Macroeconomics

The news that overshadowed everything else in the last two weeks was about the end to the dictatorship in Syria after years of oppression and torture. Brutal dictatorships are only ever temporary regimes. The only problem for their victims is the length of time it can take for them to end.

Much has changed now. However, we still don’t know exactly what the consequences will be in the end. First of all, it is important to achieve stability in the country and possibly offer many refugees the opportunity to return to their homeland.
It is clear that the Chinese government is currently very concerned about the country’s economy. Distraction outside the country has always been a method of diverting the focus of the population's interest. Nevertheless, further reports have been published that the government is planning further stimulus measures for the economy. News about meetings of the party leadership to discuss the economic situation also clearly show that it is recognised that the promise of economic advancement is still of central importance in the country.

In the world and in the US, eyes are now turning to the appointments to key ministerial and administrative posts that will follow Mr Trump’s inauguration on January 20. Many names are causing head-scratching and the almost daily new announcements regarding the introduction of tariffs, the withdrawal of the US from NATO or even the rumours about a possible invitation to the ceremony for China’s President Xi give the impression of being more about entertainment than about serious politics. The world has already survived four years of Mr Trump and it will survive this time too. It will definitely not be boring.

The central banks in Switzerland and the EU have cut interest rates further and the Federal Reserve in the US is expected to follow. The currently stable inflation rates have ensured that market expectations have been met. The only question at the moment is whether and to what extent this will continue.

Due to falling interest rates and further expectations that this cycle is not yet over, the stock markets rose to further record highs. The big technology stocks and the overarching theme of artificial intelligence are still driving the markets forward.
The price of gold is changing very little at the moment and somehow you get the feeling that many investors are currently debating whether gold or cryptocurrencies have more potential as a long-term safety net, especially if further action is taken by many countries to ease dependency on the US dollar as the global anchor currency.

The US dollar initially weakened somewhat, only to trend firmer again at the end of last week. Here, too, the focus is initially on the outlook for the interest rate markets, but also on the unstable economic development in Europe.

Market Intelligence

In this issue and in recent weeks, the Leather Pipeline has focused more on the raw materials markets.

Having focused more on developments in the consumer goods markets and the use of leather as a material in recent months, we are now turning our attention back to the question of what to do with the bovine hides that are a by-product of meat production. In recent years, there have been repeated images of cattle hides that could no longer find a market and therefore simply had to be buried.

There have been recoveries, but no real has happened for a long time. It is not necessarily noticeable because the large producers have always found temporary solutions. However, in the regions where collection and processing is a logistical challenge and associated with high costs, hides were hardly ever recovered for leather production.

Weak consumption, geopolitical risks and the departure of mass users meant that sales markets for leather and finished leather products continued to shrink. At times, this was repeatedly masked by special developments. These included the price jumps for collagen, speculative activities and the mere maintenance of production capacity in the hope that the situation would improve.

The economic crisis in combination with the property crisis in China, the collapsing markets in Russia and, of course, the automotive industry’s increasing move away from leather as a material for seat covers have played a decisive role. The fashion shift away from formal shoes towards casual and comfortable footwear also left its mark. Even in classic sports footwear (football boots, for example), leather has slowly but surely been replaced. All in all, neither the luxury sector, which was undoubtedly growing until a year ago, nor the huge success that sports brands have had with retro sneakers in the last year were able to compensate for the decline.

The facts are relatively simple. There is a supply of raw material that has not been covered by the physical demand for leather for many years. This realisation is not new, but it has been continuously ignored and is not yet solved. Many in the supply chain have not wanted to accept it as a general problem, but have reacted to it in a fragmented and individualised way. All warnings have been thrown to the wind and the discussion is essentially limited to things that cannot be done rather than searching to see what solutions there could possibly be with detailed analysis and a common approach to tackling the problem.

Above all, Europe seems to have focused its energies on issues that drive up costs and do little to solve problems. Cost-driving, but not value-creating, self-imposed conditions were sold as solutions and in the end only benefited those who came up with them. However, those who expected solutions and a successful positioning of leather as a material must be extremely disappointed today. It is very difficult to imagine how the time could be turned back. It's like politics, which, once it has passed a law, is hardly in a position to simply abolish it at some point because it has been recognised as nonsense.

Politics naturally plays an extremely large part in many developments anyway. Legal requirements in Europe, which trigger domino effects, have been worsening the competitive situation of the leather industry in Europe for years. The expertise and perspective of many politicians is, and remains, very limited and driven by individual ideological interests. The resulting interactions and damage are simply ignored.

