Macroeconomics

In terms of politics and economics, the world has been quite interesting the past two weeks. Several emerging markets are facing a serious downturn in their economies and the uncertainty about interest rates in the US is weighing on currencies.
The situation in China remains uncertain. Trust in the official statistics is fading and this results in speculation regarding the world’s second-largest economy.

Some analysts are unhappy with the Chinese government’s policies and say control of the media and market intervention are not inspiring confidence.

In Europe the headlines are dominated by the hundreds of thousands of refugees arriving via the Mediterranean by boat from Africa, Syria, Iraq and the Balkans. Most are trying to reach central Europe and Scandinavia. It is obvious these countries cannot manage the challenges related to an excessive number of people and this is now causing tension within the European Union. Members cannot agree on how to house the ones who have already arrived. These tensions might be an even larger challenge to the EU than the debt crisis ever was.

So far, the financial markets have not realised the massive threat the situation means to the European economy. Not that it will harm business, but social tensions will certainly have negative effects on the economies, not to speak of the additional costs that are going add to many already problematic national budgets.

The stuttering economy in China is also a potential problem for exporters that are so important for many countries. Many experts believe India could replace some of the Chinese business over the next years. However, we are less optimistic and see India on a good track but not having the short-term potential to become the locomotive China has been over the past two decades.

Last but not least, people have been desperately waiting for the decision of the US Federal Reserve regarding the next step in its interest policy. Observers were divided on whether they would raise interest rates. Finally, the decision was taken last Thursday to leave interest rates unchanged. It took almost a day until the markets digested the consequences.

On one side is the fear that cheap money is going to continue to inflate asset bubbles. Holding interest rates low means more investment into stock markets and real estate. On the other hand, people are unhappy that the Fed is watching international conditions rather than taking a national decision. The general state of the economy in the US would have allowed a moderate interest rate hike, at least in the opinion of most economists.

Most stock markets fell significantly the day after and the concerns about the global economy are rising. The oil price rebounded pretty well over the period and has gained an average of about 10% to 20% from the lows, despite the outlook that oil price will remain negative with excess supply.

Market intelligence

The leather pipeline is still looking for a clear direction after the summer break. This is not really a surprise. Many players were spoiled in previous years by the fact everyone was convinced they were in a period of increasing leather demand. Consequently nobody in the supply chain worried about orders; it was more about when they would arrive rather than if.

It is different this year: leather demand has declined, although not in all sectors and not to the same extent. September and part of October is the period when decisions are made about materials, designs and budgets, and orders are taken, and many had to learn that one has to fight for the business.

The leather shows in Shanghai, Milan and Paris had an impact. Although orders are not placed at fairs, they offer indications about how retailers and brands are going to position themselves for the season.

In our last issue we covered the results of the fair in China (All China Leather Exhibition) and the situation in the Chinese leather business. During the past two weeks we have visited the fairs in Europe. The shows in Italy and France were a bit of a mixed bag. The good news first: There is a massive difference between the commodity sector and the fashion and quality sector as far as leather is concerned. Where leather is considered to be an optional material, price is the number one factor and this has eliminated an important part of leather consumption. Alternative materials are cheaper, more flexible and easier to manufacture.

This is not a surprise and we have been warning about this for more than a year; but this warning has now become reality, sadly. People took this message home from their trips to Asia and were concerned to find out if the trend would apply to the higher quality sector. However, concerns were erased at Lineapelle in Milan. Coming from Shanghai to Lineapelle was like changing from a nailbed to a soft down blanket. Exhibitors in Milan were not receiving increased or seeing improved prices, but the demand for leather and the appreciation of the material was apparent. The news about falling raw material prices had reached the high street brands and producers and so they were expecting to get their share of the reductions. However, as far as we were able to discover, no final decisions have been agreed.

One complication was the figures published in one of the leading financial publications in the US, which indicated a 40% decline of material prices for the shoemakers. This had been interpreted by other media outlets as a 40% decline in leather prices and so buyers turned up at the fairs throwing these numbers into the ring. It is always difficult to enter into any kind of serious discussion with a start like that. So, we saw a lot of discussions about leather and strategies but very few serious price negotiations. In most cases tanners went home with a comfortable feeling that they will get leather orders, possibly at lower volumes than last year’s levels, but final discussions on price will be taken later.

