Macroeconomics

Apart from the headlines that have dominated the news for months, the year has started relatively uneventfully. 

Diplomacy is endeavouring to find viable ceasefires, or at least solutions that better protect the civilian population. To date, however, this has not met with success. Israel’s conflict in Gaza and Lebanon continues unabated. Houthi rebels are continuing their attacks on merchant shipping in the Red Sea, forcing more and more ships to be diverted and take the route around the Cape of Good Hope. It is estimated that goods worth more than $250 billion have had to take the longer route. In addition to the extra costs that will be incurred by carriers, the problem will also extend to the availability of equipment and capacity in ports in the foreseeable future. The medium and long-term consequences are growing worse with each passing day and are fuelling the rebels even more. Hope remains that the international community will provide further support to secure and maintain shipping traffic in the Red Sea.

The war in Ukraine continues unabated and with increasing air strikes. As was to be expected, it is increasingly becoming a war of attrition, with the civilian population in particular taking the brunt. It remains inconceivable how, after the experiences of history, anyone can think that such destruction could lead to any long-term result other than anger and revenge.

The financial markets also began the first weeks of the new year largely directionless. Days with a slightly positive trend were followed by days with a weaker trend so that on balance there has been very little change to the year-end levels. A slight increase in inflation figures has dampened hopes and conviction that interest rates could fall again in the short term; the stock markets have reacted to this.

The wage-price spiral and the Middle East war remain a threat to price stability and if prices do not fall in the coming months the central banks will have little room to cut interest rates. It will then become difficult for national budgets and the economy. Overall, the International Monetary Fund has put its growth forecast for the global economy at 2.4% for 2024. The many crises have not yet had a serious impact on energy prices, so there is no threat of further inflation in this sector at the moment.

Nevertheless, the markets remain very nervous and unstable, as not only are elections due for almost half of the world’s population this year, but uncertainty about future geopolitical developments is also putting additional pressure on market psychology. Every day you get the impression that the world is currently skating on ever thinner ice.

The US dollar also moved very little and remained just below the $1.10 mark against the euro for almost the entire first two weeks of the year.

As already mentioned, the oil price remains under pressure. Any short-term recovery is quickly followed by a reduction, with the price of a barrel of oil remaining well below the $80 mark. However, the uncertainty in the Middle East region always remains a risk for oil prices, meaning that rapid and strong price movements are possible at any time,

Gold is also showing no sustainable trend development. 

Leather Pipeline

The first few weeks of the year have passed without any major events along the leather pipeline. While many factories in Europe remained closed in the first week of January, production in the Far East mostly remained active. This was also reflected in the demand for raw materials in the first few weeks, at least in Europe. As poor as the statistical figures for exports of raw materials from the US were, interest from Asia in European material was constant and active. Although the increased transport costs and high price-sensitivity of customers meant that prices changed little or not at all, the sheer volume and interest in the period leading up to the Chinese New Year has been quite impressive.

Purchases are all for goods that will arrive in China well after the Chinese New Year (February 10) and one must at least assume that up to a certain price level, leather manufacturers in China have a relatively positive underlying sentiment for demand in the second quarter. There are hardly any other reasons for such constant demand.

If the lion’s share of demand is for cowhides and rather low-priced raw material, one must assume that a significant proportion must ultimately be planned for furniture leather production. This is honestly quite difficult to understand considering the real estate market, taking into account the situation in the property market in China and the shrinking incomes of the middle class. On the export side for leather and leathergoods, major impulses cannot be seen, certainly not from Europe.

If you look at the world from Europe, the view tends to be characterised by scepticism and perhaps even a certain pessimism. This may well be justified, but perhaps the general mood in other parts of the world is somewhat more positive. This is the only way to explain the fact that demand for raw materials from China has been quite stable for months now.

We know that psychology also plays a not insignificant role, which is of course also due to the fact that the delivery times for raw materials are very long. This is why planning has to be much longer-term. While demand in the third quarter of 2023 can still be explained by the high-production phase for winter, current purchases are now for a production period that already extends into the second quarter of 2024. Goods that do not leave Europe until February will not arrive in China until the end of March, or possibly not until April owing to the current delay. This requires a good degree of confidence that the demand for leather and prices will not deteriorate significantly before then.

Nevertheless, it is striking that the hide export statistics from the US have been painting the opposite picture for many weeks now. Although demand for cowhides is much more stable there too and prices are barely moving, the absolute figures are not necessarily a sign of much better leather business in China. We are now approaching the Chinese New Year, and next year is the Year of the Dragon, which is generally synonymous with growth and prosperity. This may also be a factor that should not be underestimated.

In addition, of course, our dialogue partners in China are firmly convinced that the Chinese government will pay particular attention to ensuring that the population does not suffer any loss of prosperity in this coming Year of the Dragon and that the economy as a whole will regain momentum. Consumers in China believe their government and its economic policy can generally be relied upon. The public is not expecting a military conflict with Taiwan in the coming year and people do not feel particularly affected by geopolitical tensions. This would at least explain the much more positive sentiment.

In the US, too, the very stable labour market and the fact that it is an election year mean that the government is assuming that it must do everything it can to preserve the fundamentally positive development of the economy until the elections. As the US economy is supported up to 60% by private consumption, real incomes are rising and it is still assumed, at least to date, that interest rates will not rise any further. This also explains the much more positive basic attitude. However, private household debt has increased significantly again, mortgage interest rates have also risen considerably, and so we must at least keep a very close eye on further developments. The mood in the US can change relatively quickly. However, the psychological factor has much less influence here too, as people in the US do not consider themselves to be directly affected by geopolitical tensions and risks.

This means that Europe remains the critical continent. War is near, the political situation in many countries is unstable and democratic stability in many countries appears to be jeopardised. Societies are ageing and trust in governments is constantly declining. Although real incomes are also rising in Europe owing to the fall in energy costs and simultaneous rise in wages, the positive underlying psychological mood that encourages people to consume is lacking in at least a large part of the continent. The possibly unjustified fear of a loss of prosperity is causing consumers to refrain from spending, and this is certainly affecting the leather products sector disproportionately.

There will be a number of consumer goods trade fairs in Europe over the next few weeks, and a large part of the leather pipeline will then meet again in Milan in February for Lineapelle, where it may be possible to gain a little more clarity about further developments for 2024. Until then, we do not expect that there will be any more information that could provide us with more clarity in the coming weeks, apart from the geopolitical influences that can affect us every day.

As far as splits are concerned, we have not really been able to gather any news worth reporting. 

With regard to sheepskins, we have heard from various producers that there has indeed been business in the Middle East and China at the current historically low price levels. However, the prices quoted for this from Europe in no way cover collection and preservation costs. Since disposal fees are already charged for some of these goods, it may be possible to cover costs here and there, but it is not possible to calculate a truly cost-covering revenue and possibly even a remuneration for the product from prices of between $1 and $2.50 per piece. Nevertheless, you have to start somewhere and it is possible that the constantly improving situation in the wool market is now making itself felt. We will be keeping a close eye on this sector, as it would be remarkable if demand were to recover here too, as this would undoubtedly be a signal that leather is once again attracting a little more attention in the consumer goods markets.

We are managing the existing situation and are now looking ahead to the coming weeks. Decisions on the direction of materials and prices are usually made in many areas by the end of the first quarter. We therefore do not expect any major change within the leather pipeline over the next two weeks. Only in the raw materials markets would price reactions come as no surprise, as the balance between supply and demand remains significantly disrupted. However, as long as this is not influenced by price changes from suppliers, no major changes can be expected in the near future.

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