Macroeconomics

In the last two weeks, there have only been a few extraordinary events and news in the world of politics and business, although the few that have occurred have been of somewhat greater significance overall. 

The newly elected EU Parliament is endeavouring to put together a new EU Commission, which will then steer the fortunes of the community for the coming years. Although the election results hardly justified the circumstances, the largest parliamentary group under the leadership of Ursula von der Leyen is endeavouring to further consolidate its political positions and individual wishes. In particular, it is now a question of securing the monument that Mrs von der Leyen herself wants to erect, the Green Deal, which affects the leather industry considerably in many respects. However, it will have the greatest impact on the automotive industry, which accounts for the majority of industrial jobs in the EU and in Germany in particular. 

As is so often the case in politics, ‘well-intentioned’ is not always synonymous with ‘well-done’, which is why the considerable weaknesses in the implementation of European policy are currently revealing themselves with brutal force. It therefore remains to be hoped that the voices of reason will be heard more in the next legislative period and that, without losing sight of the worthy goal, a little more realism will be applied to implementation.

Without this, Europe not only runs the risk of accelerated economic decline, but also the even greater risk of strengthening the political extremes and thus also of political weakening. 

In economics and finance, there has really only been one particular topic in recent weeks. Firstly, the question of whether and to what extent the US National Bank would lower its interest rates. The answer was then given and the Federal Reserve opted for a large interest-rate cut in order to combat a possible slide into recession at an early stage.

With falling inflation rates and a cooling labour market, those at the central bank probably felt the need to send a strong signal to the markets in order to combat the fear of recession at an early stage. The inflation risks were obviously seen as less significant in the meantime, and the decision was therefore made to cut the rate by 0.5%. The decision was received with little excitement by the markets and the discussion is now focusing more on whether there will be another interest-rate cut this year. 

The decisions by the European Central Bank and Federal Reserve initially supported the stock markets. However, fears of a further economic slowdown remain dominant in Europe and the stock markets are not really managing to sustainably reach new record highs. Optimism and faith in the US economy is greater, even though the presidential elections in November are now casting their shadow. Polls proved to be unreliable in the last elections, which is why the markets are not positioning themselves very well at the moment. However, it is generally assumed that no new government would trigger a really significant change in US economic policy or conditions for companies. 

Oil prices fell to $70 per barrel due to the sluggish global economy and, in particular, the negative outlook for China, before recovering slightly. Significantly lower energy prices in many places are naturally also easing inflationary pressure and logistics costs have also fallen again in recent months. This is reflected in the price trend. 

Gold prices continue to reach new record highs, with the price of a troy ounce of gold sustainably exceeding the level of $2600. In particular, the purchase of physical gold by various national banks is supporting the trend and the $3000 level is no longer an unrealistic target. 

The US dollar is moving very little and continues to trade in a narrow range between $1.10 and $1.12 to the euro. The last quarter normally always brings somewhat larger movements in the US currency due to companies’ budget plans for the following year. The interest rate trend speaks against the dollar and economic development in the economic areas outside the US speaks more in favour of the dollar, but the upcoming presidential elections will probably have the greatest influence on the value of the currency for the rest of the year. 

Market Intelligence

All interested parties in the leather industry were waiting for the Lineapelle exhibition in Milan, which took place last week. Some large and globally active retailers and companies had already met at the All China Leather Exhibition in Shanghai a fortnight earlier, but the overlap of target groups between the two trade fairs is not particularly large. 

If the trade fair in Shanghai covers the mass markets and focuses in particular on China's national market, the one in Milan remains at the heart of exclusive leather and leather products and, of course, the presentation base and meeting point for buyers and suppliers of the market-relevant brand companies.  

In this respect, the sum of impressions from the two trade fairs within two weeks covers almost the entire spectrum of markets for the leather supply chain. 

There has been sufficient coverage of the trade fair in Shanghai and by now everyone involved has probably processed their own impressions and information and drawn their own conclusions. In any case, our conclusion was that the local market in China is suffering from weak consumption, and is exposed to considerable price pressure. In addition, the export business is suffering from weak demand and geopolitical tensions. In short, demand is currently insufficient to supply the leather industry with enough orders. 

