Leather Pipeline: Biggest players are eroding natural market forces
The leather industry is beginning to feel the summer break, with little activity and people gearing up for the holidays. This will make the summer versions of this issue shorter and unless something serious happens, many questions will remain unanswered.
Trading and market activity has been light, as we anticipated two weeks ago. Tanners are waiting for indications from their customers as to what they are planning for next season. A lot depends on whether the record prices of raw materials which we had seen in the first quarter of this year will impact leather demand for the next seasons, or whether the moderate correction of prices since the shutdown of some tanneries in the north of China has been enough to lay the base for the production season, beginning in September.
The supply side continues to be convinced that the raw material demand will be high enough to keep production clear and to justify the present price levels. This is the opinion of the large companies that are supplying the large industrial tanners around the globe. Being member of ‘the club’ could be enough to see it this way. Increasing demand from the automotive industry and steady conditions from big brands for shoes might indicate a better picture than the reality, and it will be interesting to see if it will further support a more inflexible price structure with multilevel prices.
There is no question that the automotive industry can spend more money for leather and their requirements for technical standards, traceability, volume and supply security has raised the entry level for new suppliers to almost impossibly high levels.
A similar situation applies to part of the shoe business. As the global brands push requirements higher, the smaller, more flexible and possibly cheaper producers are pushed out. This hasn’t got much to do with environmental cost or labour conditions. Outside the big players, there are luxury and/or niche producers and price battles between the remaining producers that do not belong to any of the groups.
This is creating different prices levels along the supply chain. For raw material, suppliers which qualify for the big players are able to obtain better prices than those which supply to the remaining customer base.
This sounds logical in terms of economics but is rather critical in terms of market forces. It would be acceptable if it supported the better and not just the bigger. However, as long as there is no competition and it is related to size rather than to quality, it becomes a bitter pill for those who support the idea of a free market with equal access to all players. This has been the case for centuries - none of the suppliers or customers were ever big enough to avoid competition. Fortunately we have not yet reached a situation where single units can dominate, but some segments see a grouping of interest which is reducing the forces of competition by quite a bit.
There is no end in sight and the trend could possibly be accelerating and perhaps this is inevitable in a globalised world where the dimensions of the market have changed.
The leather pipeline, in contrast to other industries, is still in the early stages of this trend and we have to understand that this is going to trigger fundamental changes in the industry.
In the history of the leather pipeline, the big units that grew over a certain size always failed; think about the large trading houses or the huge tanning operations that dominated in the second half of the last century, hardly any of which exist today. It was too early for them but seems to be right for today’s market due to the changes in the structure, beginning with the size of the beef producers.
It seems the sharp rise of raw material prices during the first quarter of this year was one of the first steps in a major consolidation and restructuring of the supply chain.
In the end, it remains the old story of survival of the fittest and the money drain the market conditions created will most likely create an increasing number of casualties and a reduction in market members.
It is impressive to see how wide the prices for comparable raw material and leather have been drifting, depending on the supplier.
Some of the big players are obtaining premiums for their product which are far higher than the real added value they can offer, in our opinion. This is the basis for a renewed conflict about who is going to get how much from the cost advantage and the benefit of the economies of scale.
The split market is facing the same problems we have seen for a while. Nobody really knows where the real market is, with too little business done. On average we would say it is fair to quote a 30% to 40% reduction from the peaks seen three months ago.
However, the normal product flow in the pipeline has not been restored and there are still volumes which are hanging over the market. There are plenty of stories about customers not honouring their contracts, containers being stuck in ports and producers not being able to find enough customers for the splits they are producing. If there is good news, it is that China is reporting the decline of prices for lime dropsplits has slowed or possibly stopped. It is too early to decide if this is just a temporary, seasonal issue or if the correction is slowly rolling out and coming to an end.
The skin market is also not offering great news. Everything related to nappa production remains in the doldrums and business to the Ukraine and Russia remains quiet. We are off-season, but tanners do not have the courage yet to produce for the winter season. Prices in Europe are very low and people are questioning whether they can really fall any further.
Some tanners seem to think that despite the general poor business it might be a good idea to purchase material to make sure the inventory price is low when business restarts. This only applies to good-quality lots and in particular for new-season lambs.
There are still a number of skins around and where there are no cold stores it could become a tricky game of who is going to buy them. Consequently, the market is being driven by price and not by demand for finished products. However, it has never been a mistake to dispose of low price inventories when your financial situation allows you to finance it.
The coming weeks will be determined by the low season due to the summer break. In Europe the industry is winding down and there might be a bit of business to be done for the reopening but, in general, most tanners have got what they need and urgently require a clear picture of the leather orders for the coming season.
Having said that, we still have to exclude the automotive leather tanners which are holding full order books for the rest of the year. In this segment one can recognise improved finishing technology is allowing the premium manufacturers to readjust their raw material mix below the premium full-grain articles for luxury cars. Demand will stay high and steady and prices might undergo some fine-tuning rather than major changes.
In the shoe and leathergoods industry, the situation remains unclear. Outside the brands and manufacturers that are dedicated to leather, we are still waiting to see if leather will be reduced in the next collections.
The high prices and the impression many manufacturers got that leather could become scarce might have led to designs that use significantly less leather than in previous seasons. We do not possess any clear indications from manufacturers and many might not want to put their cards on the table.
On average, hide prices have declined by between 5% and 10% and split prices by 30% to 40%. This leaves the question of whether we are ahead of major replenishment purchasing, which the beef industry is waiting for, or if we have to deal with a reduction of demand. No one is taking a clear position or offering an opinion based on facts rather than wishful thinking.
Everything indicates we will have to wait a few more weeks until the leather pipeline is either willing or able to deal with real numbers for after the summer.