As far as leather fashion is concerned, we didn’t notice anything really new. Perhaps a few more shiny colours, and maybe that good-quality suede is seeing a bit more interest.

The only new trend we took home was the fact we saw more garment leather made from calf or splits than in the past five years. It would be nice to learn in the coming months if this is really a new trend.

After the cold shock of Shanghai and the warm shower of Milan, people arrived at the Paris fair (Premiere Visions Leather) in a positive mood. However, there it became more sober; perhaps expectations were running too high.

Paris is a very special event and not just focusing on leather as a material. Some of the easy-money sales to Russians and Chinese might have disappeared, but the fundamental interest of the wealthy people around the globe for high-quality materials and design remains unchanged and a reduction in luxury consumption is not expected at the present stage. However, even the high-end fashion brands are worried about costs, and the security of orders has to be compensated by price concessions.

AUTOMOTIVE

Many believe automotive to be a safe sector. But we have our doubts and despite the strong sales of vehicles in the US and in parts of Europe, it would be naïve to ignore the problems in many other regions and in particular in China.
The International Motor Show (IAA) in Germany, which is still one of the biggest automotive shows, has not delivered confidence for production in 2016. The leading automotive manufacturers are dealing with technology and the future of individual mobility rather than great sales expectations for the coming year.

This year will end with record sales for the premium brands and they will not disappoint analysts with any cut in production, but many of the cars leaving factories today have not got a signed contract behind their windscreen. The budgets for the coming year will be decided soon and we are waiting who is going to be first to publish their production plans for the coming model year. Let’s see if the smart phone on wheels is going to attract the buyers.

As far as raw material sales are concerned, prices are jumping all over the place and spreads of 10% for the same product and origin are not uncommon. This is not only reflecting the different quality of suppliers and the different experiences tanners have with the material in the past, but it is also a reflection of the different opinions and expectations of suppliers.

In particular in Europe but also in the US, several suppliers are trying to safeguard their business by lifting asking prices. In most cases this has been in vain. There is barely any tanner in the world who can be convinced that he will find it difficult to cover his raw material needs in the near future.

Another pretty negative factor is the financial situation of the tanning industry in China. Many banks curtailing credit lines and in particular for the opening of letters of credit. A number of tanners are trying to shift their payments to deposit and CAD (Cash Against Documents), which is possibly a dangerous game, because it is a bet that the customer is disposing sufficient funds to honour his obligations upon arrival. In the meantime, low-grade raw materials are still under pressure and demand is lower than production levels.

SPLITS AND SKINS
    
The split market is also not delivering much news, but at least there is light at the end of the tunnel. While ordinary splits face serious problems we have confirmed rising demand for good quality, fine fibre material for high-end suede articles. Higher prices have been achieved and it seems these leathers are receiving a good response from the markets as well in the garment and shoe sector.

The skins market remains problematic. The high-end materials are still finding buyers. The upcoming Muslim festival of Eid al-Adha (September 22) will bring another wave of medium and lower quality skins to the market and will make it even more difficult to find a fair price level for these skins. One positive was that there was least some speculative money shifted into the market and buying low price skins with a good wool return. Indeed, some skins are almost free when the skin has been fellmongered. There is at least a bit of hope for recovery in 2016.

For the coming two weeks we don’t expect too many changes. The optimism we saw in Milan is more psychological than underlined by hard facts. Many tanners around the globe are trying to upgrade their leather quality and so some new buyers have come into the market for better quality hides. However, without a real improvement of leather demand this will just lead to increased competition in the next price bracket. Raw material suppliers should not misinterpret the impressions they took from their visits to the European shows.

The volume of leather orders still has to be determined and at this stage there is hardly any indication demand is increasing. The financial problems in many parts of the world are not laying the base for a quick recovery in consumer spending any time soon.
There is always an end to every trend but the question of whether we have arrived at the next juncture cannot be answered before the second half of October. If it delivers positive facts we will be happy to amend our cautious position, but until then it might be better not to expect too much and be ready for further corrections.

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