In terms of the financial markets, everything is looking fairly positive at the moment. The global economy is thriving, the US economy is expected to have a soft landing, the stock markets are performing well, inflation has been more controlled due to reduced oil prices, the European economies are performing better, China is still experiencing double digit growth and so on. Despite nuclear developments, increasing regional political tensions, the murder of prominent journalists and even war, nothing has managed to dampen the global party mood.

OPEC has been trying to scare the markets a bit by cutting oil production, but at the moment oil stocks seem to be sufficient so that speculation is not sending oil prices much higher as a result. OPEC members may realise that a barrel of oil is still priced at around $60, which cannot be considered to be a price level that needs a great deal of support. However, it may act as a warning to the rest of the world to continue looking for alternative energies if the threat is eventually realised. Wars for oil supply are not only harsh on everyone, they are also expensive.

The currency markets have not delivered any news either. The $ is performing well despite all the forecasts and the final quarter of the year has in past years delivered a fair amount of variation and volatility so we will have to wait and see how the greenback performs this year.

During the past two weeks, most people’s attention has been focused on the results of the Italian Lineapelle leather fair. Some people on the sidelines were also watching for information from the furniture fair in Highpoint, USA, but this was more specific to upholstery tanners.

On the very first day in Bologna it was obvious how nervous the trade was about the general situation. While tanners obviously already knew how the order book was filled, raw material suppliers in particular came to the show with grave concerns. Everybody was aware that raw material prices had already reached a pretty high level and, combined with a sharp increase in costs over the past year, most pundits are conscious of the implications this could eventually have.

When visitors saw the empty aisles on the first day and realised that many people had not bothered turning up, most of the discussions were fixed on the potential risk facing the market. Visiting tanners and speaking to the people that were responsible, concerns actually increased as all the tanners pointed out how poor their profitability is and that they are not in any position to obtain more money for leather from customers.

Apart from this anxiety, the show’s dazzling array of articles, activities, designs and inventions that tanners had prepared were worth waiting for. It was another illustration of the extent to which leather production is now divided between the industrial mass production and this segment of seasonality and design. We have come to the point where these two segments no longer have anything in common apart from the fact they are both related to the same raw material.

Cheaper alternative raw materials on show

There were plenty of new articles, prints and developed alternatives to the existing and dominating trends on show. We were particularly impressed by the numerous inventions and creations tanners had realised on other and cheaper raw materials rather than calfskins. Our complaint that too much production is concentrated on just a handful of prestigious raw material sources was obviously pointed in the right direction and the development departments in the Italian tanneries were keen to show what they are capable of, if only they were allowed to do so.

We started to see this development back in May and it was extended further during this even more important show last week. Everything that is cheap and suitable for making leather and creating prints including sheep, goat, hairsheep and camel, was on display and attracted the attention of both designers and leather buyers. Speaking to leather buyers as well as to Italy’s leading tanners, many people confirmed that, as a result of the sharp rise in raw material prices, more and more alternatives are being taken into consideration. Nobody wants to spoil or attack the luxury lines which are still selling very well and where price is certainly not a threat to sales, but the big brand names are also trying to grow and expand sales. In cooperation with their key suppliers they have realised that raw material supply is limited and that apart from price the growth in sales is restricted by the availability of their preferred article lines.

For the time being, further growth may not even be the target of the companies in this segment in an attempt to keep the top line exclusive and to justify the high price levels. However, more economical sub-brands are now offering more potential for growth and profit. Consequently, the development of new articles and cheaper raw materials is not diminishing the top end of the range. The tour brands all confirmed that their business in the luxury segment will be at least steady for the next season and this was reflected in the orders they placed.

Having now seen plenty of new alternatives which could be bought at considerably lower prices than those at the high end will give designers and the marketing departments a lot of work for weeks or even months to come. If they are successful in developing articles and placing them in the market it could create tremendous potential for tanners and brand names in future seasons. Prices are attractive for the tanner as well as for the manufacturer and marketer and point towards another profitable season ahead.

However, if the response to this new development is not positive and the market attempts to stick solely to the same high quality products in the future things will be tight because even profitability in the top line has declined for the leather manufacturer over the past season, not to mention the limitation of qualified raw material.

Vegetable leathers perform well

When it comes to leather trends we were still impressed by the immense amount of leather for ladies boots and the strong demand and performance of vegetable leathers in general. The end of the first day ended with plenty of concerns but also with a fair amount of hope as far as shoe and bag leather manufacturers were concerned.     

The second day was much more active. The decision to postpone the machinery exhibition (TanningTech) had a substantial affect on the number of visitors in Bologna. So making comparisons with previous years would be not only be complicated, but would certainly not give a clear reflection of the total number of visitors.

After a pretty relaxed first day, visitors and exhibitors became much busier and more business-oriented by the second day. It also became obvious fairly quickly that business for shoe and bag leather remains very good and that the high levels of activity which we have been seeing for quite some time are likely to  extend into the next season. Vegetable leathers are performing particularly well and this was also reflected in the raw materials business. Suitable hides for this part of the business attracted more interest and, despite their profitability problems, tanners had little choice but to negotiate with their suppliers and to buy raw material to cover their orders and productions for the next weeks and months.  Calf skins and other raw materials for the high-end fashion productions were also quickly absorbed and sellers almost had their sold-out signs up by the end of the day.