In free democracies, political developments can only be changed through elections, and in many parts of Europe these now speak a clear language. The problem, however, is that the political administrations responsible for agriculture and the leather industry have not yet realised this. It can at least be assumed that the longer and the more they continue on the path they have taken, the more severe the backlash and the consequences will be. However, this will probably not help the European leather industry because too much damage has already been done.

After this foray into general politics, it was and is even more incomprehensible that the industry also fell for the self-imposed certification craze. This costs a lot of money, ties up energy and resources, prevents experimentation and creativity, is in many areas redundant with the legislation already in force and therefore acts as a brake-pad.

Leather manufacturing companies in Europe that seem always to have a new audit looming in the minds of their employees and, at the same time, to prioritise standard industrial processes over flexibility can hardly survive in global competition. Nevertheless, even in these leather manufacturing companies there are many who support certification and see it as an effective means of improvement. But if certification brings efficiency gains that fall short of the associated cost increases, then some serious thought is needed.

To avoid any misunderstanding: certifications and legal requirements are not the only problem, but must also be seen in context. If all certifications were abolished and the legal requirements and bureaucracy relaxed, it would not solve the European leather industry’s problems tomorrow. The damage is simply already far too great and can no longer be changed quickly. Rapid changes could only come about if there were parallel developments in competing overseas markets that could bring the European leather industry back onto an even footing.

In addition to the problems in the leather industry itself, we also have to deal with a supply chain problem. A sharp decline in leather processing and weak sales markets in Europe have at least the same negative impact on the chain, which means that at the moment the leather pipeline in Europe can only be summarised as follows: Murphy’s Law applies! Murphy’s Law states that everything that can go wrong will go wrong.

For the raw materials markets, this means that the current downward spiral will continue. The large producers are still trying to counteract the trend with a fragmented sales policy. This means defending prices for the better qualities in specific markets and for customers with special characteristics, and seeking interim solutions (storing, for example) for surpluses in production, rather than trying, through pricing, to place the goods on the markets. For lower-quality categories, production into collagen is the order of the day at the moment.

In Europe in particular, the supply bottleneck for lime splits has opened up this alternative market. In fact, it changes relatively little. Previously, the leather industry bought hides for leather production and gave the splits to the collagen industry and now the system is simply reversed with slightly different signs and the fact that a large proportion of the hides are only worked up to the liming stage and then leave the production chain. For the hides that still have to be split for the special sections of the collagen industry, a use for the grain must be found. If no use can be found for the leather, there are still the options of gelatine or biomass. In any case, the hides have been processed and disappeared physically from the market for the time being. In addition to the surplus from the current high level of slaughter, it is said that many salted, old goods are also being disposed of.

The big question now is how long this channel will remain open. The question arises because rumour has it that large quantities of salted splits from South America are on their way to Europe and will arrive here at the beginning of 2025. This would close the short-term supply gap for the time being and the demand for splits here in Europe would at least be covered for the time being. Without an improvement in the demand for leather, this would lead to an oversupply of goods in Europe again.

Basically, we would then be back at a similar point to 2008 and during and after the coronavirus crisis. At these times, we also had a similar market situation and historically low prices. Each time, it was optimism and the large production capacity in China that took the opportunity to secure cheap raw materials, support prices and bring the markets back into a certain equilibrium. Without a general increase in demand for leather and without the use of the production capacity in China, it is difficult to see a trend reversal in the foreseeable future. One question remains unanswered, namely whether the alternative use of cowhides in other areas can relieve this supply pressure.

We do not need to talk about the split market at this point. We have already explained the special situation above. In China, prices for lime splits are currently falling, whereas the market for wet blue splits remains stable at low levels.

The situation on the sheepskin market is also currently not eventful. We are hearing from China that there is definitely interest in lamb and sheepskins, but only at very low and non-cost-covering prices. The issue here is not so much the production of leather, but rather the recovery of wool, as prices for coarser wool have recovered significantly in recent months. However, one problem remains: even for this raw material, it is not possible to achieve cost-covering revenues for the producers.

There are only two weeks left until the end of 2024. Of course, war and the resulting misery are much more important than developments in the leather market, but it has to be said that overall this does not end on a particularly positive note. For many leather producers, it has been a year of disappointment and great difficulty, and the hopes repeatedly expressed for an improvement have not materialised in most cases. Many will probably use the break over the holidays to think intensively about alternatives for the future. We will also be checking whether we have overlooked anything in recent months that could dispel our fundamental concerns.

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