Over the past two weeks, events outside of the leather markets have remained more important than the business itself. Firstly, of course, it was tariffs. The most significant decision was the temporary suspension of tariffs between China and the US. In addition to the questions of which tariffs will apply, when they will apply and which products will be affected, it affected goods already shipped. The deadline now is August 14.

Bear in mind that many of the US cattle hides that were either already planned or travelling to China when the original tariffs were introduced were diverted, either because the Chinese customer was not prepared to bear the high tariffs, or the hides were destined for finished products for the US market, or simply because they were not sure whether the goods would be accepted or could not agree on what to do with the contracts. This changed again with the suspension of tariffs. A whole lot of raw and wet-blue hides could then be rebooked to their original ports of destination. Although this means high costs, it may still be the better option.
 

Questionable statistics

The official USDA statistics on sales and shipments of American cattle hides raised big questions. In the week ending 22 May, large volumes of sales allegedly to China suddenly appeared in the statistics. At first glance, this was seen as confirmation of strong buying interest at favourable prices, but on closer inspection, suspicions grew that these were merely new statistics for existing contracts. It is also possible that some larger new deals were added and some bigger names were mentioned that have the financial resources to speculatively secure large quantities of very cheap commodities. In this context, of course, it is not so much a question of whether there are really valid leather orders but whether it is just securing cover for production with raw materials. Those who are concerned will already know exactly. For everyone else, it remains speculation. In the following week, the figures then fell again significantly, even if the absolute figure was still impressive under the conditions. Here, too, there may be other reasons.

New customs negotiations between the US and China are due to begin in London and the results will certainly be of great significance for the leather business. However, it should not be forgotten that the negotiations are not only important for the leather industry but also to the meat industry. At the same time, negotiations are taking place between the EU and the US. The resulting logistics are causing problems. In addition to completely unreliable dates for shipments, the first bottlenecks for empty containers are now becoming apparent. This also means uncertainty for the calculation of freight costs.

Both exporters to the US and importers in the US are trying to hedge for the near future. This is particularly evident in the build-up of stocks in the US, trying to avoid higher tariffs, and to ensure they remain able to deliver. The logistics trade media report on rapidly filling bonded warehouse space that enables duty-free storage. Here too, it is not just a question of capacity, but also of the associated costs. Importers and exporters of products that use leather have been specifically mentioned. 

To round off the negative influences on the demand for leather, the possible production cutbacks by car manufacturers due to a lack of raw materials from China must also be mentioned. This relates in particular to rare earths, without which vehicle production is inconceivable. Even without the restrictions on the supply of base materials, the premium market for cars is in jeopardy, as European manufacturers are dependent on the two particularly important markets: the US and China. Sales were already far from satisfactory without additional restrictions.

Despite all the potential disasters that the trade conflict could trigger, there is a feeling some kind of solution can be found. There is a slowly growing confidence among most business leaders that political leaders realise an economic war could do more harm than good for them, too. Nevertheless, we are dealing with big egos and the risk of anyone overplaying their hand remains very high.

Acquisitions and consolidations

In the leather industry itself, the most interesting news over the past two weeks has been about further interlinking in the leather industry. We have already had the announcement that Pasubio, which operates almost exclusively in the automotive leather segment, is expanding its range and taking over leathergoods tanners. However, it is possible that this is not just an expansion of the product range, but possibly also the acquisition of specific expertise. It would not be surprising, as the market for automotive leather seems to be changing from a mass product to a more specialised niche product in the luxury segment.

Last week, the Rino Mastrotto Group announced that Prada had acquired a 10% stake. This is not just a purely financial investment; two tanneries that already belonged to Prada are now being integrated into RMG, plus a cash injection. Of course, such investments and acquisitions are always celebrated as a major strategic and far-sighted decision, but in our opinion the two transactions are quite different. While Pasubio’s purchase of family-run tannery Antiba is new territory, the networking between RMG and Prada is only an extension of its supply chain. 

