The Leather Pipeline - 01.12.15
01/12/2015
The world is in a difficult situation. The terrorist attack in Paris on November 13 has reminded us again that we are far away from a peaceful and respectful life. The last 14 days, with further cruelties and attacks and the shutdown of normal life in Brussels, have shown us once again how much the world has changed in the past 10 years. The brutal reality is that we cannot expect that this problem is going to be solved soon. Although daily life always continues, it has a serious impact on how we are going to live in many parts of the world for some time. We can only hope that sooner rather than later mankind will return to some kind of civilisation.
Although everyone claims to have the same enemy, interpretations and actions are very different and create new conflicts. This could easily be seen when Turkey shot down a Russian military aircraft on November 23. There is no general masterplan we can only hope that the small fires don’t end up in a really big one eventually. So far everyone is playing the risk down, but things can get out of control pretty quickly. For the moment it remains a ‘battle of sanctions’ with Russia imposing restrictions on Turkey. If it continues like this there will not be much international trade left in the future.
The Ukraine conflict has made it back into the headlines too, with electrical supplies being cut on the Crimea and a few days later Russian gas supplies to the Ukraine interrupted.
The business and financial world has tried to continue as normal as much as possible. Financial markets have almost completely ignored the political and military conflicts and have just continued with business as usual. There has been no jump in oil prices, no collapse of the stock markets, no eruption of the gold price as one would have expected to happen under such conditions in the past.
Investors are pretty much focusing on the policy of the national banks and this means that for the time being everyone expects an interest rate rise in the US pretty soon and an expansion of the liquidity injections by the European Central Bank (ECB) into the European markets. Inflation rates, which are considered to be too low, have been attacked for a long time with more money, but as a matter of fact even more money has not triggered enough demand to boost consumer prices to the levels the ECB considers adequate. Interesting in this respect is the fact that Greenpeace published a research result stating that up to 40% of the garments and apparel in the wardrobes of European consumers are never or very rarely used. Better said the low inflation rate in consumer prices, which is in part the result of low energy costs, might be because people simply don’t need what they buy. From another perspective, we continue to produce more than the market can absorb, which has never been good for prices.
The policies of the national banks have sent the euro further down versus the US dollar and we are again in the same situation as at the beginning of this year, moving towards parity, which many larger banks have forecast to happen before the end of the year.
The OPEC council of oil-producing countries is going to meet soon and will discuss how to deal with oil supply and prices. Considering how many oil producing countries are in desperate need of income because of the reduced price and because they have been allowed to return to the market or are financing military equipment, only very ambitious action can really lift the pressure on oil prices.
Market Intelligence
Over the past two weeks we have experienced pretty much what we called in our last issue a wrestling match between buyers and sellers. After the long bear market and the significant adjustment of raw material prices, the market stabilised at the beginning of November and found a better balance in many parts of the business.
However, none of the fundamentals have changed. In those parts of the world where the pressure on hide suppliers has lifted, they were already trying desperately to turn the market around and to take advantage from the temporary momentum and higher sales. Every market segment has got its own rules and dynamics and in particular the leather production cluster in Hebei province in China has changed the mood of some. The tanners in this region that are mainly related to upholstery leathers have talked about significantly better demand for higher-quality leathers, in particular from the domestic market in China but also from customers in the US.
Indeed the US is possibly the only consumer market that is showing a certain stability at present. The latest statistics do not show any substantial increase in consumer spending in the US, though. Christmas shopping around the globe will offer us some more information on how much the consumer is willing to spend in these totally uncertain times.
Back to the bright spot of raw material demand. For the last two weeks, buyers from the north of China have been trying to buy as many good-quality European dairy cow hides as they can find, although they have been pretty picky when it comes to origins and suppliers. Quality and reliability are the main drivers when it comes to the decision on where to place orders. It sounds a bit funny when we consider that this market region has been the worst performer during the months when the markets were falling. Maybe this is also reason why US suppliers of quality dairy cows have not seen the same benefit as their European colleagues. Chinese customers insist that this is for quality reasons, but it may be that it’s more to do with customer-supplier relations, which have been so damaged that business has not come back the way it should have.
Having said all this, one must also be aware of the fact that Hebei is famous for adopting a classical ‘me too’ policy, which means that if some tanners there stop buying, nobody buys and if somebody buys, everybody else follows. It remains to be seen if the present activity is really a reflection of business and better orders. The fact is that people have been buying and would even have taken more product if had been available. The majority of buyers there should now be well covered in terms of production needs until March. Shipments leaving now from Europe are going to arrive just before the Chinese New Year holidays and will allow tanners to build some inventory for the reopening in the middle of February. If tanners are positive about the second quarter of 2016, they might continue their shopping tour until the end of this year.
