Macroeconomics

There is no solution in sight yet to the wars in eastern Europe and between Israel and Palestine and, therefore, no change in the significance of the military conflict for the geopolitical balance. If anything, the situation today is probably more unstable and dangerous than it was at the beginning of these conflicts.

The financial markets remain relatively steady. Equity markets are looking more at interest rate developments and corporate results and so far less at political risks. The stock markets have continued to recover and are not far from their record levels. In some cases, these have even been broken in temporarily. As is well known, the future is always traded on the stock market, which is why it is important to think about many sectors. It is at least questionable whether the corporate results that have been achieved in recent quarters can be repeated in the long term and would therefore justify the valuation of the shares.

The latest statistical data from China was rather disappointing with only a slight improvement in consumer spending (+2.3%). The government is still trying to support the property market with supportive measures and has lowered the security deposits for mortgages. The minimum interest rates for mortgages were also abolished. The stock markets in China responded favourably to this. 

The price of gold managed to break through the next magic mark of $2,400 per ounce at the end of last week and at least here we can see a clear indication that gold is still considered the famous safe haven, particularly because physical gold is being bought in many countries.

The oil price is falling and is now in the region of $80 per barrel again, well away from the predicted $100 mark. On the one hand, this is remarkable because the geopolitical risks, particularly in the Middle East region, have by no means diminished, but also because the stock markets are actually signalling a further recovery in the global economy, which should normally lead to rising energy demand and thus higher prices.

The US dollar continued to weaken moderately. This development cannot be clearly explained either, as expectations of rapid and repeated interest rate cuts in the US are continuously diminishing, while pressure on the European Central Bank to cut interest rates in order to ease the burden on national budgets is increasing in Europe. Many countries want to extend the role of the ECB. Normally, there was and is a consensus that the role of national banks should be to protect and safeguard the currency and that this should not involve any economic stimulation activities. The US dollar ended the period at just under $1.09 to the euro.

Leather Pipeline

At the moment, we are in a difficult market phase. It would be too simplistic to point out that many of the developments that are currently determining the market situation along the leather pipeline have already been discussed and in many cases predicted by us. Who likes to be the bearer of bad news? At the moment, we can only reassure readers that there are positive and successful counter-examples too, even if they are just not strong enough at the moment. However, this does not help us much in the big picture.

Regardless of the sectoral view and individual successes, the overall demand for leather remains a major problem worldwide. A realistic look at the developments in the consumer goods markets is probably a much more reliable basis for forecasting long-term developments along the leather pipeline.

The aim of this fortnightly commentary, which we have been publishing for more than 20 years now, is not the quick and fleeting event, but an attempt to take a more fundamental look at the leather pipeline and its trends and try to draw conclusions from them. Gossip and the latest news are important, entertaining and part of the whole, but do not help strategically in the question of long-term investment decisions.

Let us take a moment to observe the current market. The market in northern China has increasingly come to the fore in recent weeks. The Hebei region is still home to a large number of small and medium-sized tanneries, and their combined weight in the market is not insignificant. There is still a lot of trading and speculation here and, in addition to in-house production, a not inconsiderable amount of semi-finished products are also produced here for resale. The focus is on the middle and lower price segment with the aim of turning this material into a competitive product with favourable production costs. The main focus here is on products for the furniture industry, with additional use in leathergoods and clothing. For the market for cowhides today from Europe and the US, as well as other rather low-priced origins, this market is of fundamental importance to the suppliers of raw materials and with the decline in the production of lower-priced furniture leathers in Italy, the importance of this market has increased further since 2021.

The last winter season was another example of this. Constant demand since September 2023 with slowly but steadily rising prices gave the impression of a good and stable finished leather business. As long as the market is developing positively, nobody asks the all-important question of whether this is likely to continue. We tried to understand where the optimism was coming from in the first quarter in China and to find out where all the finished leather was being sold. All of us were aware of the problems in the Chinese property market, all of us were aware of the depressed consumer sentiment in the interior design and furniture sector. So why a demand that could not be explained by the facts in the consumer goods markets? Every warning voice was played down.

In recent weeks, however, this trend has clearly reversed. Everything that was presented as positive two months ago has now turned negative. Many of the old experts are now pointing out that this is a perfectly normal seasonal development and that the same has happened in many previous years. At the end of the first quarter, when the APLF fair in Hong Kong closes its doors, market sentiment has often changed. However, there is a big difference this time. In the past, there was always still brisk business in upholstery leather and in furniture in general. This has not been recognisable in recent months, which is why there has been a recurring feeling that much of this has been a story of hope rather than reality.

