Macroeconomics

The big headlines have not changed much in the last two weeks. How could they? There is hardly anything more important than peace and the suffering caused by war. Unfortunately, peace is not in sight in the centres of conflict around the world at the moment. On the contrary, it seems that the warring parties are more willing to continue to the next stages of escalation. Any form of escalation is not good news.

The financial markets paid particular attention to the latest figures on the development of inflation in Europe and the US. On both sides of the Atlantic, inflation rates did not fall further to the expected extent, and even increased slightly. Although this maintains optimism and expectations regarding possible interest-rate cuts in the future, the timing and extent may not be as rapid or as great as many had hoped. 

In addition to interest rates, the next decisions from the OPEC group of oil-producing countries are awaited with great interest. Despite all the risks and crises, the oil price has not risen, but rather has fallen significantly over the past months. For some OPEC countries, the price is clearly too low and they would probably be in favour of further production cuts. Others, however, who are directly dependent on a steady flow of income, unsurprisingly take a very different view. This is why there have already been the first withdrawals from OPEC, and non-OPEC members are not honouring the relevant agreements anyway.

With a steady flow of oil from Russia, which many countries that are not participating in the sanctions are very happy to receive, there is no shortage of supply at the moment, contrary to all forecasts, which is why prices are not where many expected them to be. The further development of prices will certainly now depend on the discipline of the conveyor belts.

If the forthcoming OPEC conference is not a success, another significant fall in prices would come as no surprise. Otherwise, the price will continue to be a play-thing of crises and daily news.

The gold price was unable to continue its high. An ounce of gold is currently hovering around the $2,300 level.

The US dollar was also rather directionless. Interest rate expectations weakened it somewhat, but it did not leave the relatively narrow range of between $1.06 and $1.09 to the euro either. At the end of last week, we stood at just above $1.08 to the euro.

Leather Pipeline

Climate activists are obviously not as idealised as we thought. In purely political terms, we can see that candidates who enjoyed the limelight when climate was still in vogue are now turning their attention to other political issues. With the wars that are going on at the moment, the climate issue continues to lose importance and people are now more concerned with security than the question of whether or not to wear leather.

As far as we know, the most active consumer group leading the current hype surrounding retro trainers is female and young. This can be confirmed immediately if you look at people’s feet in the big cities at the moment. In Europe at least, this is exactly the same social group that has been most active in the climate movement and has condemned leather with great fervour. The only conclusion that can be drawn from this is that they either don’t know what materials the product they are wearing is made of, or that fashion is ultimately more important than climate activism.

Of course, it would be even better if they had made these choices for after taking a rational and fact-based decision. It would be better if these consumers had come to the correct conclusions about leather: that it is a natural by-product, is not based on plastic and fossil fuels, has better wearing properties, lasts longer, products and is, therefore, a sensible material choice. Whatever the reason, it doesn’t harm the leather pipeline and in the best of all worlds, perhaps those who have never worn a leather shoe before in their lives will realise that there are very good reasons to do so.

While little is happening at the moment in terms of operational activity along the leather pipeline and our assessments of market developments in recent months are slowly becoming clear. It is important also to take a look again at the European Commission’s Green Deal in the run-up to the European elections (June 6-9), as this will have a significant impact on the leather industry.

In this context, the European Deforestation Regulation (EUDR) is playing a particularly important role at the moment. This is the sort of bureaucratic madness that can only ever arise when bureaucrats and politicians are unable to see the consequences of their actions. They simply do not realise that there is a danger that their good intentions can release a monster of bureaucracy and control that can hardly be tamed. Instead of giving things a certain amount of time and thus enabling them to be implemented in line with reality, proper work is sacrificed for a short-term effect.

In this case, the timetable set by the legislation (for cattle hides and other commodities to be traceable and identifiable as having no link to deforestation, starting from December 2024) cannot be adhered to.

Whether this is a good way to tackle deforestation is not even up for discussion. In Europe, we have neither an immediate need nor the current bureaucratic and technical infrastructure to provide the information that will be required when EUDR comes into force. The completely arbitrary selection of the commodities affected makes the situation even more difficult.

