Macroeconomics

Over the past two weeks, politics rather than the financial markets has once again taken centre stage.

With the war between Russia and the Ukraine currently in a stalemate and the prospect of a trench war over the winter, events in the Middle East remain dominant in the public eye. Of course, the suffering of people affected by the war is always terrible, but the potential impact of the conflict in the Middle East on the world as a whole is, possibly, more significant. On the one hand, this is because the world is polarising and large groups are positioned on one side or the other.

While the policies of Western governments are clearly in favour of Israel, public pro-Israeli demonstrations are far less common than pro-Palestinian ones. Many people in the Middle East, in parts of Africa and Asia, but also to a significant extent in North America and Europe sympathise with Palestinian people. The possible consequences of this for the global economy can be quickly recognised by the attacks on ships in the Red Sea. The Red Sea is the passageway to the Suez Canal and therefore one of the most important shipping lanes in the world.

This means that we already have two serious and increasing threats to global logistics. On the one hand, the South China Sea and, on the other, possibly now the route to the Suez Canal. It can be seen that the interested major powers, the US and China, regardless of where they stand politically, will probably work together to protect at least the transport routes around the Arabian Peninsula.

We consider two other events to be just as important for our area. Firstly, of course, the COP28 climate conference in Dubai, the significance of which may well be debatable, but which is a very important meeting place that goes beyond pure climate issues. The decisions made there and their potential impact on our sector will probably only become clear over the course of the next week. One thing remains certain: the hopes of environmental activists, NGOs and their political allies of changing the world in the short term will certainly remain unfulfilled. This is of course particularly because, on the one hand, the world is still far from being able or willing to do without fossil fuels and, on the other hand, tangible economic interests also play an important role.

The demonisation of companies is only a small part of this, even if they are a particularly good target. However, many people overlook political interests, especially where there is no need to worry about public opinion.

What is missing in this situation are experienced and highly qualified diplomats and negotiators, who are able to understand the other party’s thinking and achieve the best for the moment under the given circumstances. Polarisation, as we can see in many other areas, does not help in climate issues either. As we know, the climate does not stop at borders.

The significance of a visit by Russia’s president, Vladimir Putin, to the United Arab Emirates and to Saudi Arabia to coincide with COP28 should not be underestimated. It demonstrates that Russia cannot be isolated in the way the West imagines with sanctions. Principles are certainly laudable and should not be abandoned, but we should not fool ourselves as to what effect they actually have. We can only hope that diplomacy will focus on what is feasible and not just on what is desirable.

The financial markets do not appear to be particularly affected by the political world. The stock markets either reached new record highs or remained close to them. The whole thing was essentially driven by the expectation of falling interest rates. Financial markets are sometimes funny, but in the end they are also infallible. On the one hand, recessions or prolonged periods of stagnation are expected in many economies, but at the moment investors do not seem to be very concerned or even worried about falling corporate profits, not to mention possible geopolitical risks. Perhaps money is much more realistic than politics and the assumption is that one would not dare risk the prosperity of the masses for further conflict. 

Despite all the efforts of the OPEC+ group of oil-producing countries, the oil price is falling owing to declining Chinese demand on the one hand and relatively high inventories worldwide on the other. Nevertheless, the price of oil remains a sensitive animal and anything can happen under these conditions. In any case, oil as such is by no means in short supply.

The gold price briefly rose well above the magical $2,000 mark, but fell again significantly at the end of last week, presumably because of the good performances of the stock markets and the expectation of falling interest rates.
The US dollar continues to move in a very narrow band and occasionally jumps back and forth, triggered by news that could influence possible interest rate decisions by the European Central Bank and the Federal Reserve. 

Leather Pipeline

So much is happening in the political arena at the moment that could have a major impact on the leather pipeline. It's not just a question of whether the economy is going up or down, whether people are spending more or less money, but rather the fact that military conflicts have a variety of effects. On the one hand, they have a negative impact on mood, they can impair or even stop supply chains, but they also mean a lot for the financial budgets in many countries. The western world has been groaning under a huge debt burden for a long time and the extent of this was never clearly recognised as long as interest rates were close to zero. No warning voice was heard that rising interest rates would also put considerable strain on national budgets. As a consequence, this always means that either social spending is reduced or taxes are increased. Neither of which is good news for consumption and, therefore, also for the leather supply chain.

This is particularly noticeable in Europe at the moment. People are still deeply affected by the horror of inflation and the sharp rise in prices last year. Inflation has already fallen considerably. People are shopping more consciously, avoiding non-essentials and paying very close attention to what they are told by the media about the future outlook. This is the worst possible environment for leather products, especially those that are manufactured in Europe at a higher cost and are, possibly, of better quality. It can never be said often enough that leather is not an essential material and that we have not yet succeeded in making consumers realise that a durable product can also be a cheaper product in the long run. This is currently causing the European industry considerable difficulties and a trend reversal must be achieved as quickly as possible.