When you speak to buyers and you insist a little bit more on learning what their situation and business forecasts are, you learn quickly that they have very tight limits on the prices they are willing to pay. At the same time, they confirm that their order books have become better in the past weeks, although they are also stating that leather prices are not improving at all. Quite the reverse: a good number of people we have been able to speak to have complained that their customers are asking aggressively for further price concessions on finished leather.
Speaking to shoe upper tanners, it’s clear there is a different picture here. A lack of orders, falling leather prices, serious problems with payments and massive inventories of low grades sitting in warehouses are giving many people really big headaches. The worst is that we are now already at the beginning of December and everyone should now have a sufficiently strong order book for the first quarter of the year 2016. Only the core players are sitting on reasonable production plans but they are very few in number.
It’s a similar picture in Europe where a handful of tanners have safe production plans and sufficient orders for the start of the New Year. Most people in the shoe and leathergoods sectors are complaining that they are still living hand to mouth while their customers hold back from committing to any of the normal production plans that one would expect for this time of the year. The November terrorist attacks have definitely not made it any easier and anyone in many sectors of the consumer business can’t be blamed for postponing decisions; hardly anyone knows how the consumer is going to react to the present levels of uncertainty. One thing is definitely clear: Christmas tourist spending in the shopping capitals of Europe will most likely be down compared to previous years. How the locals will react and what they are going to buy for Christmas has still to be seen. The first information about the famous Black Friday and the Thanksgiving holidays in the US are mixed, but not particularly good. Online shopping is on the rise while activity in local stores has been called far less than in 2014.
We should not ignore that consumer spending is pretty much based on bargains these days. Shopping is more than ever before related to deals and price is the driving factor more than ever before. This is bad news for leather in general, because it prevents the industry from escaping from a price competition with other materials.
The massive pressure on prices for volume leathers will persist into 2016 and will keep raw material prices under tight control. Of course raw material markets are more influenced by speculation and supply than the more long-term industrial price calculations for leather, but if leather prices don’t work out, any variation on cheaper ranges will be short-lived. We saw this in the previous cycle, which led to serious overvaluations that only corrected, eventually, this summer and had serious consequences.
Raw material and leather prices will not fall to zero, as we all know. Leather has a value and it even has a unique valuation in some products regardless of the alternatives on offer. But in the main volumes of production this does not apply and fashion isn’t helping either. We have plenty of leather ‘look-alike’ products, but they are not made from leather and nobody seems to bother about that any more. There is no longer a negative image to these products; there is no image problem. Nobody looks down on someone for wearing a leather substitute and although most of the alternatives are oil-based materials, not even the environmental card is played. This should keep in check those who think time has come for a rebound of raw material prices. One has to look at added value and this may lead to new valuations, but not to a general justification of higher prices at this stage.
The split market remains where it was: weak with insufficient demand. Some of the larger traders and players are taking some product here and there, but it is a very difficult task to find a serious valuation and prices are more a guess than a reflection of real market activity. One cannot go wrong with some product because it can hardly get much cheaper. The main problem is that no one can really say when demand for split leather will pick up again to bring supply and demand back into balance.
The situation for skins is similar. It has become a bit more lively in the past few weeks and we have heard also about some Chinese buyers travelling in Europe before Christmas, but what their real intentions are, and if this is a demonstration of more demand, remains to be seen. For the moment the Russian trade sanctions are another nail in the coffin of the Turkish tanning and leather garment industry. What was bad already has become substantially worse and one cannot be sure that other production markets can substitute for this in the immediate future.
The situation for the coming weeks hasn’t become much clearer. Those who are taking advantage of the bright spots in the market, such as dairy cow suppliers in Europe, may be more relaxed about the situation than many others. Considering that we are only four weeks away from the end of the year and have the upcoming holiday period in the Western world for Christmas as well in Asia for the New Year festivals, one should not expect too many changes for the time being. Leather prices and the general global economy are not really allowing prices to go any higher, nor is the majority of suppliers willing to stimulate demand by further price concessions. What cannot be sold these days is stuck, no matter how low the price, and for those hides and leather types for which business is still running we see a decent balance of supply and demand in the weeks to come.
We don’t want to speculate on there being a clear market trend in the first half of 2016. We would prefer to remain on the sidelines and just focus on what is needed rather than to take any kind of position reflecting hopes for either falling or rising raw material prices.
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