It will not be possible to fulfil the letter of the law and this will always result in a desperate attempt to somehow ‘get it done’. But, as is so often the case in this life, we will then see that ‘well meant does not equal well done’.

It is hard to believe that those responsible in Brussels will actually recognise the real consequences if the problem is not solved relatively quickly. If you look at it realistically, there are actually only two really realistic options at the moment.

The first would be a complete shift in the balance of power after the June elections and thus the possibility of stopping EUDR from coming into effect, or, as a second alternative, the temporary suspension of the implementation of the legislation until conditions are created in Europe that make implementation possible without huge bureaucratic effort. The simplest option would of course be for the EU, with all its already existing regulations and laws in this area, to be categorised entirely as a ‘low risk’ region as far as deforestation is concerned and for existing legal regulations to be declared sufficient and not require any further extensive measures. This would save face, the legislation would not need to be changed and further damage would be averted. 

Time is running out and we will see what is decided by voters and the European Commission in the coming months.
In the last two weeks, there has been little optimism to report on the leather pipeline. But the fashion trend currently favours the use of leather in retro sneakers and these products are selling well. All brands are currently pushing this trend in all directions. Many of the brands have old models that they can use to tap into this trend and there is almost no limit to the variety of colours and different types of leather that they can choose from.

The trend is currently expanding both in terms of the breadth of the range and the depth of the different price levels. From what we have been able to find out, there is no end in sight, at least for the next few seasons. Orders are being placed, further design variants are being developed and, considering that apart from a few old people, hardly anyone already owns this type of shoe, the market potential worldwide is not bad. It is difficult to estimate how much momentum this can and will generate, and it is still true that the quantity of leather used in one pair of shoes is not that great.

The other sectors continue to suffer. All sales figures and expectations in the furniture sector are negative. The automotive industry continues to present a completely diffuse picture. Electromobility is faltering, the use of leather is still heavily burdened by the strategies decided in the past, and consumers in most markets are currently holding back on purchasing new vehicles. It is unclear which path electromobility will go down and how quickly the changes will be implemented.

Here, too, there are timeframes already set in the European Union. The aim is to make all new cars and vans sold in the EU zero-emission by 2035. As with EUDR, these have been set without serious consideration of the extent to which the conditions can be created to implement the new rules. In addition to the availability of charging stations, there are questions over repairs and the costs. A normal family naturally also attaches great importance to how long a vehicle will last and what second-hand value cars will have. The life of a normal family is not the same as that of an EU politician. For the time being at least, we will have to rule out a positive turnaround in leather demand in the furniture and automotive sectors.

Problems have long been evident in the market as a whole. The global production of cattle hides was and is currently not covered by the total demand for leather and this has not changed in the last two weeks. The individual problems resulting from this have been dealt with many times over the past few months and therefore do not need to be discussed again now.

We are now entering the summer and the next opportunity for an improvement will probably be after the summer holidays.
The split market also remains a precise reflection of the overall market situation. On the one hand, splits are benefiting from developments in footwear fashion, but on the other hand there is a lack of additional support in this sector.

We are still waiting for a real breakthrough in the sheepskin and goatskin markets. We urgently need a renaissance in the clothing sector so that a recovery can develop here too. There is abundantly available raw material at the moment, almost for free. It can hardly be cheaper than free, but you still have to be convinced that you will be able to sell the finished leather in the end.

At this time of year, it is actually still relatively pointless to make any particular forecasts for the near future. We are now close to the holiday season in the northern hemisphere and in the western world people are more concerned with holidays than with purchases of consumer goods. In many countries, wage increases and lower inflation have led to significant increases in spending power. At the moment, this is either being spent on holidays or on financial security, which is hardly surprising given the unstable political situation in many regions. If there was a chance of a stable peace, this would certainly trigger a significant increase in consumption. However, the opposite is also possible. A further intensification of military conflicts or an outbreak in other regions would certainly be extremely stressful for the leather pipeline too.

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