With these impressions in mind, we travelled to Milan in the hope that the market for medium and higher qualities, as well as for global brands, would provide a better outlook. We have always returned from Italy in a much better mood than when we went there. This time, for the first time in decades, we have to say that we definitely did not come back in a better mood than when we went. Nor did we return in a worse mood; it is just that the level of satisfaction was low. 

Many exhibitors reported that they missed many of their regular visitors. It was also noticeable that the number of visitors from Asia was lower. Whether this was because of public holidays for the Mid-Autumn Festival or business reasons is of course unknown. It was also noted that fewer visitors from the US were registered. However, if this impression is correct, it is a further indication that consumer sentiment has cooled considerably, particularly for leather products. This in turn fits in with the recent negative reports on the situation of luxury brands in China. 

Of course, the exhibitors at Lineapelle remain the creative masters of leather production and nowhere in the world does the quality and beauty of the material come close to what you can see in Milan, but this time there was a lack of impressive new developments, even if you concede that leather is not something that can be reinvented time and time again. 

A lot of this can be put down to the fact that, of course, only developing new things and experimenting can be fundamentally positive in terms of customer and market response. This was also the feedback we received from many tanners in most of our discussions. Customers are sometimes keen on experimenting with innovations out of curiosity, but not really with a view to converting this into new products.

Visitors and buyers always want to be entertained and see something new, but the willingness of manufacturers to try out something really seemed low. This is also usually a clear indication of a lack of optimism among brands and retailers. No experiments is the motto. This description of the situation almost always led to the statement that there are simply not enough orders at the moment and that, apart from a slight seasonal recovery, no significant improvement can be expected in the coming months. There are always miracles, but the facts at the moment give no reason to hope for miracles in the coming months. There is almost unanimous agreement that a possible trend reversal is not realistically expected until 2025, if at all. 

Of course, many other indirect, negative factors also play an important role here. The European Deforestation Regulation (EUDR) is of course at the forefront of this. Many people have long ignored the issue, but even the last are slowly having to realise that the clock is ticking and, as unlikely as implementation in January 2025 may seem, the planning uncertainty is of course also weighing heavily on decisions. And this applies to the entire chain, as manufacturers and retailers naturally also do not know at this stage what they actually have to prepare for.

The EU Commission is currently unable to act and nobody knows at the moment when it will actually be able to take this issue seriously again. As much as it affects the leather industry, we are only a very small cog in the whole discussion, which is a good thing because the other sectors affected play a much more important role in Brussels. We just have to make sure that we are not forgotten, and here we have to thank the Italian leather industry and its representatives, who are currently doing the most to raise awareness for the interests of the leather industry. 

Long supply chains and the procurement of raw materials are now, of course, already focused on arrivals for 2025, and many buyers are already having to conclude contracts today that are subject to the entry into force of EUDR. Not to mention the fact that if it actually comes into force and the Commission controls its implementation, entire industrial sectors could come to a standstill. This is really very difficult to imagine, but with the chaos of the administration in Brussels, the incompetence of politicians and the massive pressure and influence of NGOs, you have to expect anything these days.

The worst thing, apart from the factual issues, is the fact that the EU and national administrations keep telling us that they do not have enough staff or time to solve and deal with these issues at the moment. Just imagine that in the remaining three months this continues to be the excuse for inaction. In the end it is relatively simple, either the regulation is suspended or else civil disobedience or tolerating non-compliance with the law will have to solve the problem. This would probably drive public acceptance of the EU towards zero.

It remains the case that many politicians who have ended up in Brussels rather than in their national parliaments end up operating in their own cosmos. This represents a real threat to the community and to the leather industry. The greatest frustration that arises from this is that the European Union is important; it offers many advantages and a return to nationalism is not the alternative. 

Let us return to the leather pipeline. In addition to the major problems, there were also rays of hope, although these are not bright enough to illuminate the entire industry. Many small niche suppliers, the specialists of the specialists, the supply chains that represent the special and or superior function of leather and reach customers that explicitly demand the product, were extremely satisfied.

