Macroeconomics

The world continues to be kept in suspense by war. Nothing is more important than senseless destruction and the senseless death of people in military conflicts, which have never been the solution to any problem.

In the case of the war in the Middle East, apart from all the other arguments, what remains the worst aspect is that ordinary civilians have to suffer under the decisions of those who are pulling the strings, some of whom are in safety, far away from the line of fire. At the same time, everyone has to pay for the fact that no successful solution to the problem has been achieved in the past; at some point the pressure becomes too intense and it escapes into violence.

In the case of Ukraine, the reasons and players are different, but the suffering of the civilian population and the young people who are sent to war is the same.

Every day, the question arises more and more whether these conflicts could end up being the trigger for a spread of military conflict. There is also the question of whether the positioning and actions of pro-Palestinian supporters outside the region could possibly lead to clashes in other countries as well. More and more people are taking a public stand.

In the US, there is a new speaker for the House of Representatives and there is now hope that the political paralysis will come to an end and that important political decisions can be made swiftly again.

In economic news, the European Central Bank’s interest rate decision dominated last week, with the bank deciding, as expected, to leave interest rates in the euro area unchanged. In the US, a lot of attention was paid to interest rates, which have continued to rise. The development of the gross national product for the third quarter was extremely positive with an increase of 4.9%, which again supported the fear that the Federal Reserve would keep interest rates high for a longer period of time.

At the moment, opinions differ on the development of inflation, whereby the share of those who still rule out a return to the desired corridor of a maximum of 2% for a longer period of time is still very large. The main drivers now are, of course, the sharp rise in wage costs and, owing to the Middle East dispute, the risk of rising energy prices. On the other hand, increased price pressure for consumer goods can already be seen on many fronts. Even if consumer sentiment is still positive in the US, this is no longer the case in other parts of the world. As a result, producer prices are falling massively, which is also reflected in consumer goods prices with a lag of six to nine months. Whether the reduction in product prices or the price-driving force of wage increases will have a stronger impact on inflation remains to be seen.

In China, the government is trying to support economic development with further stimuli. The Chinese central bank recently received a presidential visit, after which it said in an official statement that the Chinese central bank wants to support the economy more vigorously. Lower interest rates are to support national capital markets and domestic demand.

Despite the tensions in the Middle East, oil prices ended their upward spiral and temporarily fell back below the $90 per barrel mark. The supply and demand ratio does not necessarily speak for higher oil prices at the moment, although the heating season has begun in the northern hemisphere. However, the conflict in the Middle East is extremely dominant and the market reacts sensitively to any new development in the region. This makes it almost impossible to make a serious forecast for energy prices this winter. It should be clear to everyone that some of the influential players in this conflict have a decidedly strong interest in rising oil prices this winter. Rising energy prices and difficulties in supply could again trigger major problems in many Western countries, possibly resulting in economic and political destabilisation.

Stock markets are still in reverse. Many indices have suffered significant losses in the last six months, reflecting rising interest rates and geopolitical crises. Of course, the military conflicts are still playing a bigger role. The price of gold has been able to profit significantly from the conflicts and disputes. The price of a troy ounce of gold broke the magic $2000 mark again, thus proving gold, once more, to be a safe haven in crises.

The US dollar moved in close correlation with interest rate expectations. It could not really sustainably undershoot the $1.05 mark against the euro, and towards the end of the period it weakened again slightly because people obviously do not expect further interest rate hikes by the Federal Reserve in the short term.

Leather Pipeline

There are no really big events happening in the leather pipeline at the moment. Our attention in the last two weeks has been on the third-quarter results of the big luxury goods groups. In addition, there were the influences and figures of the automobile groups, from which one must then try to get a picture of the current situation in leather demand.

The manufacturers of luxury goods, which of course only represent a small part and a small segment of the total leather demand, are showing the first signs of a slowdown. Many of the big groups and brands had to present results for the third quarter that did not meet expectations. Even if here and there the financial markets interpreted the figures much more negatively than they really were, it remains to be said that the phase of never-ending, strong growth is definitely on hold for the majority. If price increases are taken into account, it can be assumed that in many cases the decline in sales volumes has been even more pronounced than the figures reflect.

Some commentators even went so far in their analyses as to proclaim the end of the luxury boom. With the strong resilience that this sector has shown time and again through all crises, this may certainly be somewhat premature. However, one should certainly pay attention to certain developments in the next month. First, some media in Asia also reported some signs of fatigue in spending by the wealthy there. They noted, for example, very sluggish art auctions, with collectors no longer as willing to spend money as in recent years.

