Macroeconomics

There is no question over which event of the last few weeks has overshadowed all others. The Hamas attack of October 7 has once again ushered in a new phase of unrest and insecurity in the Middle East and beyond. It is hard to see what benefit the people of Gaza are likely to derive from the decisions of the terrorist organisation. The fact that they are also dragging many innocent people and their families in Israel to their doom is really just as diabolical as what has been happening in Ukraine for almost two years now.

The cynical phrase that war is just the continuation of politics by other means unfortunately finds application here once again. It can only be hoped that some way will be found to quickly bring the killing both in Ukraine and now in the Middle East to some kind of end. War only brings death, hardship and misery and has never benefited the intentions of an aggressor in the long run. The question of ‘cui bono?’ remains also in the new war. 

The West must consider how it will deal with the destructive opponents of the Western way of life in the future. As bad as it is, the idea that one can convince autocrats with talks and negotiations can hardly be sustained. The question then remains, what can be the appropriate and sensible strategy under these conditions? No one in the West wants war, death and destruction, but this may not prevent others from doing it anyway. First of all, there is the question of how to deal with Iran and many other states in the Middle East, which also play an important role. With regard to Israel, the question now is how Hamas’ grip on power can be broken. This will only really be possible if different players act together and leave no one feeling the desire for further escalation.

Even though the situation in the Middle East is taking over all other news at the moment, the other conflicts are all still present, as well as disasters such as the recent earthquakes in Afghanistan.

The US at the moment is still very much preoccupied with internal difficulties and the decision on the new leadership in the House of Representatives is playing a weighty role. The next elections are important for the unity of the US, as is the continued strengthening of the extreme right in Europe. Division is the last thing Western society needs at the moment.

The financial markets have reacted relatively calmly to the developments. The stock markets did not collapse and the oil prices did not go out of control. The financial markets have not yet decided how to assess the impact on commodity prices, the stock markets and the foreign exchange market. On the one hand, crises are a burden, on the other hand, it is hoped that interest rates will fall and at the same time commodity prices will also fall again. On the surface, inflation data fell again in September, but there are still questions over how inflation is to be measured and what influence it actually has on the budgets of ordinary citizens. 

While the rest of the world fears inflation, China fears deflation. The Chinese consumer is simply not returning to the levels of private consumption of before the pandemic and the economy in China is dragging along. Of course, the real estate crisis, which is still smouldering, plays a weighty role and naturally weighs on all related sectors. This means not only raw materials for the construction industry, but of course the business of furnishings of all kinds, plus the general uncertainty that results for many citizens as a consequence.

The oil price rose and fell and ended last week tending to rise again. The US dollar reacted to inflation expectations and rose again somewhat, but remains in a very narrow trading range. The gold price is also moving relatively little and gold was again not used as a decisive crisis protection. The price of the troy ounce remains in the trading range between $1,800 and $1,900.

Leather Pipeline

At times like these, it is difficult to concern oneself with the rather insignificant events along the leather pipeline. In the face of atrocities and loss of life, priorities once again shift very quickly. One cannot say that one has already become accustomed or could become accustomed to the war in Ukraine, but it is true for many that the daily routine of reports from the war zone are taken for granted more quickly after nearly two years.

A new outbreak of war, however, quickly and immediately sharpens all the senses again and one becomes aware that peace and freedom are so incredibly important and can by no means be taken for granted.
Nevertheless, life in other places and in other areas does not stop at all, of course, and this includes the sector we are particularly concerned about. 

In general, the Birkenstock IPO in New York was of course something that particularly interested our sector. It is not that often that companies that have to do with leather in a broader or narrower sense come into the focus of the financial investors of the stock markets. Generally speaking, the IPO was classified as a flop after the first few days of trading. Of course, a decline in the first trading days is certainly not the only synonym for a successful IPO. A loss in value of almost 20% is already very painful for the first investors and no small matter. However, the question arises as to whether this means that the company was valued in line with the market at all. Even if these are more questions of financial science, it can be said that neither the company nor the sector has won any great favour. Even though it was a long time ago, Birkenstock’s IPO is very reminiscent of leather furniture company Natuzzi’s IPO many years ago. Important companies and names within the community, but still only a small fish in the international pond.

Maybe things would have been different if Birkenstock had become a real part of the LVMH Group, which has long held a stake in the German footwear company through its investment arm; the smell of not really being part of the family was perhaps too strong.

The third quarter figures for LVMH also fell far short of expectations. The leathergoods sector still managed to grow by 9%, but that was far less than might have been expected. Moreover, one may have to assume that this increase is due to price increases and less to an increase in volumes. Some analysts are already assuming an end to the boom in luxury goods sales, but it is certainly still too early for this assessment. However, the fourth quarter with the Christmas business will provide a very clear indication of where the luxury goods sector is heading. In the leather sector, too, it is already clear that activity and volumes are no longer as convincing as they were a year ago.