Bad news for upholstery leather sector

So far we have not touched upon upholstery leather. This is mainly due to the fact that, although Lineapelle does feature upholstery leather exhibitors, they are really more on the sidelines. Those in the upholstery sector were more concerned with figuring out what was happening in the United States at Highpoint than expecting a great deal of information from the event in Italy. Despite this, a number of tanners making upholstery leather were certainly present and speaking to them was not a lot of fun in most cases. The profitability problem in this segment of the leather industry seems to be increasing rapidly. Although there have been reports that some price increases were possible, particularly in the United States, it also became abundantly clear that this was not going to be enough to resolve the problems we have reported in many of our previous issues of the market intelligence.

There may still be some top-quality niches where furniture leather tanners are still enjoying good sales and prices, but this is not only very small, it is also not enough to compensate for the problems seen in the rest of the production lines. In the competition for raw material, the return for upholstery leather is not currently allowing allow tanners to make a margin and, although the problems are not the same everywhere, it is difficult if not impossible to find any producer in this field who seems satisfied with the business situation. However, with the strong performance in the shoe and bag leather sector it appears that there is very little chance that the upholstery business will be receiving much relief from the raw material side.

Having said this, many members of the industry know that without upholstery leather production the market can never be in a completely solid state. A lot of stories have been told about rising cash-flow problems and a few names were thrown around concerning where trouble could be expected to come from in the near future. Reports from Asia revealed that even Chinese tanners are currently experiencing such a profitability problem and cash squeeze that some of them are considering shutting down or slowing down production until things start to improve. 

Dairy cows may suffer

This is weighing particularly heavily on the raw material markets which so far are still almost totally focused on supplying the upholstery leather industry. With the poor performance we have also seen in the garment leather industry this predominantly means that dairy cows could suffer. Since it is not very common that the main market trend is heading one way and another trend is going in totally the opposite direction there was a lot of talk about the problematic situation. Very few sellers were expecting that the burden would have any short term reflection in raw material prices.

Regular readers of the international market reports will have noticed that many of the weekly previews speak about the growing difficulty in placing this particular raw material and some sources were even anticipating that this market could see some kind of the correction by the end of the year. Although not a lot of business for dairy cows was reported, the visiting sellers in Italy will definitely have gone home with much more confidence. However, as we said in our last report, we believe that only a very strong round of buying from Asia can support this market enough to prevent it from the smaller correction.

We will have to wait to hear the final interpretations and the finished leather orders that Chinese tanners collected in High Point as this will certainly be quickly reflected on raw material orders, particularly for dairy cows. We might have to wait another month or so to know what the total volume of raw material needs is going to be and if it will be enough to absorb the available quantities for the next three to four months. We should not forget that a decent order situation might be helpful in keeping productions going but it is pretty unlikely that tanners will be rewarded with sufficient finished leather prices to return to the necessary level of profitability.

Shoes, bags and accessories remain on top

In summary, after most of the important trade shows, it could be said that the general market situation has not changed from what we have already been seeing for quite a long time and it has confirmed that there is little reason to expect any significant slowdown in the production of shoes, bags and leather accessories during the forthcoming season. Whatever the total production and the upholstery leather production is, we will be in the production season and this will basically make tanners busier than they have been over the summer.  However, profitability and financial restraints could deliver some surprises. As far as total global numbers are concerned, automotive is also running pretty steady, but there is a massive difference in terms of success for the various markets and manufacturers. It will be very interesting to see how the problem, which is the same as that of the leather furniture market, of the large discrepancy between the smaller top and luxury market and the price developments in standard mass productions will be resolved by tanners and manufacturers.

Hope for the future of splits and skins

The splits market did not deliver much news either. To the surprise of many, splits in general have not performed too well. This is a surprise because full hides and grains are so expensive. Many related the weak performance of the standard splits to the increased volume of hides the Chinese tanners have bought in 2006 and the consequently increased availability of splits produced in China which has reduced Chinese demand. There may be some logic in this, but it has not ultimately changed the total global availability of splits and so there must be some demand related issue. We believe this issue is fashion, because the strong performer—side leather—was, and is, favouring nappas rather than anything else, and this has not given splits much market potential. However, 2007 should be a better year for splits. If leather prices in general remain under this amount of pressure, splits should find their way back into all kinds of collections.

There is not a lot of news from the skins markets. However, the industry appears to be gradually becoming more optimistic. The large number of new articles made from cheap skins available around the globe has created the impression that some of the new developments will be successful. With rising wealth in China and Russia, sheep linings should also do well next season and although all are hoping for a return of leather fashion in garments, at least it cannot get any worse. While lambs have already seen a certain improvement in demand and price, sheepskins have remained in the doldrums. Their season is coming towards the end of the year and in the first quarter of next and at this moment it seems they will also have better times ahead, if only due to the fact that it cannot get any worse.

Our concerns about the next few weeks have been eased a bit. Our fundamental concerns about the risks which could arise from the financial situation in the industry are still valid, but the strong performance of fashion and the positive outlook for the global economy in general might compensate for this in the short term. However, some grades and in particular the upholstery related hides still have a fair chance for a correction as tanners are simply not in a position to follow the present market levels. Only a wave of buying from Asia due to a strong order book from the USA for the next season could possibly alter the tone quickly. For the rest of the market, we believe that for most hides the last price potentials have been obtained and the busy tanners seem to be reasonably covered up to the end of the year. Consequently, there is still little room for change.

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