Macroeconomics

The last two weeks have been dominated by elections in many parts of the world. The most important election for our area was of course the European elections. Even if the results were not uniform across the entire region, there was a clear shift to the right. Conservatives, and in many cases also national and EU-critical forces, gained votes and were able to increase their representation in the European Parliament. The first question is the election of new EU leadership.

In any case, it can be taken for granted that the balance of power in the European Parliament has changed significantly and that European policy will therefore no longer be able to continue as it has in recent years. It is still unclear whether it will be possible to reach agreement on key points in the coming years and how Europe will be perceived on the international stage on major geopolitical issues.

Interest rates in the US were not lowered and great attention was paid to the statements on further interest rate developments in the US. It is now thought that there will be at most one more interest rate cut in 2024 and this was not received with too much enthusiasm by the financial markets. The US economy is still in a solid expansion phase and the labour market is also developing very stably, which may have an inflationary effect if wage costs rise at the same time.

The EU announced high import duties for electronic vehicles from China. As much as this may seem understandable in view of the potential threat to the European automotive industry and the high subsidies for Chinese industry, it will intensify trade disputes worldwide. It is highly likely that the Chinese will react to this and this may affect vehicle exports from Europe to China.

Trade barriers and protectionism have never been good news for the global economy, but the battle for geopolitical supremacy, the conflict between the different political and economic systems, seems unlikely to prevent further escalation.

Once the spiral of measures has started, it usually takes a long time for parties in the dispute to come to their senses again and this usually only happens after major damage has been done.

Growing nationalism and an increasing number of autocratic, nationalist political leaders will hardly make things any easier in the future. It would be desirable for all sides to focus a little more on economic expertise, because in the long term, political systems can only survive if people can expect greater prosperity and better living conditions from them.

The financial markets reacted to the interest rate developments and many stock exchanges recorded losses. This mainly affected the stock markets in Europe, which, in addition to the interest rate trend, were reacting to the EU election.

Uncertainty and an unstable political outlook, combined with the war, are not a good basis for corporate development in Europe at present.

The oil price recovered slightly, although the International Energy Agency is forecasting a more relaxed supply situation and a more than sufficient supply of crude oil in the near future. The markets have not yet reflected this and the oil price has stabilised again at over $80 per barrel.

The gold price has taken another break for the time being and may also have reacted to the interest rate trend. The gold price is currently still slightly above $2,300 per ounce. With regard to the gold market, it is perhaps also worth mentioning that the Chinese have recently massively expanded their gold reserves, probably in order to reduce their dependence on the US dollar in the long term. The steady purchase of physical gold from China has certainly also contributed to the steady rise in the price in recent months.

Leather Pipeline

Normally, our publication is more concerned with the question of whether, and how much, the economic facts relating to leather are changing. For a variety of reasons, little has changed in the direct economic parameters in the recent past. In this issue, then, we will focus a little more on the political and general external influences on the supply chain in the leather industry.

Firstly, the European elections are of course just one event, which will have an impact on European politics and, by extension, on economic development in Europe. After this election, however, major changes may be possible that could have a direct impact on agriculture and then, in the longer term, on the supply chain in the leather industry.

The European Green Deal is at the centre of this. This is the great hobby-horse of the current EU Commission president, Ursula von der Leyen. We do not want to start a discussion about appropriate and necessary climate policy at this point. It is probably safe to say that humans have had a considerable influence on climate change. If we can agree with this statement, then it is also clear that only humans can either reverse this influence. It is highly likely that technical innovation will play the decisive role here. However, the issue of climate policy has been extremely idealised and therefore often misused as a political instrument. In times of peace and economic prosperity, large sections of the population in Europe were enthused about this issue. We all remember the icon Greta Thunberg and the Fridays for Future demonstrations. War, concerns about high levels of immigration and a short but violent wave of inflation have completely changed people’s focus and their priorities are different today.

Political opportunism and EU bureaucracy have only led to a multitude of undesirable developments. Farmers’ protests in a number of countries, which may have been forgotten now, were a reaction to this. Increasing global protectionism is also a potential threat to food supplies in Europe, as is the military threat.

For the leather industry, the influences of the Green Deal were clear. In order to get closer to the aims of the Green Deal many decisions have been taken that may have pleased the former social mainstream, but whose effects have never really been understood by the political bureaucracy.

The most recent example in our sector was the European Deforestation Regulation (EUDR). Politically, it was certainly an easy sell, as its objective was the prevention of excessive deforestation. However, no thought had been given to the interests of all, nationally and internationally, nor to whether such regulations are actually expedient and, above all, how and whether they can be implemented at all. If no thought had been given to this, it becomes even worse when you think about the consequences for European industry. There are still six months to go before EUDR begins to come into effect.

You do not have to be a particularly close follower of the situation to know that it is questionable how feasible this will be and how much effect on deforestation it can have. But that is often not the point at all in the EU. Even if the public is unaware of this and many other detailed problems, it is becoming more and more apparent every day in many areas that less and less attention is being paid to the really crucial and important political and economic issues. This is something that can in no way be in the interests of Europe.