RMG has always positioned itself broadly and is a strong partner to Prada in the luxury leather goods sector. For Prada, the benefits are perhaps even greater, as the acquisition of leather factories has not really proved to be a decisive success for many of the major luxury brands. They gain access to the material, but much of the agility and creativity of the independent leather factories has also been lost, in many cases. The spirit and creativity of a tannery lies not in its production facility, but with those who develop and produce the leather. You often get the impression that people have not realised that a leather manufacturer has a lot in common with the designers who develop the collections. They must be given a lot of freedom, and creativity must not be restricted. If they are used solely as fulfilment for materials, the real appeal of leather in luxury goods is lost. Further developments in this sector will be particularly exciting. It may even point the way forward for the leather industry as a whole.

Kangaroo catastrophe

The decision by Adidas to abandon kangaroo leather has caused a great deal of consternation, at least within the industry. The decision was not a new one, nor was it made by Adidas alone. However, it sends out an exceptionally negative signal. It is difficult to understand why Adidas, a company that is riding a wave of success with its retro sneakers made of leather, should ban kangaroo leather from its collection. It raises questions about how long it will stick with leather in its other models.

There are many reasons for this decision. It is possible that they are being driven by the “spirit of the times”. This would be strange, as kangaroos are hunted and killed in Australia for many reasons, but certainly not to obtain the skins for leather production. What's more, kangaroo leather has very special properties. It is exceptionally tear-resistant and is better suited to the stresses and strains of sport than most other alternatives. Everyone has tried other materials, but almost everyone always comes back to kangaroo leather shoes, particularly for football and rugby. Wetness, temperature, adaptability and comfort remain unrivalled. 

Brands have been pushed so far into a corner by supposed social trends and public opinion that they don't know exactly how to get out of this position. Over the years, the realities have been bent in such a way that great marketing tricks have to be performed to justify the use of leather again. The facts are still on the table - it remains to be seen whether anyone will be prepared to use these facts openly and re-qualify the use of leather. If the decision to ban kangaroo leather is just caused by the scale of economics (production numbers are considered too small) then at least this should be communicated. Valuable raw material is being destroyed in large quantities. The kangaroo skins must find another home or, like so many other hides and skins, they will be left to rot.

Splits and skins

There have been no significant developments in the split sector and for sheep, lamb and goat skins. In the case of splits, collagen and gelatine remain the dominant uses, at least in Europe. Splits for suede are in short supply. The decline in leather production is leading to correspondingly less production of splits and this must be compensated for by other raw material alternatives. It remains to be seen in the medium term whether the production of collagens and gelatine from bovine hide in Europe can or should be continued. Here too, the first mergers of producers are already taking place, as the existing production structure does not match the market situation.

Leather orders are not enough to make use of the capacity available. Not only are the quantities insufficient, but the size of the individual orders no longer matches the production, in most cases. This applies to both Europe and China, with some exceptions. In our view, the new global risks are reorganising supply chains. Mass manufacturers have not yet made a decision on how to deal with the changed conditions in logistics and trade policy. Relocating production, increasing regional stockpiling, changing product ranges - opinions differ widely. This may be lamented, but perhaps this is exactly what is needed after many years without any significant change. Companies can be managed less administratively and more creatively. The leather industry has always proven to be very resilient. There have been major changes and relocations in a decadal rhythm and somehow the leather industry has always reinvented itself. In the last ten years, unfortunately, much of its potential has been taken away because the material has been demonised.

So, for the next few weeks, we will simply have to wait and see under what conditions we will have to plan for the coming season. Either way, not much will change in the summer months. We can only hope that this time will be used to think about how we can regain the sovereignty of action and opinion for leather as a product. We remain convinced that the permanent defensive policy of apologies and explanations is not particularly useful. Anyone who wants to actively take their fate into their own hands must not become a slave to opinions.

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