Macroeconomics

 The dominant problems of the recent past remain, with the wars in Ukraine and Russia, and in the Middle East still at the top of the political agenda, with developments that are critical and dangerous.
Recovery on the financial markets continued after the brief collapse in Japan and its global consequences. Share indices have almost reached record highs again and are now relying on interest rate cuts in the US. It can now be assumed with almost 100% certainty that interest rates in the US will be cut in September and it is now really only a question of the amount and whether there will be further rate cuts by the end of the year.

The price of gold has climbed to new record highs and has broken through the $2,500 mark on a sustained basis. Political uncertainty, falling interest rates and massive purchases by major national banks over a long period of time are continuously supporting the price of the precious metal. Without political calm, the next major mark of $3,000 is no longer an unrealistic target.

The price of oil has fallen continuously because supply is currently exceeding demand and at the same time the economic outlook suggests that demand will be rather subdued. Only the renewed flare-up of tensions in the Middle East was able to push oil prices up again.

The US dollar was unable to benefit from the geopolitical tensions. The weak economic development in Europe did not put pressure on the euro either, which is why the value of the US dollar fell continuously. In addition to the fact that falling interest rates in the US are making investments in US dollars less attractive, the election decision in the US may also be playing a role. Chinese measures may also play a role in reducing dependence on trading in US dollars. The US dollar is now trading at over $1.11 against the euro.

Market Intelligence

Even though the holiday season in the northern hemisphere is slowly coming to an end, we are still in a phase of general calm along the supply chain in the leather industry. However, it is also the case that the holidays have not fundamentally changed anything and the problems at the end of August are still the same as we saw before the holidays.

We will hardly be able to recognise the effects, changes and possible solutions before October. At the end of the holiday period with the start of the new production cycle for the winter, hope and fears dominate and thus, in many cases, emotion rather than facts.

The two problematic regions are obviously China and Europe at the moment, but although the mood here is also subdued, the situation in the various sectors is still very different in many cases.

You only need to take a look at the automotive industry and China, where the transition to electromobility is not only in full swing, but is already very advanced. In other regions of the world, and particularly in Europe, the transition is stalling for many different reasons. However, it is making the sale of European brands with combustion engines for export problematic and here the effect is also beginning to have an increasing impact on the market for premium vehicles. Even if the situation varies from brand to brand, the news that Mercedes is likely to permanently reduce production of its S-Class to just one shift in the final quarter must be worrying.

The highest luxury class of vehicles continues to be clearly dominated by leather in the interior. If you just take a look at the current adverts for top Mercedes models, you will see almost exclusively white leather. Of course, the colour is debatable and anyone who has upholstered snow-white leather cannot have fully understood the product, but the material remains dominant in the luxury class. Other top brands and niche suppliers also show no intention of doing without leather.

As we all know, there are two important reasons for this. Firstly, the main buyers of these vehicles are in no way prepared to forego the exclusivity of leather in their vehicles and, even more importantly, car manufacturers have not yet succeeded in finding an alternative material with the same properties that they can present as exclusive and luxurious.
We keep hearing from the manufacturers that their heads are spinning and that top management expects alternatives and solutions to be found as quickly as possible. This is particularly urgent if the transition to electromobility is ultimately to succeed for luxury vehicles from Europe as well. Where engine technology no longer plays the decisive role, software, interior fittings, designs and gadgets must do so.
Mobility is not just a question of the drive system. The decision in favour of a vehicle will certainly be influenced more by other criteria than in the past. From what we can see from consumers today, interior features, entertainment and value-creating software will become much more important in the future. If the next big step is indeed autonomous driving, then this significance will become even greater.

Those who are less concerned with performance on the road will inevitably be more concerned with their immediate surroundings, which is to say the interior. If you are not driven by anti-leather constraints and ideologies, then, in truth, this should mean there are great opportunities for the material. There would be even greater opportunities if the car industry were a little more realistic about leather’s technical values.

Many of them continue to stand in the way of a very high-quality impression and a pleasant feel. This also raises the question of whether there requirements are needed at all, or whether it would even be much easier to eliminate certain problems using other technical solutions. Light fastness and anti-fogging are just a few examples where technical solutions and a fair evaluation of the values could be game-changers.
The up-and-coming brands in China are much more lax about all these issues. Either leather is used because it helps the image or, for cost and processing reasons, it is not used if it is not considered necessary. 