In the end, they are no more or less satisfied than before, but their business is stable, the orders are coming in and the problems lie more in completely different areas such as availability of qualified labour, access to chemicals and availability of specialist machinery, support from technology providers, obstruction by authorities and so on, but not at all in the demand for their products.

The only thing that concerns them at the moment is the risk that they may be drawn into the maelstrom of general industry problems in the coming years. One thing they all realise, of course, is that they would be too small to expect any kind of support or help from the public authorities or anyone else. 

To summarise, we maintain our assessment that the markets in the supply chain are currently not in balance. Too much raw material is being pushed into the market. This material is still a by-product of meat production. Overall, there is too little demand for leather and, as a logical consequence, there is a large proportion of unutilised production capacity. This varies from region to region and also from sector to sector, but the overall balance is disturbed. If this happened in the past, one could always assume that the demand for leather would resolve temporary disruptions. But we believe that this is no longer the case. 

A realistic view also shows that many meat producers have been looking for alternative uses for their by-products for some time and some have activated them. Collagen and gelatine production is just one example, but there is now also more and more movement towards using the raw material for the production of bioenergy.

The surplus raw material, and we are not just talking about cattle hides here, has to be handled, even if it means putting it into large, deep holes in the ground. This is of course the very last thing we should do. It sends shivers down the spine, but if we are honest, we already have no economically viable use for many other raw materials. If leather demand does not increase in the short term, this proportion will continue to grow and the only question that will then arise is if the potential added value of the raw material can determine what we do with it.

As long as meat is produced, hides and skins will continue to accumulate and something has to be done with them. Leather is the best option, but if the demand for leather is not sufficient and the leather industry continues to fail to put forward convincing arguments to counter the pressure from NGOs, alternative uses will have to be accepted and leather will continue to develop into a speciality item and niche product.

The really perverse thing about this is the fact that the NGOs would celebrate a decline in leather production as a victory, but it will not change the production of meat. All forecasts indicate that the market for animal proteins will not experience a major decline in the foreseeable future. The completely useless discussion about sustainability, traceability and so on and their certification programmes for the leather industry ties up urgently needed resources, causes non-productive costs and misses the necessary goal of supporting the use of leather.

It should also be clear to everyone that lost capacity along the leather supply chain cannot simply be reactivated. Of course, this applies not only to the production of leather, but also to quality manufacturing. 

The split market is currently continuing to benefit from its use in the retro sneaker sector. In some cases, we have now reached the point where the entire hide no longer costs much more than the split alone. In the collagen and gelatine markets, the imbalance between supply and demand also remains and many standard products continue to fall in price. Nevertheless, many tanners, especially in China, continue to use the split in these sectors. 

The market for sheepskins and lambskins mirrors the situation for cattle hides. Specialities that are exceptional can find their markets and also achieve their prices. The situation in the standard markets has not changed and here too it remains the case that many skins are simply disposed of. In the meantime, the slightly improving market for wool has achieved a small response. A number of Chinese leather factories are already beginning to calculate whether the extraction of wool from the skins alone might be profitable. In fact, here too we have the situation that the low proceeds for the wool alone and the subsequent utilisation of the pelt in the protein sector may achieve a better result than destruction. 

The next few months will probably see everyone finally come to terms with the realities of the market situation. Everyone may react differently to the situation and the options about what to do are manifold. The simplest for some will be to close down. The news about the closure of a very well-known Spanish leather manufacturer, Tenerías Omega, may serve as an example here. We do not wish anyone to have to go down this path and wish everyone an orderly adjustment to the current situation.

The main problem will certainly be the time factor. In the end, we can carry on as long as the money lasts or as long as the financial institutions are prepared to support us. Maybe the situation will recover; this has happened before. We hope it does and we are not giving up hope, but we would feel much better if we had the impression that the leather supply chain was once again concentrating more on the essentials and, above all, on the functionality and superiority of the material, rather than continuing to see an over-defensive approach with regard to sustainability and traceability to satisfy brands and retailers. 

This may not be right either, but the strategy of recent years with regard to the use of leather as a material has clearly not been successful. One of the keys remains value creation in relation to costs and we will be addressing this in future issues of Market Intelligence. 

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