With regard to the deforestation regulation and, to be honest, some other issues, the election result can at least give us some hope that some decisions affecting the leather sector will not be carried out, or will at least delayed, whether on the basis of better judgement or out of political calculation. Unfortunately, EU laws that have come into force can only be discussed and possibly legally changed again after two years. Once political life in Brussels has been reorganised after this election, we will see whether and what, if anything, can be achieved for our sector. In any case, time is running out at the moment.

It is also true that a large part of the sector has also joined the mainstream trend. A bit like the politicians. Certifications for which they themselves are responsible are being accepted uncritically and are forcing additional and unnecessary bureaucracy on many companies. However, it is up to the companies and their organisations themselves to change this.

The majority of the European leather industry is currently no longer competitive and this increases the risk that further capacities in Europe will have to be closed on a daily basis. Those who still manage to achieve a high added value may survive. Anyone who thinks ill of this may come to the conclusion that this is precisely the objective in Brussels, that this is the way to get rid of unpopular industries. What may work in EU countries that have little or no leather industry will trigger a completely different reaction in other countries where it still plays a significant role. Take Italy and France, for example, where the leather industry is not only a major employer, but also an integral part of the value chains that are of huge importance to the national economies, thanks to the luxury goods industry. 

It is easy to see from the current development in leather production that this trend is already very important and that companies have been adapting to it for some time. From an entrepreneurial point of view, not only the current situation but also the prospects play a decisive role. Who would want to rely on production chains in Europe under the conditions described above?

While the problems dominate in Europe and the capacity utilisation of most leather production plants is far below an acceptable level, production in Asia is slowly but steadily recovering. The eyes of those who continue to rely on leather material products have long since turned away from Europe, and this is by no means only due to the eternally and repeatedly lamented cost situation. Some time ago, the leather industry also looked very intensively and for good reasons at the possibilities of re-shoring. Today, there is hardly any talk of this anywhere. In any case, we will be closely following further development, because we believe that the decisions of the EU bureaucracy, which could turn out differently or bring about changes in the current new political situation, will have a decisive influence on the future of the leather industry in Europe.

As for the last two weeks, we have seen the trend that we have been following for a long time confirmed. In Asia, and not just in China, we think we can recognise that the negative trend has now reversed. This is not only due to the much-cited renaissance of retro sneakers, but also to the overall impression that the basic social mood has passed through the deepest valley. The situation is similar in the US, although the presidential election in November means that people are still taking a wait-and-see approach. The pure economic development, the rise in real incomes, the situation on the labour market and the general outlook, geopolitical and territorial security provide a completely different psychological basis from what we feel in Europe.

The significantly lower prices for raw hides also play an important role. In the long-term price cycles, we are now not far away from historical lows. What can no longer be obtained for the leather industry or utilised in an economically viable way is either channelled into other applications or is simply destroyed. This is also slowly but steadily reducing supply pressure. The Asian leather industry, which has significantly longer delivery times for incoming raw materials, must now decide in the next few weeks whether it wants to lay the foundations for a reasonably priced supply of raw materials for the next six months. If you look at market developments over the last few weeks, there are many indications that this is the case.

China in particular has always been extremely price-conscious and gambling is an integral part of its purchasing policy. Having been successful in the last three months with an aggressive strategy focusing on lower purchase prices, this trend now seems to be slowly coming to an end. Prices are no longer falling significantly, meat producers and suppliers no longer seem to see the need for further price reductions and now there are really only two alternatives. Either there will be the classic follower effect, which will then flush a larger wave of demand into the market, which does not even have to be covered by leather orders, or buyers will simply ignore higher price demands and withdraw from the market for the time being. Suppliers will then quickly have to decided what matters more for them: prices or product flow. By the end of July, we will definitely know the answer.

We have no news or interesting information to contribute to the situation in the split market. The market for collagen and gelatine is controlled by cheap products from South America and Turkey. For standard products, the situation in terms of available raw material, production costs and production conditions is much more favourable than for the other, traditional production locations. There continues to be good interest in cheap suede splits for leather.

Not much has changed for sheepskins either. However, it is also true here that the general weather situation is improving. Raw material prices cannot fall any further either, some major brands have once again focused intensively on leather and here too the picture in the footwear industry is the most positive. Lambskin as a decoration accessory or as a functional lining material is clearly gaining in importance again. Only time will tell whether the positive trend in nappa clothing can continue after the summer holidays.

We expect the situation to continue to clear up slowly over the next few weeks. The next few weeks will determine how the leather industry assesses its opportunities and prospects for the rest of the year. In any case, we expect the mass producers in Asia to remain stable and perhaps even take another turn for the better. In Europe, many other things also play an important role and we refer to the first part of our report. The best that can be said in any case is that the situation has at least stabilised and there are generally positive signs that the outlook for the rest of the year is good.

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