More interesting and perhaps much more significant for the luxury goods market was the news that sales of second-hand luxury goods in Hong Kong and also in China have clearly lost momentum. In our opinion, this is a really important indicator of the situation in this sector. If the market for resellers of luxury goods cools down considerably, then we would certainly assume that this will also have an impact on the new products. The next three or four months will definitely be of great importance for the assessment of these markets. First of all, we still have the Christmas period ahead of us and then, of course, Chinese New Year (February 10), another very important time for gifts and purchases.

In this context, a closer look at the production and demand for materials, including leather, will then also be necessary. As we all know, the big luxury goods manufacturers have invested massively in the production of leather in recent years by buying tanneries and expanding manufacturing. In addition, there has been a significant expansion of production capacity in the manufacture of bags and leathergoods. This massive expansion and the financial power behind it has created a considerable pull on the raw material markets and inflated demand and prices.

This produced an overall coherent picture until now. Almost all luxury goods brands were able to show growing sales from quarter to quarter and in this respect it seemed only logical and reasonable to continue investing in growth and production.

The only thing an outsider could never judge was whether the expansion of production capacity was in sync with demand. Given the size of the companies and their marketing competence, everyone assumed that there could be no doubt about their decisions. On a rational and less emotional view, however, one has to admit that it is hardly possible to keep production and demand in sync all the time and it really only excludes those very few brands whose business concept has always been to serve demand with a delay first. Many others followed and switched more to the concept of ‘we make, because we grow’.

The sceptics, of whom there are plenty, have long pointed out that they could recognise larger stocks along the calfskin production chain. The big question that immediately follows is, of course, what kind of stocks might we be dealing with. As we know, the qualitative requirements in this area are considerable and the extreme added value allows for selective use. This means that, on the one hand, there are large stocks of semi-finished and finished goods, but these are not suitable for production. On the other hand, demand is sufficient to use the desired qualities.

The next few months will certainly provide more information and, from our point of view, it certainly looks at the moment as if there are some top brands whose business is still untouched by any problems, but at the same time there are also a lot of brands where the planning of sales and actual sales do not match production and expectations. Should the luxury boom weaken, then it is quite possible that business concepts of the integrated value chain can no longer be sustained in the long term.

In the last two weeks, the business results of Mercedes-Benz were also interesting. Here, of course, the leather pipeline’s interest is in the vehicles that have a strong impact on leather demand. The production and sales figures for the S-Class were particularly striking. With only around 11,000 units, the number of these cars sold fell well short of expectations, even if this was played down by the management and covered up with very special expectations for the coming year.

A decline in sales of luxury class cars would also be evidence that the rich are no longer quite so willing to spend their money. In addition, the status symbol car is becoming less important, especially in European countries. Our attention will be focused on the results and sales figures of other manufacturers of luxury cars in the coming weeks and months.

On the commodity markets, the larger purchases from China remain the supporting force. From Europe, we hear of declining production volumes in the tanneries, which is rather unusual, especially at this time of year. What remains surprising is the news that the main interest from buyers in China is said to be in furniture leather manufacturers, which would be more than astonishing in view of the problems in the real estate sector in the Asian country.

Here, too, it will have to be observed whether the purchases are actually covered by leather orders or are of a speculative nature. We do not believe that there is actually good demand from the furniture sector, but rather demand from the smaller and medium-sized car manufacturers for electric vehicles, who are trying to enhance their brands with leather upholstery.

There was no big change in the split market. In Europe, the lime split and the other raw materials for the collagen and gelatine industry remain a very difficult sector. Weak production in the leather industry eases the supply side somewhat, but the problem is not completely resolved. In China, prices for lime splits are fluctuating at the moment, but are able to maintain some stability. Demand for wet blue splits has shown no major fluctuations.

For sheepskins, business has rather clouded over again. We hear of some factories temporarily interrupting their production because leather orders have been cancelled and, therefore, production did not seem to make much sense for the next weeks and months. In Turkey, inflation is a burden, decorative skins are suffering from the weak real estate market and in the garment sector leather is still unable to grow its market share, even though it is cheaper than ever.

The weeks until the end of November will certainly give clear signals for further developments in the markets. If production does not recover quickly and sustainably, almost the entire winter season will have been lost. Optimism can only be developed at the moment with a view to demand in China and at the same time one can only hope that the holiday season in the US confirms good economic development there and a positive consumer mood. For Europe, we still have considerable concerns. Consumer sentiment is bad, costs are high and that is not a good combination for a fast and sustainable recovery along the leather pipeline.

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