Macroeconomics

In Europe, the EU Commission is endeavouring to fill all positions after the European elections in June in such a way that all parties involved feel that they have been sufficiently recognised. It appears Ursula von der Leyen will again become the EU Commission president for the next parliamentary term. She still has to be elected and it will certainly take some concessions and compromises, but it seems that it will actually be enough.

The future of her special political hobby, the Green Deal, will be very interesting. In addition to the fact that with the significant changes in the world in recent years, climate policy has been pushed out of the top ranks of priorities, those in the EU Parliament are not necessarily in favour of the diverse ideas of the last parliamentary term being implemented so easily. However, it remains to be seen whether it will be enough to correct some of the technical mistakes that have been made in the last few years when the new parliament and the new EU Commission take up their work.

The US presidential elections are getting closer. This was particularly evident from the first TV duel between the two presidential candidates. The results were very disappointing. The prospects regarding the leadership of the largest and strongest western economic power after this duel are rather frightening. Neither of the two candidates, for a variety of reasons, gives you the impression that the fate of the US and the world will be in safe and reliable hands.

The wars are of course still the dominant news of the day.

Trade disputes have intensified between the EU and China. The EU saw it as necessary to impose tariffs on Chinese electric cars to compensate for subsidies from the Chinese government. This was another blow to free global trade and it is always unfortunate that these things only come onto the agenda when it is actually too late. The Chinese policy of subsidising certain core industries that are clearly defined has been known for a long time and the experience with the panels for solar energy could easily have been transferred to vehicles. Negotiations have now been agreed, but it is always more difficult to solve existing problems than to avoid future ones.

The stock markets have been rather directionless in recent weeks. Setbacks and recoveries have alternated. In Europe, the markets have been weaker because the two biggest economies, France and Germany, do not offer a particularly positive outlook at the moment for a variety of reasons. In France in particular, the current debt policy and the upcoming elections are a considerable burden. This not only applies to the economy, but ultimately also poses a risk to the political stability of the European community.

The gold price continued to crumble and there is obviously a lack of further and sustained buying of physical gold, particularly from India and China. Gold as a safe haven and the uncertain development of interest rates are probably an additional burden. The oil price has hardly changed in the last two weeks and has only risen marginally. The price per barrel remains in the $80s.

The US dollar has barely moved in the last two weeks, hovering in a very narrow range around the $1.07 mark against the euro.

Market Intelligence

We are now fast approaching the holiday season in Europe and North America. The months of July and August are traditionally characterised by less activity, by maintenance in companies and by looking back on the first half of the year and planning for the rest of the year or the coming seasons.

This year, at least up to now, the impression has been that the slow period has started much earlier than usual.

If there is no particularly big news and activities to report along the production chain, then we can and should use the time to look beyond the horizon and see which sectors and areas of consumer goods could possibly provide general and interesting information. Drawing conclusions from this information is always very challenging, as the time factor along the chain also plays a decisive role.

While the commodities market is looking for fast movements and trends, the effects of information from the next stages in the chain are always much more delayed and therefore anyone who then ventures into interpretation must think very carefully which events can have an effect on their own situation, and when.

Let us start with Nike’s business results for its most recent quarter and at the same time on the outlook for the rest of the financial year. As is so often the case, everyone was able to pick out what they liked most from the figures. While profits rose massively on the one hand, sales fell far beyond analysts’ expectations. Rising profits with falling sales is actually a very pleasing situation from a business point of view and generally speaks in favour of a company’s cost management.

However, investors in consumer goods often think somewhat differently and are still extremely growth-orientated. Falling sales and a very subdued business outlook therefore led to a massive slump in the share price.

As is so often the case, these results can be interpreted in two ways, even if investors obviously only recognise one.

Firstly, it is of course worrying when such a strong brand in the consumer goods sector suffers such a massive slump. It is even more worrying when the management appears not to have any reason to forecast a turnaround. This either means that they no longer have the right products for their customers or that they are expecting a completely negative trend in consumer spending.

From this perspective, the investor reaction is more than understandable. What is certainly also having an extremely negative impact on investor confidence is the fact that 2024 is a year with many major sporting events, from which sporting goods manufacturers normally benefit significantly. Added to this is the fact that Nike’s gross margin is falling, despite the significant increase in profits, while new and aggressive competitors are able to report significantly higher gross margins. It is certainly much easier for a small newcomer to deliver a better performance than it is for the big cats to maintain momentum. 

Everything will now depend on whether Nike manages to regain market leadership with its articles and products, because otherwise the pressure on prices and margins will continue to increase with the quantities that have to be sold every season; this usually ends in discount battles. 

In this context, a number of conversations in recent weeks have also been very interesting. There are experienced experts in the fashion scene who believe it is quite likely that there will be a significant turnaround in the fashion market over the next few years. After almost a decade of casual wear and downgrading, which was further intensified by the pandemic and the increased focus on home life, the possibility that the elegant, eye-catching outdoor appearance could once again become a stronger factor in fashion is being discussed. This could also mean a return to better, more elegant leather shoes.