Whatever the outcome of the story, and we will probably know more precisely at the end of the summer, the situation at the moment is that large quantities of raw materials, semi-finished products and finished leather have piled up in the region at the end of the busiest production season. At the moment, the usual reaction is occurring among Chinese buyers. The excessively expensive, unsold stocks urgently need to be reduced in price so that manufacturers can enter the next production season with an appropriate valuation of their stocks.

This logic has often been applied and has also often been successful in the past. The season starts in autumn with relatively low raw material prices, low purchase prices and a solid costing basis. Over the winter, prices slowly but steadily increase to support leather sales and leather prices and to reflect rising demand. Companies endeavour to keep stocks as low as possible at the end of the season and if they are able to do this successfully, they slowly withdraw from the market in the summer, let the prices for raw materials fall as far as possible and start the game all over again.

As long as the markets absorbed leather in sufficient quantities, as long as the rhythms on the consumer goods markets were reasonably predictable (which they were until covid-19) and as long as China was able to produce at competitive prices and was also a stable sales market, the theory always worked quite successfully. In 2024, however, you have to look very closely and try to check whether the parameters of the past can also be applied to the present and the future.

According to all the information we have been able to gather and check so far, it is indeed true that the stocks available in Hebei province are currently significantly higher than one would expect for this time of year. Added to this are the number of hides that have been purchased in the past two months and are already on their way to Hebei or have already arrived.

The average price of all these goods is at the upper end of the price-cycle. At the same time, reliable sources agree that the massive competition for the few orders still available in the market is leading to falling leather prices. The whole thing is a toxic mix, of course, and would be a little less problematic if it could be assumed that there would still be enough orders to absorb current stocks. However, this does not appear to be the case, which is why there is currently a flurry of activity as to how to deal with the situation.

Basically, the same thing is happening here that has always happened in the past. Claims, the reasons for which often seem questionable, delayed payments, delayed contract acceptances and attempts by individuals to reduce the market prices for raw materials. These activities have a particularly questionable effect.

If there is any truth in the theory that the general demand for leather is simply not sufficient at the moment, then even more favourable prices at this time of year will not stimulate leather orders. Particularly in a market such as China, it is more likely to lead to a further massive increase in pressure on leather prices and the value of stocks. It would not be a problem if a significant improvement in demand for leather and thus the liquidation of stocks were to be expected in the foreseeable future. Of course it is possible, but there are very few signs of this at the moment. The only thing that could possibly indicate an improvement in the situation in the second half of the year would be the government’s current support for the property market. However, it is at least doubtful whether this will be enough to lead to an improvement in the consumer situation for interior design this year.

Leaving aside for the moment the difficult sectors such as the situation in the European leather industry and the special situation in northern China, there is at least a better situation to report from the large mass manufacturers for the sports shoe industry. If you take a look at the available sales statistics, the relatively stable volumes of hides that are currently being sold and shipped to China and South East Asia every week are at least an indication that this sector is still relatively stable, at least in terms of volume. It is also true that large companies involved in this industrial production are benefiting from the constantly falling raw material prices, so the entire leather industry is not currently suffering.

The split market has no major news to offer. Splits that are also used in the sports shoe sector are still in demand and are enjoying good demand and sales. Everything else is rather sluggish, and the market for collagen and gelatine is not currently showing any great growth or increasing demand.

The news on sheepskins is also still relatively thin on the ground. In Europe, people are waiting for the slaughter of young lambs so that the seasonal price for this special product can be fixed again. The quantities are still too small for any real price negotiations to make sense. The only interesting thing we have been able to note in recent weeks is an increasing demand for European sheepskins with long wool. The reason for this is an improvement in demand for cheaper wool types that can be obtained from these skins. Interest is increasing as wool prices rise. The price trend for wool over the next few months will show whether this will be permanent and sustainable.

We are still not particularly positive about the market as a whole. Of course, it is to be hoped that the difficulties we are reporting are far less dramatic than we realise, but if we can find some justification in our arguments, the consequences have not yet been taken into account. It is unlikely that the difficulties of the past and present will not lead to adjustments in the leather industry.

If there is not enough market for leather, then the entire production capacity cannot be maintained. Even if it hardly plays a role in the perception of the western world, it should not be overlooked that there are already clear signs that some leather producers are looking more and more intensively at the option of withdrawing from the market. If you look closely, you can already find a not insignificant number of companies in various countries that have already quietly ceased production.

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