not filled, production costs will rise dramatically and are already far too high by international standards. In this sector, too, it will probably not be ‘business as usual’, but who and when will make which decision is still in the stars.

In our view, there are no major changes in sheepskins. Specialities easily find their market. In our estimation, stocks have now been reduced to such an extent that there is no longer much pressure. Only what can be marketed is collected and prepared for the leather industry. The rest goes for disposal. Some are buying material now in the hope of an improvement and for a return of demand; they are doing so because goatskins and sheepskins will probably not remain as cheap as they are now for much longer. Thus, the price range between special skins and standard types continues to be wider than at almost any time in history.

The next two weeks will be dominated by a holiday week in Asia. It may be an opportunity to take a breath and analyse. If the Asians remain optimistic and take advantage of their significantly lower production costs, believe in a positive trend in their economies, then nothing really stands in the way of a continuation of improved demand and higher activity. Europe has to solve its own problems, and this cannot really be generalised either.

The incredibly large spread between the production costs for leather in Europe, the US and their competitors in Mexico, Thailand, Vietnam, China and recently also South America must inevitably lead to a change in production chains and production locations. The leather industry is used to fundamental changes occurring regularly every 10 or 15 years. The covid-19 crisis and the war in Ukraine may have delayed the next big change, but it now looks like there is a need for quick action and decisions.

We know the industry well and many of the people involved. We are therefore sure that many companies are now adapting to this situation and making the necessary preparations. The leather industry is known to be a well-trained industry that is excellent at dealing with change and development. Its resilience has always been impressive and we are sure that this time, too, there will be surprising and successful solutions, even if this does not apply to everyone. 

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