Macroeconomics

There have been some particularly significant events in politics over the past two weeks. The presidential election in the US in November is something that is not only important nationally, but also for the world. The assassination attempt on one of the candidates, Donald Trump, on July 13, as well as being an act that is fundamentally abhorrent, also shows just how emotive the political situation in the US has become.

In Europe, there is a new government in the United Kingdom, and then everyone followed closely the French parliamentary elections, which ended in a heavy defeat for the current president, Emmanuel Macron, on the one hand, but did not bring success for the far right on the other. In the end, nobody is really satisfied and we will have to wait and see what political alliances emerge in France and what they actually mean for future French politics, and also for future politics in Europe. 

What is worrying in this context is the fact that the public is increasingly talking about the risk of the spread of war. The relapse into the Cold War may have already happened, but unfortunately we have a completely different balance of power and interests today than we did 50 years ago. Even if these geopolitical problems are not perceived to the same extent everywhere in the world, it must be assumed that they are also part of the reason why consumers are reluctant to buy. Economics is also always psychology.

There were two dominant pieces of information for us in the area of the economy. On the one hand, the weakening of inflation in the US, which is again strengthening market expectations of interest rate cuts. Hopes are now rising again that the first interest rate cut could come as early as September. In purely factual terms, there are good arguments against this. Absolute interest rates are by no means high by historical standards and at the same time there are sectors that harbour even greater risks of further price increases.

In our opinion, the very low price increase in China is also important for the considerations in our publication. Prices there rose by just 0.2 %, documenting once again that private Chinese consumption is by no means in a particularly good state. Experts on the country, who do not necessarily always believe the government statistics, are of the opinion that deflation is more likely in China at the moment.

Expectations of interest rate cuts in the US weakened the US dollar, even if the overall movement is still very manageable. Nevertheless, to be honest, the weakening of the US dollar against the euro is particularly surprising. Considering the economic development in the EU and the political situation here, a weaker euro would probably be easier to explain. In the end, the dollar stood at around the $1.09 mark against the euro.

The share indices changed little and actually fluctuated within a narrow range in sympathy with the respective news on further interest rate developments. The political side is currently having little effect on the stock markets.
Although the gold price moved somewhat more strongly overall, it must be said that overall it was somewhat directionless. Weak days were replaced by a firmer trend and in the end the price stood at $2,400 per ounce.

The same can be said of the oil price, which ended last week at $85 per barrel. This means that there were no major price collapses, nor were the producer countries able to achieve a significant price increase with their various campaigns.

Market Intelligence

During this rather quiet period, marked by the summer holidays, we wanted to focus our thoughts and analysis a little more on the general issues surrounding the leather pipeline. This naturally includes political decisions, attitudes towards animal proteins and therefore also the availability of raw materials for the leather industry, plus an examination of the consumer goods markets and buyer behaviour. There have been some developments in recent weeks that we believe are so important for the leather pipeline that they should once again be the subject of this issue.

Let us start with the important but less spectacular part, which this time deals with the long-term availability of raw materials. Firstly, it is worth mentioning that Denmark is the first country in the world to actually intend to levy a tax on livestock farming. Converted to one cow, the amount will be around 100 euros. This is not an immediately effective decision for the global situation, as it would only come into effect in a few years’ time anyway. Nor does the amount and the size of the cattle herd have any significant effect.

Nevertheless, it is important to recognise that there is still great political pressure to reduce livestock farming, particularly in Europe. It remains regrettable that it is still not possible to take a truly differentiated view of the situation. Somehow it always ends up in a ‘fully in favour’ or ‘fully against’ situation. This does not do justice to the situation at all, especially when it comes to differentiating between the various animal species.

Unfortunately, it does not seem possible, especially in Europe, to move away from a kind of symbolic policy and focus more on the very diverse and varied issues of agriculture, the real impact on the climate and, of course, a secure food supply at a time of massively increasing geopolitical tensions and an ever more threatened global free trade. The fiasco of the switch from combustion engines to electromobility, as we are currently experiencing in Europe, should be warning enough. Well meant is not well done.

Just as the climate takes a long time to change, it also takes a somewhat longer time to initiate fundamental changes and new solutions. In this context, it is particularly unpopular to point out that the market is often the fastest and best tool for change. If we can offer people something better or possibly cheaper as an alternative, then people will change their behaviour much faster than politicians could ever do with their measures. Certainly in democracies. On the other hand, people are also much more sensitive and hesitant when they have the feeling that you are trying to sell them innovations that are not differentiated and cannot really be explained convincingly.

Another point was the confirmation that no fewer animals have been slaughtered in Europe in 2024 than in the previous year. This was suggested by many, but could not really be found in day-to-day business. As a result, some people turned to statistical sources, which clearly show that slaughtering has actually increased significantly in many countries. Growth rates for male animals of between 5% and 15 % were the rule rather than the exception. The really crucial question for the leather industry is whether farmers will replenish the reduced livestock numbers. This question is not so easy to answer and will certainly vary from country to country. In general, however, we can probably assume that livestock farming will continue to shift from the north and west of Europe to the south and east.

In this context, it should also be mentioned that milk prices have improved significantly again, which means that the incentive to reduce the number of dairy cows and withdraw from milk production is declining for the moment. Many politicians like to stir oat milk into their cappuccini, but broad sections of the population still prefer cow’s milk in all its different varieties. If milk prices can remain at the current level of over 50 cents per litre and reflects good demand, then a significant reduction in livestock numbers can hardly be expected in the near future.