Otherwise, in the weeks following the Lineapelle fair in Milan, there has been relatively little heard from the leather industry. In the absence of hard facts, rumours and gossip took over the daily communication. Again and again one could hear speculation about possible mergers among automotive leather suppliers. If financial investors are the owners, this is certainly a conceivable option, especially considering that it is currently difficult to imagine that other buyers could be found. It is also difficult to imagine particularly good prospects for successful, organic and profitable growth. However, if there are indeed negotiations in this direction, one can be assured that they will not be spread in public or in the marketplace. From Asia, too, one hears again and again that there are interested parties who want to sell their leather factories and at the same time of possible interested buyers who want to relocate and are therefore considering buying existing factories in addition to the possibility of building new ones.

Otherwise, there has been a considerable difference between the market situations in Europe and in the rest of the world in recent weeks. Most suppliers report, as can be seen from the available statistics, that the greatest market activity is currently in China. It is reported again and again that there is relatively good local demand for furniture leather and also automotive leather, which to be honest is rather hard to believe. In particular, the considerable difficulties in the real estate sector do not suggest that demand for leather furniture in China could be sustainably increasing at the moment. In the automotive sector, the situation is a bit more difficult to assess, simply because the market there is very confusing owing to the large number of new suppliers for electric vehicles. 

Nevertheless, most raw material suppliers report continued good demand from China, as long as the goods are within a certain price range. It seems that Chinese buyers who are currently in the market have set themselves clear price ceilings that they will not exceed. So as long as you stay within that range, regular sales are possible, but if you want to get out of the price range and go up, then you can’t do any business. The big question now is how sustainable these levels of business and demand really are. One should not forget that, firstly, it has been obvious for months that the tanners in northern China, in particular, have been replenishing their stocks with hides that were very attractive in price. All the purchases of the last few weeks could then be enough to supply the industry with raw material until the next big interruption, the Chinese New Year holiday that will take place around February 10. By mid-December at the latest, shipping possibilities from the US and Europe will already decline significantly. This is especially true if the thesis is correct that the demand for leather has by no means increased significantly and that the purchases we have seen in the last weeks and months are only a build-up of stocks at favourable costs.

There are quite a few sources in China that point out that the purchases are not really being made by full-scale leather factories, but often by companies that produce semi-finished goods and then hope to sell them in the local market. Evidence of assured demand is very limited at the moment.

In Europe, the situation is much worse. As has been reported several times, there is little demand for leather, there is low consumption and the high stocks in the retail trade continue to be a burden. Miscalculations on the part of leather manufacturers in Europe are also a very big problem. Almost everywhere you can see underutilised production capacities at the moment and that is never good news from a cost point of view. Lack of orders and a very uncertain outlook for demand in the coming months are not very helpful either. We are usually now at the beginning of the strong production phase. There are actually only eight real production weeks left before we start talking about the Christmas break again. The question this raises is how long factories can sustain such a situation without raising the real question of long-term survival.

If the conflict in the Middle East causes a sustained rise in energy prices and interest rates remain high in the coming months, the overall environment for the leather industry in Europe will deteriorate rather than improve. Many other factors, such as the situation regarding the availability of labour, bureaucracy and new European Union legislation requirements are also causing great concern for the leather industry, but also for many other sectors at the moment.

What else was there to report from the leather sector? New Balance has also decided not to use kangaroo leather in the future. Here, too, one gets the impression that it is less a question of the material than a statement. Objectively, one can only shake one’s head at this decision. They are mercilessly prepared to make a product considerably worse in terms of quality. It is not even necessary to think about the use of leather as such. A sports shoe made of kangaroo leather cannot be beaten by any alternative product in terms of functionality, quality and durability.

Another big problem is the market for collagen and gelatine and their production from splits and trimmings, especially in Europe. The market is oversupplied and the production of standard articles in Europe is simply too expensive. At the moment, stocks are piling up and there are discussions everywhere on how to cope with this situation in the short and medium term. This is a situation that is also putting a strain on leather production, because it is already no longer certain that all splits and trimmings can be sold to the regular buyers. This means that the focus is once again more on wet blue splits.

This is a difficult situation, because here too the situation is very different. While certain items are not available in sufficient quantity at the moment, on the other hand, there is no really satisfactory marketing opportunity for others either. However, here it is more a price than a real sales problem. Again, the two things are inextricably linked and one problem cannot be resolved without solving the other.

No change at all in lambskins and sheepskins. Niche and specialised products continue to find sufficient interest in outlets, while standard items go for disposal and destruction.

As was the case after the outbreak of the war of aggression on Ukraine, it will take a few weeks for the market as a whole to digest the new situation. At this point in time, the effects cannot really be assessed and for the time being one must continue to deal with the problems that already exist. According to our analysis, the situation remains very fragile and we still cannot see any sustainable improvement in leather demand. Isolated areas are of course excluded, but overall this is not enough to achieve a general improvement.

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