It is perhaps particularly important that the footwear industry and brands don’t miss out on this opportunity and develop the courage to embrace and accompany this potential trend with interesting designs and suggestions.

It will probably be the smaller and more progressive designers and brands to start with, as the big mass-market brands usually only follow in the second round. If there is not yet a return to more elegant outfits, then the existing trend towards ‘western style’ (thanks to Beyoncé) should at least be utilised. Levi’s is already looking forward to it and denim is everywhere. You can already see on the streets of the big cities that many young women have dug out the boots of the seventies and eighties either from their mothers’ or from their own shoe cupboards. Alongside retro trainers, this is certainly another huge opportunity for the shoe industry to make greater use of leather again.

If you take a close look at the latest fashion shows in the major centres, you will once again notice a greater proportion of leather clothing and, at the same time, a trend in outerwear that could support shoes other than sneakers with synthetic uppers. From September onwards, we will probably be able to gain a little more insight into the tastes of the fashion-conscious for the coming seasons. Whatever happens, whatever the big brands and retailers offer consumers, fundamentally the chances of a return of leather are probably greater than they have ever been in the last ten years.

Still in fashion and consumer goods, the most recent study on luxury leathergoods by management consultants Bain also stood out. Without going into too much detail, it was possible to extract from it that the supply chain for many brands is currently extremely disrupted. Sales plans and expectations have not been met for a large number of brands, which has led to not inconsiderable stocks of finished products. Discount battles are not an option, nor is selling off last season’s goods in this sector. However, the sales of finished goods are not the only problem; there are also considerable backlogs of materials, as production has had to be cut back.

This explains why not everywhere, but in many places, especially in Tuscany, there is a great calm. At the moment, efforts are being made to develop new collections and designs in order to empty the material stocks first. This naturally leads to a reduction in production of new material.

The slowdown in consumer spending in China is also playing a particularly important role in this. Sales figures could only be maintained by increasing prices significantly.

The conclusion from the Bain study was, of course, a hopeful outlook. Luxury brands are extremely resilient and less susceptible to fluctuations in the consumer goods markets. As far as the thesis goes, this has of course been true in recent decades. However, luxury goods are almost always something you buy because you want them and very rarely because you really need them. In an era of globalisation, easy travel, rising prosperity and a community of the rich with little political pressure, the conditions for a steady and secure increase in spending on consumer goods were of course perfect.

The truly rich are a species that is very difficult to predict. But they do not bring the real big volume in this sector. It is more the rising middle class that wants to document its social advancement with expensive luxury goods. With the current political leadership in China, at least in this extremely important market, it would not be surprising if it took a while for people there to return to their old spending behaviour. In addition to the issue of the general economic situation, the display of wealth is no longer as popular in China at the moment. There is also a slowly increasing and returning national consciousness, which could possibly support Chinese brands rather than global luxury brands in the coming years. Just look at the trends in the automotive and electronics sectors.

Finally, if we take a look at the current production situation along the leather chain, it remains the case that the major producers in Asia, which operate in the footwear and automotive sectors in particular, clearly have well-filled order books as well as positive expectations for the rest of the year. To understand this, you only need to look at hide exports. In addition, the raw material has become so cheap again in many cases that many slaughterhouses are ultimately forced to sell their by-product. This makes it possible to offer leather at prices that make it economically interesting as a material, in addition to all its other advantages. It may still not be enough to absorb the entire global amount of raw material, but it is certainly better than letting it rot.

Last but not least, the news that Denmark wants to levy a climate tax on cattle is remarkable for the leather industry. Given the number of cattle in Denmark, this hardly plays any role for the global climate, but for interested political circles in other countries, this will of course have a signalling effect. After New Zealand failed with a similar idea and the farmers’ protests in the EU also pushed back climate protection measures in agriculture, this measure will certainly revitalise the discussions again. The problem remains the tendency to view everything in black or white terms. The question remains as to whether a better balance in animal husbandry or a change in feeding system might not be significantly better options.

There were few changes in the split market. The need to produce determines the situation. This applies to split for the leather industry as well as for use in other sectors such as collagen and gelatine. Virtually nobody is able to offer a clear calculation by use. 

The market for sheepskins is also sluggish. The long, positive cycle for decorative skins is certainly coming to an end. In the garment leather sector, the big breakthrough by mass producers and retailers is still missing. Autumn will certainly be decisive here. Where lambskins and sheepskins can fulfil their function as a lining material, and this is particularly true of the shoe sector at the moment, there are orders, but of course they cannot absorb the entire volume of raw materials.

As we mentioned at the beginning, we are now entering the holiday season in our part of the world, which is why there will probably be relatively little change over the next few weeks. There will always be interested parties who will try to change the mood in one direction or another, but fundamentally, geopolitical developments are the only thing that can have a significant impact on the supply chain in the leather industry.

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