We would now like to move on to issues that we have already reported on frequently here: the demand for leather. The fact that there are completely different interests along the leather pipeline is neither new nor particularly surprising. However, some things should generally be accepted. The demand for leather determines the demand for raw materials. The added value that can be achieved with leather in finished products also determines the price along the chain. So, you do not have to be an academic to understand that if demand is not sufficient to absorb supply it is a problem. At the same time insufficient added value is also very threatening for producers. If you are not able to keep up with the competition in terms of costs, you will quickly feel the conditions and the merciless rules of the market.

The problem of demand and price is often blamed on inflation and consumer restraint. In our view, however, this is at best a lukewarm excuse. We still have over 8 billion consumers on this planet and the pure inflation-adjusted turnover of goods has not fallen by the percentages that the leather industry has been complaining about for a while. Firstly, the changes in the leather industry are not linear. Secondly, the extent is far greater than the actual decline in consumption. The use of leather is declining in terms of quantity but some locations are affected more than others and this is causing considerable distortions of competition. We are seeing drastic changes.

On the one hand, we are seeing a significant decline in the use of furniture and automotive leather, particularly in the higher-quality articles. In the footwear sector, the picture is mixed. While on the one hand the retro trend is favouring the consumption of leather, on the other hand we are struggling because of a clear reluctance to buy classic street shoes in this sector because they currently play a less important role in people’s choices in terms of fashion. Similarly, the mass consumption of standard consumer goods, which can still be made from leather but do not have to be, is one of the main victims of declining consumption. These are things that we do not necessarily need and that we can do without when we have other spending priorities.

The effect that the decline in furniture and automotive leather has on the consumption and production of leather is proportionally greater in relation to the overall volume.

At the same time, this also explains the truly fundamental crisis facing the European leather industry. The list of negative influences that particularly affect the higher quality and more expensive leathers that are (or have to be) produced in Europe is long and we will not repeat it here. However, the fact remains that, in addition to the costs, the European leather industry is also suffering a disproportionate drop in demand and is also exposed to considerable political and bureaucratic obstacles. This is a truly toxic mix for many tanneries in Europe, the effects of which have been steadily increasing in recent months.

Perhaps the same can also be said for other regions. In China in particular, it is always very difficult to make a realistic assessment of the situation. However, we know from the statistics on private consumption in China and the situation in the property market there that we cannot expect too much support for leather demand in China in the short term.

It remains the case that we will have to deal with no expansion in demand for leather in the coming months, and possibly a further contraction. As such, this would not be such big news, as there has always been fluctuating demand for leather. However, the small but significant difference that we currently have to accept is that there is no sign of a broad and sustainable recovery in demand for leather for the coming months.

Even that would not be too significant. Exactly one year ago, the situation was not much different and the price structure on the commodity markets was very similar. However, there has been a significant change this year. We are entering the rest of the year with relatively high inventories along the supply chain. In the last 12 months, many have decided either to store goods that could not be sold at the desired price or even to keep their production higher than the sales situation required for understandable production cost reasons. These stocks also have to be absorbed, and this is at a time when higher production capacity utilisation is urgently needed anyway. A classic double effect, but unfortunately a negative one.

A realistic assessment of the political and economic situation, even with falling interest rates, can only lead to a situation that cannot be expected to improve in the coming months. This then brings the time factor into play, which raises the question of how long the producers along the chain will be able to hold out financially. This is not just about the current situation, but necessary investments are of course affected too. Who is going to invest in new machinery and equipment if they cannot see a sustainable and long-term improvement in the business situation? And when politics and bureaucracy work against you, the basis for decision-making doesn’t get any easier. 

An additional and major problem in the leather industry is that existing production units cannot simply be used for other purposes. Other industrial companies can often switch to other markets and products with their machines and expertise. This option is virtually unavailable in the leather industry.

When we have tried to talk openly about all these difficulties and problems within the industry in Europe and to find possible solutions, or even just discuss strategies, we have had little success so far. The problems are named, the problems are known, the decision-making options are also known, but somehow you get the feeling that the principle of hope is still the main basis for decision-making. The cost advantages outside Europe may not make the problem seem so serious there at the moment, but in some regions a similar situation will probably have to be addressed in the coming months as well.

In Europe, the multiple takeovers and investments in the leather industry by well funded investors in recent years have probably prevented a quicker response from companies, banks and credit insurers than we have seen so far.

Now it is time to enjoy the summer. The next two major trade fairs are scheduled for the beginning of September, first in Shanghai and then in Milan, where we will almost certainly find out more and learn more about possible decisions.

We cannot report any major changes in the market for splits. The prices of wet blue splits are still holding up very well owing to their usability, while the market for collagen and gelatine splits is also experiencing a major imbalance between supply and demand. Here too, the question arises as to whether the growing demand, which undoubtedly exists, will be sufficient to absorb the simultaneous, faster growing supply. Here too, the cost problem that we know from the leather industry is a major problem in some locations.

The market for sheepskins and lambskins is also still characterised by a certain weakness in demand. However, there are certain niche markets that are still developing well, but in some cases can no longer be supplied with sufficient quantities of the raw materials required. The fact remains that skins are of very different quality and usability, but are not available in a standardised, available quality as a by-product of the slaughter industry.

For us, the next four or six weeks will be devoted exclusively to observing and analysing the leather industry. The financial resources still seem to be sufficient to ensure that there are no immediate financial calamities. Many leather factories had a very successful previous year and therefore have financial reserves that can buy some time. However, if nothing fundamental changes in the near future, more and more tanneries will certainly be asking themselves from day to day how sensible it is, economically, to wait and hope. If convincing strategies can be developed to achieve a good compromise between volume and added value in co-operation with the hide processing industry, then leather will remain an attractive business segment in which to operate. However, if this combination cannot be developed convincingly, then it will remain a very difficult and complicated time, at least in large parts of the leather industry.

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