Macroeconomics

There have been three political and economic events in the last two weeks that have had a particular impact on our sector.

First, the escalation of the conflict in the Middle East, which is causing further damage and casualties and fuelling the tension in the region. One way or another, the spiral of violence in the region must be interrupted as quickly as possible.

Of course, the focus is on the many victims that every armed conflict claims, causing displacement and flight on both sides. The same naturally applies to the war in Ukraine. Any escalation in these conflicts benefits no one and only harms civilians.

Any further escalation of the conflict in the Middle East is likely to lead to increases in energy prices and have a major impact on global logistics.

The second event is the port workers’ strike on the east coast of the US. Here too, supply chains have been disrupted, which can ultimately lead to considerable disruption in international shipping and could almost certainly make transport costs more expensive. Fortunately, the strike was averted after a few days, presumably to save the Christmas shopping season. For now, however, only an interim solution has been found and the negotiations have only been postponed. We will see what happens at the beginning of 2025.

The EU's decision to impose tariffs on Chinese electric cars will also have a negative impact on trade relations between Europe and China if it comes into force. Automotive plays a very special role for many economies in Europe and the general worldwide trend towards more nationalism and a restriction of global trade will probably not have any positive effects either. 

Various decisions taken by the Chinese government to stabilise and revive the economy and consumption there are also important. With public holidays in many parts of Asia and China, the effect had not yet been fully realised, although the stock markets have reacted to the news with significant jumps in share prices. China’s CSI 300 Index has risen by over 25% in the last two weeks and the full opening after the holidays this week will show whether this is just a flash in the pan or a real turning point towards more consumption and economic activity.

Fundamentally, the measures taken by the Chinese government cannot and will not bring about an immediate improvement in the economic situation in China. Many of the problems affecting growth in China are of a structural nature and cannot be solved in the short term with additional liquidity. Nevertheless, an increase in consumption will be helpful for our sector and, in view of the important sales days in China in November and then later for Chinese New Year, these measures have come at the right time.

As economics is always to a large extent about psychology, the next few weeks will show whether Chinese businesses and consumers go along with this plan to resolve some of the country’s economic challenges.

The escalation of conflict in the Middle East initially led to a significant rise in the price of oil. Barrel prices rose by 10% to levels that are once again approaching $80 per barrel. In the days before, there had been talk of an expected oversupply in the market, with the suggestion that traders were more likely to see a fall in oil prices.

The price of gold continued to hover above $2,600 per ounce.

The US dollar rose, supported by good labour market data in the US. It is hovering around the $1.11 mark against the euro. 

Market Intelligence

Recent events in China and the Middle East may have a considerable impact on the leather pipeline. External triggers can cause rapid change or amplify existing trends.

Even if the markets in the Middle East do not represent a major purchasing power in the wider consumer goods markets, they still play a significant role. A great deal of wealth and consumption is concentrated in the Arab Emirates in particular.

Saudi Arabia is also planning to develop a new status as a centre of attraction for the world’s wealthy at the end of the oil age. New investments and attractions will serve this purpose and the success of some Emirates will serve as a model.

Tensions and risks are therefore poison for the region. An escalation of the war in the Middle East would also have a massive impact on international air traffic and the safety status of the region. With the major airlines now firmly established in the region with links to all parts of the world, this would have a very negative impact and would certainly have a negative effect on retail sales in the luxury sector.

If the conflict were to spread further, oil prices would also rise significantly and with them, of course, energy costs in the western world, which would not only be a driver of inflation, but would also have a negative impact on consumers’ disposable income. Not to mention the negative psychological impact on global consumption. With the status accorded to leather today, namely that it is an optional but not an essential material, the prospects are not good.

Next, we must look at the possible positive influences of the Chinese government’s most recent moves to support the economy. Never before have short-term developments on the stock markets had a lasting impact on the fundamental economic situation. They are a psychological stimulant, but they act like a drug. A short-term high is followed by an equally rapid crash if the drug is not replenished. 

Nevertheless, many hope that the decisions this time will reverse the prevailing negative mood in the Chinese economy. Particularly in the leather pipeline, people like to follow short-term emotional changes and, especially in the raw materials sector, people rarely take a long-term view. Many are therefore hoping that the next few weeks will provide an opportunity to convince Chinese buyers that it is the right decision to continue stocking up on low-priced raw or semi-finished hides. It will be very exciting to see whether this actually works in the end and whether Chinese tanners and manufacturers are prepared to add to their already very large stocks.

If they believe that demand for leather will recover over the course of the next year, then a further reduction in price and increase in stocks is of course a good strategy. If, on the other hand, consumption does not increase and leather demand does not recover accordingly, then it would only constitute an additional risk and probably an even bigger problem.
In any case, the problems in China cannot be solved with short-term measures. They are very deep-rooted and structural in nature, and at the same time there are now even greater tensions in trade relations with the EU and the US.

Nobody with any sense will make any far-reaching decisions before the US presidential elections. The outcome of the elections will certainly determine trade relations between the two countries, including trade in shoes and furniture. At this point, it should also be pointed out that many large manufacturers are reducing their dependence on China if they can, so it can be assumed that the orders for the demand expected in 2025 have long since been placed and, therefore, the political decision would probably only have a limited impact on the demand for leather for the coming season.

Here too, it is more a question of whether consumers worldwide start to increase their spending again and whether products that can be made from leather will be in demand and produced.

No matter how you look at the current situation and what expectations you derive from it, the time factor probably remains the biggest problem. Even assuming that the demand for leather increases, the problem remains that the effect will probably not materialise for another six or even 12 months.

In Europe in particular we are already at the beginning of October and the usual seasonal recovery that unfolds at this time of year is absolutely not in sight at the moment. This must be a major cause for concern. At least in the industries that we follow and analyse here in Europe, the situation looks very bleak. Furniture manufacturing, shoe production and, of course, production in the automotive industry are running at very reduced production levels at a time when capacities are usually almost fully utilised. Short-time working and the utilisation of every opportunity to cut production are now the order of the day. If you also consider that such decisions are made not just for days and weeks, but for months in advance, then the problematic nature of the situation really becomes clear.

We therefore need a strong increase in the dynamics of production in Asia, from Turkey to the Far East. Here too, most of the manufacturers we speak to lack any enthusiasm. Let us take a look at Nike’s most recent quarterly results. Overall, sales fell by 10%, which is of course largely due to individual problems, but you can still hear from suppliers that the plans Nike had at the beginning of 2024 have now been significantly reduced and cut back. This cannot be compensated for by the temporary and good performance of other brands at the moment.

A recurring and very painful side effect is of course the subsequent price pressure that results from such a market constellation. Although production costs are rising overall, the oversupply of capacity and the now dramatic competition for orders have led to the classic spiral of price cuts, which have a corresponding impact on manufacturers’ earnings. This pressure has been evident along the pipeline for a long time and was only temporarily masked by the sharp rise in inflation, which made it possible for retailers to stay away from price cuts for a certain period of time. The pressure that is now building up to sell inventory and use up production capacity is leading to the usual consequences of market laws, namely falling prices.

It also comes full circle, confirming the corresponding underutilisation of capacity along the supply chain.

This brings us to a point that we have already reached several times in the past in our observations. Leather is an optional product, not a must-have product. This has developed over the decades on the basis of alternative materials and was masked for a long time by the strong growth in overall global consumption. Basically, there was room for everything.

Capacities were greatly expanded, leather as a material was increasingly adapted to the poor performance characteristics of the alternatives in order to achieve better costs and revenues in further processing. A few years ago, the leather industry took the wrong road at the last junction. The European industry in particular was convinced that if it bowed to the pressure of the big brands and manufacturers and stopped caring about the material itself and its success and, instead, focused on certifications and value-destroying activities, it would be able to protect its business concept and its product. All warnings were thrown to the wind.

As a result, a whole world of departments and organisations was formed triggered by politics and brands. Although they are of no use whatsoever for leather as a product, its perception in the market, its quality, its usability, its value and its special properties, the structures are now firmly established as irremovable. The leather industry has never been particularly successful in marketing its product, but a few hours of training alone could have taught everyone that products sell much better when their positive characteristics are emphasised than when the supposed, avoidable negative aspects are placed in the foreground. The ‘yes, but’ marketing strategy doesn’t work.

It seems unlikely, at least at the moment, that anyone will have the courage, strength and fortitude to leave this caravan and take a different path given the current difficulties and constraints.

All in all, it remains the case in the first weeks of October that hopes of a rapid and sustainable recovery in demand for leather have been significantly dampened. Leather will remain and continue to be produced, but whether there is enough time to achieve this again for all the raw materials available is an open question at the moment. This means that we are continuing the adjustment process that may take much more time.

The market for splits is not providing much news. The decline in leather production is leading to new questions regarding procurement. Less raw material means, above all, initiating a supply discussion in Europe. There are enough raw materials, but not in the usual form and as a result of the usual production chains. In other regions, the situation is rather different: although there are enough finished products in the form of gelatine and collagen, the growth in demand has not kept pace with the global increase in supply.

Meanwhile, many report that prices for final products are often below production costs, even in cases where the manufacturer can use the raw material for zero value. The falling production of leather inevitably leads also to less availability of wet blue splits. Demand here is not proportional, but price pressure is also present owing to the situation in the consumer markets. This means that there is a price and procurement problem for many manufacturers of split leather.

There is also nothing really new on the market for sheepskins. Here the market is already much more advanced than for bovine hides. Disposal and destruction of the raw material has been normal and common practice for years and it remains the case that the high-quality niches and speciality products can continue to defend their corner. However, it is also becoming increasingly difficult to secure the procurement of raw materials for niche production. Many niches are just one part of the whole and there is not always the willingness and ability to extract the desired and specialised raw materials from the total supply.

In the next two weeks, we will first have to take a look at the further development of the Chinese market. Positive flurries are conceivable in the short term, but we do not believe they will be sustainable. Furthermore, we will now have to take a very close look at the situation in the leather industry in Europe. Many tanneries are now having to take a very close look at their situation. For many, there is a clear feeling that waiting is no longer a real option.

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