Macroeconomics

Over the past two weeks concerns about the global economy have started to increase, however, in our view, the global economy is still on a path towards expansion and even if  things may slow down a bit in 2005, we still believe that the short term outlook is reasonably positive. Global growth is expected to slow down to a level of around 4%.

We remain concerned about the general problems that the global economy has to deal with, in particular the rising cost of raw material, in addition to the increase in energy costs, and as we mentioned as early as last year we are afraid that inflation could be on its way back up. Under the present circumstances where manufacturers are unable to pass increased material and production costs on, due to fierce competition and overcapacity, the laws of economics state that this has to mean that manufacturing businesses will fail. The leather industry is a good and small example of this phenomenon.

As far as financial data is concerned, the most important figure that was expected was an increase in American interest rates.  While in America the economy is still following a pattern of moderate expansion, the employment data released last Friday showed that other Western regions are still struggling.  In Japan deflation has still not been fully beaten and in Europe manufacturing is still shrinking.  The purchasing management index fell to 49.2 in April and unemployment across Europe rose to 8.9%.

In the United States good and bad numbers are still balancing each other out.  Consumer confidence fell again for April, but new home sales and positive news from the job market were a boost.

The US dollar continued trading within its recent range against the other major currencies and it seems that the trigger for a new trend will have to come from Asia, and in particular from a change in monetary policy in China. There were a lot of rumours circulating in the media that the government in Beijing is preparing to revalue the currency. But although they will without doubt do so sooner or later, it is unlikely that they are going to react to rumours. The Chinese government is fully aware of the rising tensions between China and most of its main trading partners, not only in the currency markets, but also politically.  With full membership of  the WTO, cheap Chinese products have been increasingly flooding Western consumer markets thus increasing the job losses, particularly in Europe.

Fortunately, oil prices have continued to fall which offers some hope that the increase in energy prices might come to a temporary halt at least.

Market intelligence

Trading activity in the last two weeks was divided into two completely different parts.  While the first week was still reasonably active and most eyes were directed towards Bologna, last week was almost a non-event.

The leather fair in Italy confirmed more or less what had been expected.  Despite many complaints that attendance was lower  than last year and definitely lower than what people had expected, we still have to deal with the question of the quality of visitors.  And this event was another confirmation that the leather business is becoming more and more divided into ‘the winners and losers’. As harsh as this may sound, it seems to be becoming the reality more and more, and as far as Europe is concerned the number of the winners is definitely much fewer than the number of the losers.

Speaking to the visitors and talking to exhibitors it quickly became clear that the companies that have done their homework over the past few years and have paid attention to the setup of their operations, developed products, built strong customer relations, increased flexibility and integrated well into the supply chain had no complaints about either the volume of orders, or the present levels of profitability. The stands of these few were crowded and sales staff were more than busy. If there was any complaint to be heard it was that the vast majority of visitors and business were focused on Wednesday alone, while the other two days saw much less activity.

This has become a bad habit in that visitors to trade shows are increasingly choosing the central day(s) to attend and this is concerning everyone more and more.  From the visitor’s point of view, it is understandable, because people have to save time and expenses in relation to visiting trade shows, and it makes very little sense if the value of the visits and the efficiency of the discussions is affected by the time restraints everybody has.

Someone made an interesting comment that it might be much better to return to fixed time schedules given by the exhibitors to their key visitors prior to the show. This could stretch activity over the full-length of the show and would definitely ease a lot of the time stresses people are confronted with. However, this idea would  definitely not be welcomed by many of the satellite industries who represent a large proportion of the foot traffic at such shows.

There might be fairs where this idea applies less than for others, but Bologna in May should definitely be left to the tanners and their customers rather than a marketplace for almost everyone. It should certainly be left up to the exhibitors to decide who they want to see and who they are going to invite to visit their stands. This statement, which has often been made, might not be popular for many, but at the end of the day it has to be left in the hands of the organisers and exhibitors to decide how they will get the most out of the investment involved in such an event.

As far as the leather business, as such, was concerned, most exhibitors confirmed that no really new fashion trends can be expected for the coming seasons.  There were eye-catching, colourful leathers on display which confirmed the trend already seen for this spring and summer season that has brought a lot of bright colours back into the shops. The elder statesmen of the trade commented on this saying: bad times, bright colours.  Speaking to the tanners, they called the bright colours more of a visual effect to attract attention rather than having any real expectations of selling them in any volume.

