Macroeconomics

The two major wars, in the Middle East and Ukraine, remain the dominant themes. These conflicts continue to mean immense suffering and sacrifice for ordinary people in these regions. 

Despite all the anger and suffering, one can only hope that no one should lose sight of the fact that it is absolutely essential to end armed conflict. It would probably be better to increase the pressure on those politically responsible to achieve this aim. However, those politically responsible in the current theatres of war do not give the impression that peace is more important to them than their political intentions.

Beyond that, however, it can be said that diplomacy and talks are at least being cautiously resuming. This applies to meetings between China and the US, but also between China and Australia. In addition to direct bilateral interests, these are always opportunities for the major powers to talk about possible influence and ending the wars.

The election campaign in the US is starting to pick up speed, even if it is still more about candidate selection at the moment. However, the ghost of Donald Trump and the rift in US society continues to hover over everything. In the western world, many fear the return of the former president, as it is clear that this would have considerable consequences for the US’s international position. Many people are of the opinion that these consequences would not be particularly positive for the world.

In the global economy, the focus remains on interest rate developments in addition to the possible consequences of an escalation of the armed conflict. The markets are watching to see if and when the central banks might cut interest rates again. Inflation is falling, even if purely statistically in many cases, but the financial burden on normal households is basically falling again. As a knock-on effect of inflation and a latent labour shortage, workers’ incomes are rising.

Depending on the country and sector, these increases range from 5% to well over 10%. Of course, this has two consequences: on the one hand, it has the effect of fuelling inflation and the so-called second-round effects must be taken into account, but if there is a further reduction in energy and food prices, the net disposable income of normal households would increase considerably next year. This in turn would be extremely good news for consumer spending, which is currently rather weak in many regions.

The financial markets seem to be taking a rather relaxed view of the global situation at the moment, as share prices are holding up relatively well.

The price of gold has not managed to break through the magic barrier of $2,000 per ounce on a sustained basis and has fallen back to levels of around $1,900.

The development of the oil price remains astonishing. Neither the conflict in the Middle East nor OPEC policy have really been able to support the price of oil in the long term. This is certainly because economic development does not yet indicate a major increase in industrial production, because China has built up significant stocks and, because OPEC's production restrictions are often being circumvented. The supply of oil is more than secure at the moment and that it is good news for the coming winter.

The US dollar lost some of its value because the markets see US interest rates falling and are convinced that interest rate cuts may even be on the cards in the first half of 2024. In Europe, the pressure on the European Central Bank is probably even greater, as national budgets are starting to feel the effects of higher interest rates, and the same naturally applies to companies and the property market in particular.

Leather Pipeline

As unusual as it may be at this time of year, there are phases in which not much happens along the leather pipeline. This has been the case for some time now; there have been no significant trends or changes for some time. If you take a closer look, this general paralysis started last year. Therefore, this may be a good moment to look at the situation from the outside and try to see the view that an objective and uninformed observer might have of the leather industry.

What would someone see if they were looking at the leather sector for the first time? First, that there is raw material from which a very valuable and useful material for humans can be produced. At the same time, this material can be replaced by other materials, which in most cases are cheaper and easier to process.

Next, the objective observer would see that leather offers functional advantages in many application areas and should, therefore, be preferred to the alternatives. However, if the same person gave no thought to fashion, luxury or image, it would be clear that leather is also used for some products for no functional reason at all; people simply decorate themselves with it. This may be difficult to understand. Questions may follow about why manufacturers of leather do not try to find more users.

It would also be clear that the available raw material is not being used to its full extent, adding to the overall difficulty in understanding the situation along the leather pipeline.

With a little more understanding, however, it might become clear that decisions on the use and production of materials and goods are usually not only rational ones. The distribution of purchasing power globally is not evenly distributed and in affluent societies, purchasing decisions are no longer based exclusively on need. In affluent societies, the classic ‘homo oeconomicus’ does not exist in its pure form. Otherwise, people would most likely prioritise leather products in their purchasing decisions owing to leather’s functional properties and durability. Of course, it is not only the material that plays a role, but also the workmanship. In general the cost-benefit analysis would tip the balance in favour of leather for many products.

Our observer would also very quickly realise that products that are not bought out of a ‘need’ situation and whose real costs are dependent on material and processing quality often have a difficult time competing. A marketing expert would be able to explain that success, here, is about distracting the customer’s attention from the facts, from what is truly important. This is often easy when there is more money available for consumption than people need to cover pure needs. In the end, this is probably what we mean by prosperity.

