Macroeconomics

The economic world delivered mixed information. The emerging markets continued to show healthy growth and industrial production rates (Indonesia, Philippines, Korea, etc), and the euro zones are also finally reporting better data at last. Japan – which has been favoured for some time by the economists - is now the lame duck. Germany is making serious attempts to get out of the doldrums, and the business confidence index rose to 98.7 in October which is pretty high especially considering the structural problems the country is still dealing with and the fact that a new government is not yet in place. Other countries in the euro zone are also showing promise with Italy and France reporting rising business confidence levels too.

Japan’s stock market index rose over 14,000 points and retail sales went up by almost 2% in October.

In the USA the GNP for the third quarter came in at 3.8 % which is much better than had been expected in view of rising energy costs and the after effects of the hurricanes. As a consequence interest rates were raised again by 0.25%, as expected, to 4% and one has to assume that this trend is going to continue for some time to come, until inflation is under control. The ECB kept interest rates steady as the economy remains vulnerable and inflation is not a factor as yet.

Oil prices stayed below $60 per barrel and the warm autumn weather so far in the Northern hemisphere has, so far, helped to keep the demand for heating oil under control.

In view of rising interest rates and the strong performance of the economy, the US$ broke the chart levels at $1.1870 against the euro and finished the week at almost $1.1800. There is a good chance of further gains over the coming weeks unless the ECB decides to raise interest rates too or that the economy in the euro zone really takes off.

Market intelligence

Most of the interest in the last two weeks has focused on the Lineapelle leather fair in Bologna, Italy and most people were impressed. Even though visitor numbers were lower than in the previous years, attendance seemed to be spread more evenly over the three days of the show and was less hectic on the second day.

The show was unusually busy on the third day when there is usually hardly anyone in the aisles and the staff on the stands are just usually busy packing up. Quite the reverse was true this year as everybody remained reasonably busy until the very last moment of the show. The only ones with any complaints were the exhibitors from the machinery and chemical sectors and more and more - in particular chemical companies - are planning to stop exhibiting. This is definitely not good news for the event as such, because the November exhibition has always depended a lot on technicians and other technical decision makers as well as people from the leather sector itself.

Despite all of the problems such the leather pipeline and the high uncertainty about the economic future of the world, it was surprising how entirely positive the results from the fair were. Hardly a single complaint was heard from anyone and the entire mood within the trade was particularly good.  If anyone had a single complaint it was the current margin situation and worries about the development of production cost in 2006.  All the rest, such as fashion, quality, demand, interest and, last but not least the order books, were mentioned in a positive light.

Upholstery reflects success

Although it is an event for leathergoods and shoes some of the success spilled over into the upholstery sector. A number of traditional Italian upholstery tanners exhibited at the show, and they too demonstrated that they are not willing just to give up and leave the field open for their Asian competitors.

Extraordinarily nice finishing technologies were seen and what the leather-making specialists were able to create from all kinds of raw materials proved again that tradition and skill cannot just be substituted by cheaper labour and technology transfer from the chemical companies.

Even if one doesn’t want to get too excited, it might well be that the price problem for leather is coming to an end.  Prices are without doubt still a very important issue and hardly any tanner or leather buyer would accept that prices are no longer in the foreground, but nobody can deny that quality and beauty are taking over once again. This definitely applies more for fashion-oriented products and leather is definitely enjoying an advantage as it is being used in so many luxury items, but nobody should underestimate the ordinary consumer as he/she also has a feel for touch and a sense for fashion.

Hope for the garment industry?

If what we are seeing in the leather goods and shoes sector could spill over into the garment segment there is a good chance that one of the weakest areas in the leather industry might eventually come out of the doldrums. There is no reason why the same attraction to beauty, feel and design could and should not revitalise demand and interest for garments made from beautiful leather. Now it's the turn of the fashion designers and the big brand names to take the subject of leather up again and to promote the same. After so many years, there should be a fair chance that not only the consumer would be happy but also to make some money with the present prices.

Mixed feelings

It might seem a bit contradictory that in general the mood in the leather industry does not seem to be particularly good and then we dare to give such a positive review one the present situation. And indeed, if one looks at the general economic environment and the outlook, then the scratching of a few heads would be understandable. However history has shown that difficult times have frequently been good times for the leather industry. The most critical aspect remains the fact that leather is simply not a good product for the classic global price war. There are in reality only a few products where leather, as a material, would be essential.  Without the attraction and beauty of the product as such, there is little reason to buy a product made from leather. The big brand names in the luxury field determined some years ago that using leather as a vehicle material is highly profitable.

What does this now mean for the general market? Is there a fair chance that raw material prices will rise? Or even better: Is there a fair chance that leather will obtain better prices again? Our regular readers will remember that we have always tied the leather prices to inflation, and inflation is definitely rising around the world.  Consequently, we think that raw material and leather prices both have a chance of moving upwards again.

This will - as usual – take some time and will not happen overnight. It will be a hard fight indeed, because there will be a lot of opposition to rising price levels. Rising prices through the supply chain will also create victims, but this has always been the case and has never been any different. As far as the victims are concerned, we should not forget that we actually need them in order to reduce the overcapacity which has built up in the leather pipeline over the past years.

All in all the situation for the leather pipeline looks much better than in the first quarter of the year and some of our readers will remember that we became more optimistic some time ago.  That theory has been backed up with a few more facts over the past weeks and we now have to watch carefully to see if this is not just a flash in the pan, but can be turned into something even more substantial in the weeks to come.

Split market could benefit

The split market could also benefit from the generally better mood of the trade.  Interest in splits is becoming more and more widespread and leaves just the heavies and the high quality ones. With fashion and the generally positive order situation for shoes, splits have become an important item again and will be even more attractive when the low grade hides increase in price.

Skin market remains stable

The skin market remains in the same state it has been in for quite some time.  Every product suitable for leathergoods and shoe production, in particular goats and crossbred, is enjoying pretty good demand and with the shortage of calf and kip it would not be a surprise if interest increases even further.  When the designers also eventually determine the leather for garment production, we should see a strong revival for lambskins, which have been neglected.  We think this has to come from the fashion centres of the world as the sheep producers do not seem to be strong enough to attract the interest of designers and retailers.  However, everyone who needs skins for their production might be well-advised to make sure that they are taking advantage of the current historically low raw material levels.

For the coming weeks, we believe that the level of regular and ordinary trading will be sustained. Although we are painting a very positive picture nobody is expecting that this is going to turn into higher prices and better business immediately. It has to come slowly and this is also healthier for the trade. High volatility and sharply rising prices kill trends and never reflect the true situation of the leather pipeline, only speculation. So, we believe that some of the pessimism which has been hanging over the market might continue to fade. Thanks to the good seasonal slaughter in the northern hemisphere, there should be no immediate shortage of raw material except maybe for light weights. Consequently, the pressure on raw material prices will ease and sellers might gain more confidence in their future, but this does not mean that we expect raw material prices to rise sharply.  However, I advise that everyone with a clear picture of his needs might be better advised to ensure enough raw material rather than to bank on it becoming cheaper and more plentiful in the first quarter 2006.

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