Macroeconomics

The list of priorities has not shifted in the last two weeks. Wars around the world dominate the general attention. 

In the democratic states, war is seen as intolerable and this weakens the position vis-à-vis the autocrats, who see war as an effective means of realising their power fantasies. They therefore see further conflict as an effective means of weakening the so-called Western alliance. All the other potential conflicts that we see today on the Korean peninsula, between China and Taiwan, in the Americas and in Africa should also be seen in this context. There is no way the democratic West can afford many more conflicts.  Also, the division of public opinion as a side-effect is very convenient for the opponents of the Western understanding of democracy. Growing nationalism, also in the West, further reinforces this development. What weakens loose state structures such as the EU simultaneously strengthens autocratic systems and their despots.

The Chinese government’s economic support measures have not yet had any real lasting effect. The stock markets in China have not been able to maintain their gains and are currently very volatile. The Chinese government tried to support its announcements with additional measures, but neither Chinese nor international analysts are yet fully convinced that the economy there is on a new growth trajectory yet. In the third quarter, the Chinese economy grew by 4.8%, missing the target figure of 5%. Moreover, official Chinese statistics should often be viewed with a certain degree of doubt. In any case, the external perception of the economic situation in China is much worse than the figures. The trade disputes between China, the US and Europe and the possible protective tariffs that may be imposed in the near future are having a considerable negative impact on exports. Many Chinese Silk Road projects have also come to a standstill, which threatens globalisation. There is a growing conviction that the political threat to global free trade could potentially lead to a considerable burden on the global economy in the medium term.

However, investors on the international capital markets are still little impressed by this at the moment. The major stock markets around the world are rising and are either already at new record levels or not far away. This even applies to economies such as Germany’s, where the economy is not even growing at the moment. However, investors are not impressed by this and are focusing more on corporate profits and, above all, interest rate trends. The large amount of liquidity that is still in the markets from the zerointerest rate policy is always looking for new investments.
The European Central Bank lowered its key interest rate by 0.25 %, the statistical inflation figures continue to fall in most countries and this means that investors are once again prepared to take greater risks and invest on the financial markets.
The US dollar benefited significantly from these developments, gaining up to 3% against most other global currencies in the last two weeks. At the end of last week, it was trading at around $1.08 against the euro.

The gold price also continued its upward trend, jumping from record to record, which was also favoured by falling interest rates. The ounce has now reached prices of over $2,700.

The oil price has fallen back to almost the levels of a few weeks ago. A significant oversupply of oil is expected in the foreseeable future. Weak demand and, at the same time, higher production and selling pressure from producing countries are putting pressure on prices. Prices have now fallen back to just over $70 per barrel. 

Market Intelligence

Global political events are weighing on the decisions of consumers and companies. Of course, this applies also to leather products, which are non-essential. Business and economic decisions are influenced to a large extent by psychology. In uncertain times, the willingness to buy non-essential products decreases.

This also means that in particularly uncertain times, people tend to distract themselves, seek quick pleasures and cultivate the idea of ‘carpe diem’ more strongly. However, in Europe at least, we can see that this spend tends to be on short-term pleasures such as holidays. The willingness to give oneself pleasure with goods has definitely declined significantly in recent years. The ‘shopping as an event’ that we could see almost everywhere in the world until the covid-19 pandemic has been massively pushed back. The short-term boom in online shopping during the pandemic is no longer able to compensate for the decline in bricks-and-mortar retail. The new players on the online retail market are also unable to exert a particularly positive influence on the consumption of leather products with their focus on lower-priced products. We have reported on the use of some leather in the collections of other ‘fast fashion’ retail chains, but it has never brought about a comeback for leather as a material of choice. 

Leather has remained the material of choice for luxury brands. But those who have been observing these companies’ sales figures and share prices in recent months have realised that this sector is also having difficulty convincing customers to buy. In this sector, it is not money that is the problem for the consumer; psychology plays the decisive role. For many luxury goods companies, the wrong sales forecasts led to large production runs in 2022 and especially 2023. Luxury or not, if you produce goods you cannot sell, you are left with unsold inventory. Some brands are committed to growth; others see not keeping stock as a basis for exclusivity and therefore always control production via actual sales.

To put it simply, there is the ‘make and sell’ concept, which actually belongs more to mass consumption, and the ‘sell and make’ concept, which was originally intended to be the business model of luxury brands. Luxury brands have the major problem that they cannot use discount sales, special promotions, outlets or other classic sales promotion measures; to do so would irreparably damage the exclusive luxury concept of their brands. The situation in this sector is, of course, particularly hidden, as none of the luxury groups are interested in publicising the problems that arise. Publishing weaker sales figures is already enough to kill the mood.

The reality is that the centres of production in particular, and the industry in Italy plays a particularly important role here, are suffering as a result. Of course, this is not the end, because luxury is here to stay and the world’s wealthy do not make their consumption decisions on the basis of a limited budget. The luxury goods companies also have large financial resources so a difficult period will not immediately put them into major difficulty. The question remains as to how production and supply can be brought back into line with demand. In addition, of course, there must be also a realistic assessment of sales in the coming seasons. For the time being, independent manufacturers along the chain have been massively affected by the decline in production and orders, and their production and employment have plummeted, which also poses a financial threat.

