Macroeconomics

The world of general economics has not delivered many hard facts of particular interest in the past two weeks, but in general the global economy is still on track.

In the month of January the dollar gained almost 4% against the euro. The ongoing descent that we saw in the last quarter of 2004 was consequently stopped, thus our comments at the end of last year to watch the development of the dollar , because the American financial community could not allow an ever-falling currency have been proved to be correct. At the same time we now have to be very cautious of the temporary consolidation being the reverse of the weaker trend of the greenback.

This all depends very much on the general interpretation of the US policy for the next three to four years and whether one believes that the euro area can be accelerated. Looking at recent unemployment figures, in particular in Germany where a correction of the unemployment statistics lifted the number of unemployed to more than 5 million (some say the true figure is over 6 million), it would be easy to be sceptical about the development of the EU community in the near future.

So, on the one hand, the deficits in the United States remain a great worry which is hanging over the US dollar and affecting confidence, but on the other hand, the outlook for the euro is not much better.  With steady growth in the emerging markets and the reasonably robust development of the US economy, at least in the short term, there is a bit more to be said in favour of the US dollar rather than the Euro. Medium to long term, however, the deficits in the United States have to be corrected, for the moment and at least, there are very few solutions to this problem that do not include a further devaluation of the American currency. For the time being one needs to see if the currency climbs over the 1.2850 mark which could trigger another short-term rally which might offer those who need to exchange US$ a good chance to protect themselves against further surprises.

The focus of the meeting of the G8 in London concentrated less on the present economical situation in the main industries, and more on a settlement of the problems of the world as a whole. A great many proposals were made regarding reducing the debts of the poor countries and we must all understand that solving this problem is not only necessary to deal with the problem of terrorism, but the rich countries also need to develop new markets for their products and services.

As far as general statistical data is concerned, consumer confidence in the USA rose from 102.7 to 103.4. US economic growth was still reasonable in the last quarter of 2004 at 3.1%, while growth in Europe slowed, mainly due to a slowdown in industrial production.

Market intelligence

We have spent a little more time on the currency subject in the macroeconomic section of this edition, especially because for the time being currency issues remain more important than the raw material price development itself.  If the raw material market is really physically in balance, or if buyers and sellers are making it balance as a result of their attitude, is extremely difficult to tell for the time being.

Following the reports of many players around the globe, most of them agree that trading activity was quite slow throughout the month of January.  In the second and third week  it seemed that some positive signs of activity were noted, but at the end of the day this all seemed to be pretty short lived.

So, the most interesting news could well be the closure of the beamhouse at one of the leading German contract tanners. As in previous cases, this was not due bankruptcy or a shortage of financial resources that made the company decide to close down operations. It was, once again, the general environment of the market, the cost structure in Western Europe, the strong euro, and last but not least, the outlook of further restrictions and increasing bureaucracy created by the EU in Brussels, that has made businesses review their strategies and the ratio of risk and chance.  Under the present conditions it would not be a surprise to see more follow this path as we have already seen quite a number of tanneries close down voluntarily in the last 12 months.

The slow performance of the leather pipeline at the beginning of 2005 can  be explained in part by the upcoming holidays in Asia. This part of the world now accounts for the majority of the world’s leather production and so it wields a great influence. But, having said this, this influence is no longer as strong as it was a year ago and countries such as China, parts of the Eastern bloc and also old Europe still play a very important role.

So, the holidays can't be the only reason why the leather pipeline is so idle.

There must be more to this and as the supply chain for leather is not delivering many subjects worthy of discussion, we think it might be more interesting to deal with the more structural and fundamental issues of the business.

Let us list in no particular order just a few of the main aspects that could influence normal business parameters.

We should have been in one of the best periods for the sale of leather and leather related products, because:

a) in the past two years, the global economy has grown at the highest rate for the past 30 years.

b) interest rates have almost reached the lowest levels ever and should have encouraged people to build inventories.

c) almost all raw materials have seen an increase in value over the last two years, partly as a result of the booming global economy and partly due to simple speculation.

d) consumer spending, with the only exception being Europe, has been at very high levels led by the Americans as well as Japan with its recovery. The emerging markets also took full advantage of the positive global growth.

Negative influences

The only negative argument one could find was the war in Iraq and the consequence of a substantial rise in energy costs.  However, these influences are generally lagging behind the general trend and have not yet had any massive impact on general development in recent years.