It is simply too early to make any statements about demand from the furniture industry. Basically, the mood in the northern hemisphere is not particularly positive for the next season either. Major furniture manufacturers in Europe are signalling a decline in demand for leather of between 15% and 30% for the last quarter. Expectations from China are also not particularly favourable. Considering economic development in China and the general consumer sentiment in connection with the problems in the property market, this is not particularly surprising either.
In the end, the only remaining market is really the US, which is undoubtedly very important for furniture leather. Possible interest rate cuts and a significantly more positive consumer sentiment in the US, compared to the rest of the world, provide a more positive basis for order activity. Of course, this would ultimately also have a positive impact on the production of leather and furniture in China.

In our opinion, almost everything will depend on whether the retro trend and thus the use of leather in the shoe industry as a material continues to spread. The prospects for this are not bad, as almost all collections of the major sports shoe brands include models that deliberately reuse leather as a material. The major manufacturers who are qualified to supply these leathers are also all reporting well-filled order books for the coming months. If it weren't for the many problems that continue to surround the use of leather, then it would come as no surprise for leather to make a comeback in other sectors too.

However, the many obstacles, especially in Europe, remain a major problem. In particular, the European Union Deforestation Regulation (EUDR), which prevents any form of planning clarity at the moment. At the same time, this situation gives manufacturers and those outside the EU an immense competitive advantage over the European industry. Without a suspension of the entry into force of EUDR (scheduled for the end of this year), the consequences will be considerable. The additional home-made problems of the industry are added to this. Plus, the uncertainties from the geopolitical situation cannot be assessed at all.

Political and epidemiological problems are further burdening factors. The trade disputes between China, the US and Europe make it possible for political decisions to be taken and again that could hinder trade in agricultural products, particularly hides and skins. We have already seen this with pork and at the moment the focus is on dairy products.
In addition to trade policy problems, the rapid spread of bluetongue disease in Europe must also be a cause for concern. In the meantime, the disease has continued to spread from the Netherlands to Germany and now to Scandinavia. Not that it is a real health problem for humans, but it could be used as an instrument to hinder or even prevent free trade and the export of hides and skins. Almost all countries in Europe can no longer be considered disease-free and this can very quickly lead to difficulties in the issuing and acceptance of health certificates in international trade. Something similar can be said about the bird flu spread in the US.

All in all, the period before the trade fairs and at the start of the production phase in the second half of the year is once again characterised by individual interests. Reliable facts are not available at the moment, which is why the various interest groups along the supply chain are positioning themselves accordingly. Sellers are painting a positive picture and buyers are spreading a more subdued mood.
In the end, it will only be possible to assess the situation correctly at the end of September or perhaps even a little later. Even if the behaviour of the individual interest groups is of course understandable, a situation that is too difficult and unstable at the moment is not really a good basis for solid and stable planning. An honest exchange about the facts would be a better way forward at this stage in view of the many problems that need to be resolved with regard to the use of leather.

The market for splits is currently divided. While the good and positive development in sports shoes favours the use of split, the situation with collagen and gelatine is rather difficult. The performance of global demand cannot keep pace with the significant increase in supply. This makes production particularly problematic in markets that are burdened with high costs. The supply and price pressure is exerting massive pressure on the structures of this industry. Here too, Europe is the number one problem area.
We have the same situation with sheepskins as with cattle hides. The further development in fashion and the orders from industry and retail for the coming seasons will only be finalised in the coming weeks. Russia was and still is an important market for these garment products and, as we all know, many other factors play a role here, not just fashion and consumer sentiment.

Over the next few weeks, many will be travelling to Asia and will probably end their trip with a visit to the All China Leather Exhibition in Shanghai (September 3-5). From the exhibitors’ point of view, the trade fair is becoming more and more national and therefore it will probably be possible to draw some conclusions regarding business and expectations of developments in China. Of course, representatives of small and medium-sized companies from northern China, who traditionally use the trade fair and the meeting of the Chinese Leather Industry Association to come to Shanghai, are particularly expected. For the large international companies, the trade fair is now of secondary importance. Nevertheless, it is an important indicator for the mood of producers in China and will be able to provide initial and clear signals for developments in the coming months, especially for the raw materials market.

In Europe, the Lineapelle and Tanning Tech fairs in Milan two weeks later (September 17-19) will of course play an important role. Here, too, the meeting of many representatives from the supply chain will play a major role and, as a large number of buyers from the major brands will also be represented, there will be plenty of information and impressions to take away, particularly in the leathergoods and footwear sectors.

It will be particularly important to get an impression of the order situation and, above all, the current physical stocks along the supply chain. In the end, everything for the next season stands and falls with the orders placed.

Share this story: