The Leather Pipeline - 26.01.16
26/01/2016
In the past two weeks the financial world has had to digest a lot of negative information. However, there might be also be also something positive in the mix.
In the foreground we had statistical data. China’s gross domestic product rose in 2015 by just a fraction below the expected target of 7%, which had been set by the government. However, overseas analysts and Chinese experts are seriously questioning the numbers and there are more than a few who think growth was well below 7% and that 5% might be more real. It is still a very impressive number in relation to what we are used to in Europe and the rest of the western world but is not enough to sustain a stable labour market there and to pay for the debts most of the large industrial conglomerates are carrying. This is considered to be one of the big risks to the global economy.
The International Monetary Fund has reduced the forecast for global growth by 0.2% for the year 2016 and considers slow growth in China, the refugee problem in Europe and the low oil price as the main risk factors for the global economy in the current year.
The oil price has fallen further and has gone well below the $30 per barrel mark in the past two weeks. Owing to the low commodity prices Russia is piling up a whopping budget deficit, considered to exceed $30 billion.
Consequently stock markets have been vulnerable and the general trend was down. A number of stock indices have lost 10% or more already in the first three weeks of the year; one of the worst starts to a new year ever seen.
Most experts and analysts are nervous about the trend of the current year and most of them share concerns about the Chinese economy and about the negative effects of the rise of interest rates in the United States. Many companies, in particular in Asia, are sitting on pretty large loans in US dollar terms and every rise in the interest rates is causing increasing risk that the loans can’t be repaid. Everybody is denying any parallels to the situation at the end of the 1990s when south-east Asia fell into a deep depression in similar circumstances.
The weak oil price is also dragging down other commodities and expectations of the slowing global economy is becoming an additional concern for the budgets of many producer countries. Too many of them are dependent on oil revenues and, for some of them, serious financial and economical problems are already on the horizon. Shrinking demand for oil and the present oversupply with excessive stocks are indeed carrying the serious risk of another uncontrolled collapse in the price for oil. Physical stocks around the globe are extremely high and bear the risk that when owners have to liquidate, the physical position the market could get out of control. Many people think this is not realistic, but it cannot be ruled out now as one would have done a year ago.
On the other side of the coin on the low energy prices are a massive boost for industrial countries that don’t have their own raw material resources. For companies, it means a substantial decline in their energy bills and costs and for the consumer it can be an injection of extra disposable income.
Most of the world considers the lifting of the sanctions against Iran as positive for business. It is bad news for oil prices because everyone is expecting Iran to pump as much as possible to finance the long-delayed imports and infrastructure investments, but it is also good news because the country will need to import and to purchase consumer and industrial goods in the near future. This could be some compensation for various countries and producers around the globe suffering from the sanctions against Russia and the decline of business with China. Iran cannot compensate fully for this but at least it’s considered to be a help.
Market Intelligence
The past two weeks have been pretty quiet in the leather pipeline. Most westerners came back from their annual Christmas holiday hoping to feel refreshed and relaxed as they took up the challenges of the new year. This only lasted for a few days. The mood quickly changed and this was possibly more psychological than a fundamental change in the economical environment.
Terrorist attacks, the falling oil price and the direct effects on the financial markets with declining stock values have not paved a positive way into the new year. With the dominance of China in global leather production the upcoming holidays for Lunar New Year (February 8) and the big concerns of the Chinese industrials about a continuing devaluation of their currency have made them also turn quickly towards a wait-and-see position. This year we just have two or three weeks between the restart in the west after the holidays and the beginning of the holidays in Asia, particularly in China. With declining leather orders and a very uncertain outlook many of the Chinese players have decided not to risk anything and to decide what course of action to take only after their return from holiday in late February.
This will mean a period of almost three months when market activity and manufacturing are not operating in full, mainly due to a lack of confidence. It’s a much longer period than the summer break, which is usually considered to be the longest and lowest season of global manufacturing and market activity. The biggest problem continues to be uncertainty for the leather business. There is no substantial news (positive or negative) about this. Hardly anyone is clear about how the consumer spending is going to react to the global situation.