So why have leather and leather products seen such a slow performance in the last few years and how is it possible that raw hide and skin prices have not changed very much in US dollar terms? No-one should have been surprised if this had happened considering these conditions. So, in theory,  the price of this raw material and its products could have reached record highs in the past two years.

We believe that many in the trade had already asked the same questions and it also seems that nobody has found a definitive answer to the question.

In our attempt to analyse the past and to learn something about what is likely to happen in the future we came to the following conclusions. When we look at the situation of the global economy over the past two years, which is entirely positive, and at the same time look at leather products which have not performed very well, then there must be issues involved other than the normal matter of supply and demand. First one has to consider purchasing habits. Second, we have to deal with the fact that leather as such is only required in a very small sector of the consumer product range.

Buying habits

If we start with buying habits, this is less a question of ‘habits’ rather and more a massive shift of global consumption.

We have already dealt with the individual reasons for this  many times in the market intelligence, but when one puts things together the picture becomes much clearer. Fact number one: except in shoe leather, it is hardly needed anymore in any other sector in which it is used. Consequently, in all the other sectors it is more a question of taste and fashion as to whether leather finds a market or not.  Fact number two: again except for shoes and the luxury segment, leather is a classic middle-class item, if it should be sold in larger volumes.

When we look at the development of consumer spending in recent years, then we find two main reasons why leather and leather products are struggling so much.

Loss of image

In regards to furniture, leather has lost its image. The shift of production to China, the lack of consumer spending in central Europe (middle-class), prices spiralling downwards have slowly but surely killed the reputation of leather furniture in the educated markets. Consequently, more and cheaper products have been produced in an attempt to stimulate demand, which has in part failed, but has also kept a tight grip on prices. The logic is simple: if something gets progressively cheaper, it can't really be appreciated as a value product. Leather furniture is not a throwaway item and as a consequence the consumer’s  idea of getting something of value has faded over the last few years.

If we wanted to include automotive upholstery in this segment, then one might argue that at least this sector of the market has tried to stem the trend. However, one has reason to question this, because the logic of price, and consequently, of value has in the meantime overtaken the use of leather in cars. The main reason why leather is used in cars and why the quantity has increased is much simpler: car producers make a decent profit and the maintenance is said to be much easier. In addition to the longer lifetime of a car and the development cycles and material decisions, a short term decline in the use of leather in cars cannot be expected at the moment. It would, however, be interesting to analyse the proportion to which leather interiors might decline over the next few years, rather than continue to increase as forecasted by most of the analysts

If we look at leather garments next, then we have a similar situation. While the western markets have already been saturated for quite some time and the traditional black or brown leather jacket has ceased to be a standard in the Western Worlds wardrobe, leather garment production focused almost exclusively on the East. China and Russia were the only remaining driving forces behind the large manufacturers in China and Turkey. Little was invested into maintaining the western markets and the only solution was seen to be to sell more product, which led to a decline in prices and increasing pressure from retailers on manufacturers. The same as with furniture, this trend has killed the image of the product. While in the furniture sector, plastic and artificial leathers ruined the reputation of leather, it was pig skin that killed the reputation of leather garments in the western world. When finally the attraction of leather also started to fade in the east, there was nothing really left to protect as such. For garments as well, the trend towards cheaper quality, that means cheaper prices failed to stimulate demand, as many are pretending to hope for. We could argue that total number of pieces produced and sold has not slowed down, and maybe the increase in wealth has assisted this, but the general standard leather jackets have lost their attraction and market. Manufacturers cannot and retailers have no particular interest in supporting this specific consumer product.

The only market segment which is still strongly related to the quality and image of leather is the shoe sector and in part the leather goods sector. Not only the increase in global wealth, but also the strong performance of the emerging markets as far as consumer spending is concerned, have boosted the use and consumption of leather shoes. Fashion also still plays a dominant role in the use of leather in shoes. Leather goods, in particular handbags, are also an accessory that is still within the financial limits of the ’normal’ people in this world. Shoes, as well as leather accessories, are usually chosen by individuals and not by a group or a family. Shoes more than anything else remain a product that is needed and there is no doubt that leather’s image is still superior to any other alternative.

Market trends

All this may explain the present pattern of the market.  We have all been so interested by the strong performance in the growth of manufacturing, in particular in furniture leathers in Ch

Share this story: