Macroeconomics

The statistical data from the past two-week period offered no clear indications in terms of direction.

Japan and Germany delivered very positive news with GDP increases for the first quarter of 5.3 and 4.1% respectively. While Japan enjoyed strong consumer spending which has created the growth, strong exports accounted for the strong performance and growth in Germany. The Central European economy continues, however, to suffer from slow consumer spending and most analysts do not see the economy as being back on track. Despite positive news, Germany, which is such an important factor in the European business outlook, continues to suffer from massive structural problems.

Positive news came from the energy markets. Oil prices continue to remain below the $50 mark. And with the end of the winter season in the northern hemisphere, there is some hope that the continuous increases in oil prices that have been seen, could stop in the months to come.

The US dollar continued to strengthen and reached an eight-month high against the euro last Friday. It was also firmer against the Japanese yen and having left the previous trading band the financial markets are now intensively discussing whether the strength of the greenback is only temporary and a technical reaction or if this could be the beginning of a longer term change. After the high of 1.36 at the end of 2004, for Europeans at least, things are looking a little bit brighter now.  If the trend continues and reaches the 1.20 level, it would definitely ease a lot of the price pressure on European manufacturers.

Discussions about the revaluation of the Chinese Yuan have calmed down, although the American government continues to increase the pressure on China.  However, knowing Chinese politics, it is unlikely that the government in Beijing will give in and revalue the currency in the near future in line with the expectations of the rest of the world. The government is still very busy bailing out State-owned banks which are still burdened with a huge number of bad loans. The best one can hope for in 2005 seems to be an expansion of the actual trading band between the US dollar and the Yuan.

The fact that China has noticed its importance and influence on international economies can be seen by its quick reaction to the complaints of European and American manufacturers and governments about textile exports. Western markets have been flooded with very cheap products and local manufacturers have been complaining and threatening further layoffs in the local job markets.  As a consequence of this, the Chinese government has now imposed export taxes which account for increases of up to 400% on selected items.

Market intelligence

The last two weeks were a bit unclear in terms of trading activity.  Raw material sales and price developments were definitely not entirely positive.  Price trends were also mixed on the whole. Some materials were said to have moved up slightly, while others had to come down to find enough customer interest.  All in all we would definitely call the price trend weaker rather than firmer - at least when we look at the volume of hides traded at higher or lower prices.

The market remains in the trading pattern which we have now seen for a long time and the market segments are continuing to separate more and more from each other.  Furthermore, a very clear picture is emerging about the present market situation, following the publication of results from certain individual companies working in the leather field.

While well-known brand names in the shoe and accessory business are reporting stronger sales and better profits, high volume manufacturers of leather upholstery are complaining about shrinking margins and falling sales. (Please see our news section on Leatherbiz.com for more details). An example of this is Tod’s and Natuzzi, where one was able to report growth in sales and profits whilst the other had to inform its shareholders of exactly the opposite situation, a drop in profits and substantial job cuts to get the cost structure back under control.

We can also now see very clearly how much fashion has really taken over command in the leather field.  A very good example is handbags. In the 50’s and 60’s, ladies who did not own a handbag were almost non-existent. After this there was a long period when youngsters at least considered handbags to be very old-fashioned and there was hardly a teenager or twenty-year-old seen carrying such a item in the street. Although this might have applied more to Europe and the United States rather than Asia, handbags were definitely not one of the hot sellers in leather products.  However, this has completely changed in the past five years and definitely accelerated in the last two. Today the handbag is an absolute must for the fashion-oriented woman, which comes as no surprise to those in the leather business, who saw the demand and a shift in production a long time ago.

With handbags being a very fashionable product, and with the selection of designs and leather being seemingly endless, it leaves a lot of room for creative tanners, designers and manufacturers to develop products and price them adequately. With a variety of products and selections the price transparency is always substantially less.

In the shoe industry, we are unfortunately seeing the total opposite. There are more and more global shoe businesses and fewer global marketers selling more uniform products that can be much copied more easily than ever before. This means that not only manufacturing, but also branding and distribution are becoming more problematic and this leaves the customer with fewer designs and a smaller selection. As a consequence, there is less choice as far as products are concerned, and the decision comes down to purely one of whether to spend more money on a branded product or less money on a non-branded product. Those consumers who are less brand-conscious have, at least for the time being, the opportunity of buying cheaper than ever before.

As an example we can look at ordinary sneakers and ladies moccasins which are very similar in design and style no matter which brand they carry or who has manufactured them. Consequently, they have become an ideal product for discount stores and the average price level in Western markets has fallen by at least 30% to 50% from the last season.

While most consumers still find it extremely difficult to distinguish between a good quality shoe and a mass manufactured one, it is very difficult to teach them why they should go for a better quality product. With the trend of mixing and matching in fashion, consumers tend more and more to buy a single luxury garment or accessory and combine it with no name products and shoes, which would not have been possible in the past.

We dealt with this subject in our last issue of the market intelligence, but it is probably necessary to remind our readers that we have exactly the same situation in the leather garment business.

The situation in leather upholstery is different, because leather sofas are not a small ticket item and are not turned around as quickly as shoes. However, we are also seeing a similar trend in this sector which is less related to brand but more to image and quality. In any case, it has become pretty obvious that the demand for quality products is at least stable if not increasing.  This can also easily be seen in the shortage of high quality raw material and the slow but sure change in the price trend. Heavy and high quality material, from Europe in particular, has never really been faced with the sharp reductions in prices and in fact the reverse is true and they were able to go against the trend and have increased prices in the past few months.

At the same time everybody is now aware of the enormous problems facing mass-produced furniture leather and furniture in the present market. We have dealt with this subject already numerous times and we assume that everyone is familiar with the situation.

Summarising the above, we have already seen a reflection of these trends in the raw material markets and there is a good chance that this trend is going to continue for the near future. Only a change in fashion, designs or a sudden change in behaviour on the part of the unpredictable consumer could really knock the markets in another direction.

For the time being, we still see hides of commodity quality under the control of the rules of mass markets.  Prices will remain under pressure until demand outstrips supply and this is hard to envisage in the coming months. Quite the reverse is true in the case of high quality products.  One can see that prices for high quality calf and kip have made a clear turnaround.  Although premium bovine hides are still affected by the general price pressure in the mass markets, they have already started to free themselves and their prices have, in most cases, started to move against the trend. As the production of these kinds of products is going to be very low for the coming three to four months, one would not be surprised if they expand on their gains.

The split market was a bit of a mixed bag. While some supply origins are at least reporting a stable market on steady demand, European suppliers, at least, are continuing to suffer.  Prices in the main producing markets in Europe have fallen by 30% to 50% in the first months of this year. A decline in production might ease the pressure a bit, but in general with a large offer of cheap full hide material it is hard to believe that splits will really regain any of their attraction in the near future.

The skin market also remains inscrutable. While there are still people trying to attract trade through talk of large purchases of raw materials, most of the established businesses cannot find any of this activity.  Prices of reputed producers for lamb and sheep, in Europe at least, are at very low levels and once again it is only the top quality raw material origins that are attracting interest and buyers at reasonable price levels. The rest of the market is seeing the same price and demand difficulties that we have mentioned above in the bovine section. For us, only one question is of any particular interest.  Raw material prices are no longer prohibitive for designers and retailers to promote garment leather again. We are now in the period where decisions for the coming seasons are made and we will watch with great interest for any kind of indications that we could see a rebound in fashion for leather garments as we have seen in accessories and handbags.  The time would be right for it now.

The outlook for the next few weeks and a bit further into the future has to be separated. Great parts of the trade are suffering significant problems as the losses and structural problems which we have been talked about so frequently over the last few years start to affect financial results.  A French contract tanner has gone bankrupt, as has a small German hide collector. A large name in the German hide and leather trade has announced another significant change in its top management and many say that it has produced negative results recently. 

Speaking to insiders in the European tanning centres, more and more of them are very concerned about the present payment problems to come over and after the summer.  In China, it seems that the problem of overcapacity is still unresolved, however, over there restructuring is definitely still much easier than in Europe.

It seems that it does not require very much courage to predict a continuation of the separate paths the leather business is continuing to take. We remain quite positive for the high quality and high fashion market segments as they will only be limited by the quality and price of the suitable and the raw materials available.  For the rest of the market the story of fighting for orders of the right size and at the right price is set to continue. We are very afraid and cautious about the structural changes in the raw material and leather industry in Europe and the financial consequences we could see by the end of this year. If we don't see a sharp rebound of the business situation in Asia and the Middle East at the same time, the pressure on prices and margins will continue and limit any kind of positive outlook for the hide, skins and leather trade in general.

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