This would be difficult enough if the production conditions were favourable or even normal. But in addition to economic problems, such as high energy prices, lack of labour and generally rising costs, there is also the problem of European legislation to solve.

Even though the issue has been known for some time, the new EU Regulation 1115/2023 has suddenly come to the attention of the leather supply chain. The regulation is once again proof of how much the EU bureaucracy has created its own world. Good intentions do not always lead to good decisions and sensible solutions. Without going into detail at this point (we recommend reading the regulation), it is clear to see what successful lobbying can achieve. It cannot have been expertise and facts. What we have already experienced with bisphenols and other chemical substances in recent years is now also happening in the area of raw materials.

It is nothing new for NGOs deliberately to pick out the leather sector in order to hinder meat production and livestock farming.

Anyone who takes a closer look at EU 1115/2023 can hardly imagine how it will actually be implemented and lived. That is why many players in the sector are still relatively relaxed, because they are firmly convinced that the regulation as it is currently presented will never be implemented and applied. There is a lot to be said for this, because what is being demanded is far removed from any feasible reality, and not just because there are still no implementation guidelines at all.

With what we have now in Europe at least, the proposals would make it almost impossible to place bovine hides on the market. 

If you know the EU and have had experience with it over the last few decades, then you know that there is no way these proposals will simply be swept off the table. As we see it, another completely useless bureaucratic monster will be created, which will place an additional considerable burden on the production of leather in Europe in particular. More costs, more administration, more complications.

The sales market for leather is uncertain, and many in politics and mainstream media are doing almost everything they can to hinder the sector. Costs in Europe are not competitive and so the industry is not really an attractive option for investors, finance institutions or entrepreneurial activities. Our industry in Europe is still very fragmented and is largely driven by owner-managed companies. 

The large investments by private equity companies or the investments by the large luxury goods groups do nothing to change this. But perhaps we can benefit from the fact that their strength can probably achieve much more politically than the rest of the players in the leather industry.

It should not be forgotten at this point that the agricultural and meat sectors in particular are also challenged in this issue. If a solution is not found quickly, a valuable and important by-product of meat production will finally become a waste problem here. What was intended to prevent deforestation in Amazon regions will hit hard in Europe, where deforestation is not a great concern. According to the current regulations, it is the slaughterhouse that places the product on the market and is therefore also responsible for compiling the required documentation. To do this, however, these companies will need input from farmers. If what some of our sources tell us is true, then the scope of the problem has not yet reached these players.

So, if we consider all those affected, we can see that there are political and economic forces at work. Farmers’ organisations, the meat industry, the luxury goods groups and the leather industry and other intermediary traders and service providers are all involved. All together these make up quite a large group in terms of importance and economic consequences. So if it is possible to coordinate and combine forces, then the hope that this problem can still be solved is realistic. However, owing to the timeframe, which depending on the size of the company only extends into the summer of 2025, we should not be lulled into a false sense of security.

In any case, one thing is already clear. Europe is facing many problems at the moment, and not just in this matter. We should stop paralysing ourselves. 

There is still not too much else to report from the leather pipeline. In the western world, people are preparing for Christmas and the New Year. It seems that more than ever, many people are eagerly awaiting a time of peace and reflection. In fact, there is hardly anyone in Europe who has not found this year to be one of the most challenging in a long time, despite the covid-19 times that preceded it. Many in the leather pipeline are tired.

It is difficult to assess whether and how this might also have an effect in other regions of the world. Our impression is that although it is not easy anywhere with leather as a material, at least in Asia there is more optimism and confidence in the future. As we know, confidence does not solve problems, but it does help.

In the split sector, we are only seeing a continuation of the trend of recent weeks and months. Here too, Europe as a region is one of the biggest problems for the utilisation of raw materials for collagen and gelatine production. With the exception of high-quality niche products, Europe is not competitive in terms of cost and is increasingly being attacked by rising production in other regions via prices. Here too, sooner or later the question will arise as to whether production capacities in Europe can be maintained at this level. This will have a lot to do with how growth in the finished products market develops and what decisions are made regarding production locations.

At least the sales opportunities for wet blue split are developing favourably. There is growing interest in the search for inexpensive raw materials and a certain return of suede leather. The new year will show whether this can still be realised in terms of price.

We can safely leave out the sheepskin sector as there are no new developments. The winter season is over in the clothing sector, while the general economic situation and the weaker property market are weighing on interior design, leaving only the niche in the high-quality nappa and leathergoods sector. Skins suitable for this will continue to find their market.

For the next few weeks, there is actually no need to worry too much about further market developments. In Europe, people are slowly starting to wind down their production, in Asia they are producing their orders, but owing to the long supply chains, they are already more concerned with planning the scope and length of the break for the Lunar New Year celebrations in February.

There is every indication that we will probably all be burdened with a lot of administrative tasks over the next few weeks, but market activity has already ended for the year, much earlier than usual.

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