For anyone whose living does not depend on the success of their work along the leather pipeline, the situation is relatively unimportant. For those of us who depend on the success of this value chain in one way or another, it isn’t. Although the feat of diverting the customer’s attention was successful, it can also be achieved a second time. Because remember: decisions are not made rationally and, it cannot be said often enough, in the end the customer can only buy what is on offer. At the moment, many buyers are not being offered products made of leather in sufficient quantities because manufacturers have decided in favour of alternative materials for mass production.

Until now, the leather industry has chosen to deal with these problems by trying to face up to supposed social trends, to explain, to apologise or, probably, to yield. The general assumption, and this is particularly the case in Europe, is that the potential customer makes a purchase decision based on whether the material is animal or non-animal. In addition, if it is an animal product, it must also have sophisticated labelling and proof. Even if our position is by no means popular, we vigorously dispute this as being an accurate portrayal of the global demand structure and consumer behaviour.

The whole thing was a game and everyone may judge for themselves how much of it can be transferred to reality. At this point, perhaps a small note for those who are convinced that certifications and an anti-leather campaign are dominant factors at the moment. You may want to take a look at the latest published reports from adidas, in which the chief executive reports that the current demand for the retro models (shoes made from leather) cannot be fully met at the moment. An additional model (Globus00) is now being added. Side note: It would be very pleasing if adidas could perhaps decide to continue the production of kangaroo leather for football boots after all. There is an extremely large fan base of these models who are very disappointed at the moment. 

If you walk the streets of Europe, you will notice that the main buyers of these shoes are women of between 15 and 30 years old. If this impression is accurate, then it could be confirmed that what is fashionable is still much more important than the question of what it is made of. Allegedly, this the same target group that is strongly in favour of a vegan diet and against animal products. 

In this context, the planned collaboration between the Stella McCartney fashion brand and adidas is particularly exciting, because this is where the extreme opposites meet again. However, it must of course always be remembered that she also works for LVMH and that, as we all know, the Paris-based luxury group is no small user of leather. It remains exciting, but it is also true that many things are very different in reality than they are often thought and presented in the marketing departments of large corporations. This is a big conflict anyway, which in our opinion is extremely damaging to the leather industry and where it is unfortunately losing a lot of its energy at the moment.

The market for splits has not shown any particular anomalies in recent weeks. Revenues for the raw materials for gelatine and collagen are continuing to fall slowly, with a stronger impact in Europe. The market for semi-finished goods made from splits has been rippling along, showing similar patterns to the rest of the leather market.

The market for sheepskins is not particularly remarkable at the moment either. There is simply a lack of demand for consumer goods made from this raw material. We are hearing that the market for wool is slowly beginning to recover.

Until now, hardly any revenue could be realised from the wool used in leather production. Should this change for the better, it would at least be possible to include further revenue from the material in the calculation for leather. However, the question remains as to whether the price is actually a decisive parameter for demand.

The world is slowly beginning to prepare for the winter in the northern hemisphere. Christmas is only a few weeks away and then the Chinese New Year will be upon us. While Christmas has a major impact on the just-in-time delivery of raw materials in leather production, the effects of Chinese New Year can already be felt to some extent today, as there is still a short window of time in which goods can still be dispatched on time from many provenances. This will be followed by a two to three-week break, which will then extend right into the factory closures in the western world.

If we were convinced of a strong and active demand for leather, this would be of little significance, as the procurement of raw materials is based more on market expectations and less on delivery times. Conversely, however, this also means that production pauses are often used to excuse or explain a reluctance to buy, which can only really be explained by a lack of orders. With regard to Asia, we will see how the situation is handled in the next few weeks, and in Europe it will also be decided in the next few weeks what the extent of holiday production interruptions will be over the Christmas period. Two full weeks are now being assumed with certainty and an additional week is even being discussed here and there. It is not yet really clear which closures the producers in Asia are planning where similar decisions have to be taken related to the leather demand.

However, the demand for leather must be viewed critically. We are now at the absolute peak phase of production, and the volume is really unsatisfactory at the moment. Everyone is currently looking for indications as to whether there is still a realistic chance of winning additional orders in the coming weeks. The retro trend in sports shoes could continue to be a trigger, as the leverage that mass production can exert would certainly be noticeable in some sectors.

What is particularly important in this context, however, is whether the major brands serving this retro trend are prepared to continue focusing on leather. We all know that it would not be a big problem to make the same shoes from the same plastic that has been used many times in the past and label them ‘vegan’ in the hope of attracting additional consumers and then slowly trying to say goodbye to leather and make entire collections from plastic or substitute materials again. Let us hope that common sense prevails.

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