The types of leather on display were also pretty much the same. On the one hand there were the very high quality, natural grains which require the best raw materials available, and on the other hand,  a lot of artificial prints which can absorb quite a number of cheaper selections and raw materials. The driving force behind the fashion, and the healthy order books of many tanners, is definitely the leather goods sector and in particular ladies handbags. Handbags have again become a very hot item in ladies fashion, an accessory the fashion-oriented woman can't miss at the moment. Some European retailers report sales increases over the past six months of up to 40% which explains why business activity in this segment has been so much better than any other over the past six  months. Fortunately, this trend seems set to continue at the moment.

Although upholstery was only on the sidelines at the event, a lot of discussion was noticed.  It is becoming pretty obvious that many in the trade are more than concerned about the situation in this sector, and in garment leathers too. The question frequently raised was: How can we get out of this dead-end we have run into for the production and sales of these products? While in upholstery it is mere overcapacity in production, in the garment sector we are faced with a lack of fashion products.  We are missing in garments what we have seen in handbags.  The fashion revival through leather jackets as a garment is not enough in itself to bring about a recovery.  More and more bovine garment tanners, in particular in Korea, are going out of business and their cheaper counterparts in China cannot find sufficient market demand.

Fortunately, it was good to see that some Italian tanners in Bologna still dared to present new ideas for garment leathers based on bovine raw material and splits.  If the fashion designers and the purchasing departments of the big fashion retailers notice this, and if they are willing to consider the product remains to be seen. However, we all know how quickly things can turnaround, when the right person, the right company, or the right film etc. shows leather garments. Product placement is the key word here.  Unfortunately, leather manufacturers have very little opportunity or the financial power to support their own businesses at this level. Sometimes it seems to be just luck, or was it more when Madonna all of a sudden started to wear Puma shoes of the 70s, or German top model Heidi Klum started to declare Birkenstock sandals ‘the combination’ for designer fashion garments? There are more examples, but this just goes to prove that there is plenty of opportunity to

get leather garments back into the shops and to sell them successfully.

As far as the raw material market was concerned, price variations continued to be reasonably limited. Hides and skins suitable for the successful market segments saw good clearance and continued to develop against the general trend. Their prices moved moderately upwards. Hides, particularly those used for medium and lower end furniture production and of course garments, continued to struggle.  We saw moderate adjustments in prices in the United States, but this was accompanied with very impressive sales numbers.  With a very low slaughter in Europe, the volume of raw material is no longer so  pressing on sellers, and prices in general stabilised, even for the less attractive raw materials.

The split market remained pretty difficult. Although there is less general supply, splits are losing more and more attraction, because there are plenty of cheap hides, in particular, wetblue available. So, why buy spreads when you can get full hides or grains at this similar price?  It also seems that splits have been removed from a number of producer’s lists and consequently we would not be surprised if split in general will have a difficult time the next season.

The skin market did not deliver too much news.  The gossip that there are speculators trying to buy the available raw material cheaply did not prove to be true. Sales and business was a bit better, but we tend to believe that this is not enough to solve all the problems and to clear inventories. With the first new season lambs coming to the market in Europe, Turkish tanners, in particular, are sniffing around to figure out at what price the season is going to start. There are still a lot of rumours about cheap sales for lambs from the UK in particular and true or not for the time being it seems that there is more talk than trade.

For the coming weeks we think that supply is going to come more and more back into focus. Individual hide grades are in shorter and shorter supply and in Europe, in particular, we have to wait and see if tanners are covered well enough and have made the necessary preparations for the raw material procurement to cover the summer holidays. This mainly applies to the small market of top quality hides and also hides for the production of high substance leathers.

In furniture leathers we now need to verify if there is a new trend. There is plenty of indication that many tanners are starting to give up production of very cheap corrected grain upholstery leather. Prices per square foot, which are below US$1, do not make future production feasible.

So, we have just two options. Either the market (furniture makers) stop the price spiral to stop the loss of production capacity - for the short term the price pressure on cheap and low quality hides will persist. Or, the second alternative would be an attempt by tanners and manufacturers to upgrade leather qualities again. This would favour medium quality hides and could let them follow the higher quality hides.

We know that hardly anyone will agree that there is any chance of a price increase, but one thing is also true, only the scarce, quality product which still has a chance of becoming more expensive rather than cheaper, attracts the necessary appreciation and attention from the consumer. The attempt to do it the other way round has already failed.

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