Even if the environment is not very different in the other regions and sectors, the situation is somewhat different in the areas of mass production. Economies of scale and production costs play the decisive role here. Size goes with size and at the moment this favours the globally operating companies. They can produce in lower-cost locations and market globally at the same time. Those that produce in expensive locations (Europe) have lost out and are losing in the markets in which they have specialised until now (Russia and Western Europe). On the one hand, there are the consequences of war and sanctions and, on the other, weak consumption. This is hitting these companies extremely hard and it is almost impossible for them to find new markets to compensate for this.

In the automotive leather sector, despite all the concerns and bad news, there was one piece of news that deserved attention. The Mastrotto Group, undoubtedly one of the most successful and well-positioned companies in the industry, announced the acquisition of the Portuguese manufacturer Coindu. At a time when the use of leather in the automotive industry is expected to decline, this is a remarkable decision. However, it may have less to do with members than with the further processing of materials into seat covers. No matter what the drive system looks like, autonomous or self-driven, private transport will continue to be the dominant form of mobility for years to come and this requires seats.

The latest quarterly results from adidas were also pleasing and are certainly largely based on the success of retro sneakers. We can only hope that these shoes remain not only fashionable, but will also continue to be made from leather so that the shoes wear better and last longer. Unfortunately, adidas is not focusing its marketing on the fact that these shoes are made of real leather again. What is pleasing in this context, however, is that a premium shoe from the Samba series, made from high-quality leather uppers and a high-quality leather lining, is also coming onto the market. This shoe is being sold at a premium price and it would be nice if not only premium marketing and appearance were publicised, but also the fact that this more expensive shoe also contains better materials.

In addition, discussions about the further development of the raw materials markets are gathering pace. As all our regular readers know, we have not been very positive about the demand for leather for some time now. In principle, this assessment has also been correct and is clearly reflected by the current situation on the market and its prices. However, we have also repeatedly pointed out that markets always reach equilibrium and that if demand does not solve the problem, supply will ultimately do so. It is certainly undisputed that supply of raw materials for the leather industry over the last few years has decreased as prices have fallen. Either the cattle hide has been diverted to other protein production processes or the goods have gone straight to disposal in one way or another. What is certain, however, is that the total global supply of bovine hides for the leather industry has continuously shrunk.

At present, this assumption has not changed in principle, but as the price gap between the various bovine hides of similar quality has become very, very narrow, the leather industry is beginning to purchase its reduced requirements more selectively. Raw materials for large-scale industrial production, which are regularly available in sufficient quantities and of consistent quality, are currently attracting more interest than other alternatives and more limited and less consistent options.

This leads to the impression in some regions and with large players that something fundamental has changed in the balance between supply and demand. However, we believe that this is not the case and, in our view, minor price changes or individual sales options do not yet indicate any new trend. The fluctuation phases also depend on slaughter, transport costs and currency changes. In order to ensure a revaluation of the raw material, the demand for leather would first have to increase and at the same time both the stocks along the pipeline would have to be reduced and higher leather prices implemented again.

At the moment, many leather prices are still under pressure and although rising raw material prices are in the short-term economic interests of many, they would probably lead to the rapid demise of some leather manufacturing facilities. After all, capacity in the processing sector also has to be adjusted to demand.

Commodity markets do not care about such structural, long-term considerations. Whatever help and benefits in the short term, one should by no means rely solely on rational facts and long-term trends when analysing the commodity markets.

There is no doubt that there have been major shifts in stocks in the chain over the past few months. Those who produce raw materials or have larger stocks will therefore be interested in rising prices for this reason alone, even if it may not be justifiable in the long term. So far, the power of these interests has not been strong enough to offset the supply and selling pressure, but at least for the moment there is the impression that interested parties are making another attempt to turn the price trend in the commodities market around. The willingness to try again certainly has something to do with the season.

It certainly makes very little sense to do this in the phase of weaker production in the second and third quarters. Trying the same thing again now in the stronger fourth and (next year’s) first quarters definitely offers better short-term opportunities.

Meat producers and tanners who have stocked up on low-priced raw materials or are still sitting on significantly more expensive stocks are united by the same economic temptation in the short term. Whether this results in more successful and better sales of leather in the medium and longer term will only be known at a later date. We remain convinced that the risk of such a test would bring more danger than success, and a look at the market for sheepskins in recent years may at least serve as a reference to influence the thinking.

We do not see any major changes in the split market. Possible shifts in the production of proteins from more expensive locations are probably still pending, while the price of splits for leather production dominates, as is so often the case. Here too, an adjustment of supply and demand is still to come, if reduced production of leather in some regions of the world is naturally also accompanied by a lower availability of splits. This needs to be adjusted and it is not yet completely clear to us how this adjustment will be made by the major decision-makers.

There has also been no change in the market situation for sheepskins. The small niches for speciality products have no problems, but they don’t play a major role in the overall market. Nothing is changing in the mass market. There is still no noticeable renaissance of ‘real leather’ in the clothing sector. The interior design sector remains in trouble after the boom of recent years and the lack of additional demand from the cowhide sector to compensate means that there is nothing to compensate for the severely depressed demand for sheep leather.

We do not expect anything fundamental to change in the coming weeks. However, as we explained above, there is at least the possibility that the raw material market will provide fresh impetus. At this point in time, however, we believe it is almost impossible for this to turn into a sustainable new phase. At the moment, we are not changing our fundamental assessment that only a noticeable recovery in global demand for leather could justify a reassessment of the market situation.

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