Macroeconomics

The holiday period in the northern hemisphere is now coming to an end and most people are back at their desks.

The financial markets have also taken a break and investors have not been interested in any major market moves during their absence. However, the problems in the global economy, which were obvious before the summer break, couldn’t be covered up and so were the last two weeks pretty vulnerable.

The steep fall of commodity prices, in particular of oil, is meaning the fear of deflation is returning. On one side, private consumers are happy when they see their energy bills and consumer product prices decline, but on the other it could delay consumer spending in a time already affected by general economic issues. This is particularly noticeable in the BRIC (Brazil, Russia, India, China), which were considered the main drivers of the global economy some years ago. All, except India, are facing either stuttering conditions or contractions of their economy.

One of the main concerns is the slowdown of the economy in China, which has had such a big impact on the global economy. China might be the most important, but the situations in Brazil and Russia are also worrying and there are concerns for emerging markets such as Indonesia, Turkey and Malaysia.

The fall in oil prices and the general concerns are reflected on the stock markets. Banks and investors are telling people that the situation is not as bad as many think, but private investors might look to cash in on any profits that exist after the strong performance of the stock markets in previous years, rather than sitting back, hoping everything is going to recover.

One has to keep an eye on the financial markets and the general economies in the year to come. Europe aside, we have been on a pretty positive cycle since the big crash in 2008 and, according to logic and history, could be at the beginning of a downward cycle.

In Europe we are also now dealing with a migrant problem, and this is dominating headlines. The situation in Greece is less prominent now agreements have been made, the Ukraine conflict is making footnotes and the increasing number of terrorist attacks in many countries are not making headlines for more than a day or two. Very few are considering whether these factors could have a major impact on the economy in the short and medium term.

The expectation that the dollar could rise as a result of a potential interest rates rise in the US didn’t not happen, and, in fact, the greenback lost almost 3% against the euro. Oil prices are close to the $40 level, which had been predicted a couple of months ago. Oil prices could fall further, but it could need very little to turn the trend around – for instance if there was any military action between North and South Korea.

Market Intelligence

The leather pipeline is slowly returning from the summer vacation. Even in China, more and more people are taking a break.

In Europe, most tanneries close down and only contract tanneries or a few operators with limited staff remain open in August. The summer break is getting more compressed, and this doesn’t suit everyone. Fresh hide supply pipelines are interrupted, pending issues cannot be resolved and this creates stress when tanneries are reopened. Many people complain September is too short to deal with all the trips, fairs and issues. Most of the holiday recovery is wiped away until the normal winter production cycle is back in full swing around October.

The global economy, the networking, the global supply chain, the fixed seasons in retail and the time windows in deliveries are setting rhythms that are reducing flexibility, and this is not good for a raw material-related supply chain like ours.

The industrial producers and members of the leather pipeline, like many other industries, are increasingly managed by financial controllers and they can add to the problem. Inventorying management, cash flow planning, budgeting and forecasts prevent the industry from anti-cyclical action. With the producer-to-producer relationship becoming the standard, this is exacerbating making market trends - something we experienced until the end of the first quarter 2015.

Prices have corrected by between 10% and 40% depending on the origin and quality and we have learned that leather demand is fragmented. The extremes, which are the super luxury and the low-cost raw material market segments, have been affected most. Top-quality veal skins for the luxury leathergoods section dropped massively from their tops and the low-end market is not only having a price problem but also cannot find any interest and so many low-quality, low-cost items such as splits are not attracting any interest - even when they are free. The demand has simply vanished.

However, nothing ever comes to a complete stop. The price correction has hopefully meant tanners at the medium and higher end now have workable prices, for the moment, at least. Demand has increased, the leather industry is willing to replenish inventories and a lot of the risk factor has been taken away, which making business run much better. There has been relief this month, a least for those covering this market section.

LOWER-END LEATHERS

For the others it might not be over. Falling oil prices, the acceptance of leather substitutes by retail and consumers, and the easier production of these substitutes has wiped out a lot of leather demand in mass production and it is unlikely to recover soon. We hope we are too pessimistic, but all the discussions we had over the past months have not given much hope for a short-term recovery. It seems it will take another season or two before we see a change.

The warning sign should be the situation in the lamb nappa market, where even the lowest prices for a year have not stimulated demand. Apparel has shifted to other materials and has not returned, even when prices became attractive.

The next weeks will first see the Asian get-together in Shanghai [All China Leather Exhibition, August 31 to September 2] which is followed a week later by the European meeting in Milan [Lineapelle]. After these two events, we should have a clearer idea about the psychology of the industry.

We see still a potential for price reductions in the US and even more in Europe.

For the moment, the US suppliers are the ones in the most comfortable position. They have the best valuation and sales position, while in Europe the correction potential is much higher considering that the low kill period is ending and slaughter numbers are set to rise. From the price standpoint, the lower-price origins like Middle and South America have taken the biggest beating and their real price levels seem to be attractive – if there wasn’t the problem with demand in the commodity section.

However, decisions will not be taken before the shows and we will draw our conclusions after then.

SPILTS AND SKINS

The split market does not show any signs of improvement. Warehouses are full, shipments are slow and prices remain under pressure. We hope to get a better understanding of whether split leather can make a return into production in the next season(s).

The skin market is also in agony. There has been a bit of movement in the high end, in high quality linings and a handful of speculative nappa fellmongering, but far too little to absorb the supply of skins. It will soon be the Muslim festival of sacrifice, Eid al-Adha (September 22), and this is not good news for the skin market. We are interested in whether discussions at the shows will point to the leather becoming attractive again. However, with the main two markets (Russia and China) in trouble, one can’t be too optimistic.

We are not willing to take any position for the next two weeks. Next week, business will be done in face-to-face meetings and we would be surprised if the suppliers were not painting everything pink to prepare for the fairs. It is always difficult to figure out the truth until you speak to the people in person.

The week after ACLE we should have a better picture, and in Milan it should be possible to get a feel for the fashion trends. The Italians are still the trend setters and they are the ones that can develop something from difficult conditions. Whether retail agrees, we shall see.

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