If there is still an exception it is the automotive industry, which continues to have a steady and stable sales volume throughout the year. There is no sign that any of the big manufacturers is considering a cut in production in the foreseeable future. This does not necessarily mean all the cars are going to be equipped with leather, but a bigger number of vehicles produced means a big volume of leather absorbed. The strongest performers are definitely those brands that are using new model lines in the middle-class and premium segments, and there are quite a number of them. Just the roll-out phase to serve all the showrooms, expiring leasing contracts and new vehicles for car rental companies is already enough to keep production lines busy for a few months. Consequently we believe that the real first breaking point could be the summer holiday, when the industry will be able to count the number of vehicles sold and compare those figures with the forecasts of the sales department for the rest of 2016.
The rest of the leather-related industry is heading for a new round of exhibitions and will wait to see if these deliver greater security and a reliable picture of orders for the coming months. Shoe shows, furniture, fashion and lifestyle, plus the leather fairs in India, Pakistan and finally in Milan and Paris are dominating the calendars of many in the industry. Some are even (correctly) complaining about the number and the timing of all these shows and more and more people are becoming increasingly selective about where to go to exhibit or visit. However, many are afraid of missing something and so they appear wherever they can.
As far as leather production is concerned the market is pretty well divided into those who have developed into serious, quality producers supplying leather for consumer products that have leather as an important part of their DNA, and those who have not. Volatility in the financial markets and general uncertainty about the future of the global economy have not brought the entire leather industry to a halt. From the standpoint of consumer one could even say the world has become not safer but better in some ways because spending much less on energy means more money in people’s pockets than a year ago. Many leather products are not very cyclical and the middle-class citizen above 45 years of age has a leather-friendly spending attitude compared to the 20-year-old fashion hipster. Fashion-minded wealthy women, for example, still find leather bags of the right brand an absolute must-have. In uncertain times the home could become a much more important issue again and people might spend less money in restaurants and for travel and more on having a comfortable, attractively furnished home. This could lead to a strong recovery in the upholstery sector too. The same applies to the automotive market. Self-driving cars could turn the inside of the vehicle into something more like a living-room than a cockpit.
We have been describing for almost a year now our concerns about the leather pipeline. Much of it has come true and we may not even be at the end of the cyclical trend yet. We have to mention manufacturing overcapacity in leather production, we have to deal with environmental issues, we have to manage the threat to the material from cheaper alternatives and we have definitely to work on the image of leather as a material rather than just allowing public opinion to be swayed by opponents of leather without offering any defence.
It might be a good idea to have a look at the wool market, which has gone through a similar development in recent years. It’s a natural fibre that, despite competition from artificial alternatives, is able to maintain its position much better than leather. A global marketing campaign with the wool trademark has definitely been very helpful. The natural fibre in textiles or carpets has been able to find and hold its position despite going through the same kind of economical troubles like leather. Also in wool scouring and spinning we have seen the rising dominance of China, environmental problems, the rising cost of production and the success in terms of function of artificial alternatives. Today the natural character of wool makes it a privileged material, either on its own or in combination with artificial materials. What we are missing is a global campaign to make people understand that they should not fall into the trap of the anti-beef and anti-leather campaigners and explain that responsibly manufactured leather is one of the most sustainable materials in the world. It has to be explained to the educated consumer that buying consumer products made from artificial materials, to use them for a couple of months and to dump them because they were cheap, is definitely not the right attitude when, at the same time, they demand environmental protection, food safety and sustainability.
Everyone is entitled to their own opinion, but the entire world will not become vegetarian and consequently leather should continue to be recognised as a valuable raw material with – if correctly produced – fantastic characteristics. We could say that almost everyone owns or has owned a leather product that has become a long-term comrade or a private treasure, although it might be fair to say that leather production has become too industrial. We know that this is the never-ending story of the leather family, but we might now be at a time, with the threat so serious, to deal with the subject seriously.
The markets in the past two weeks have been in agony, with suppliers talking prices up and customers telling them that they should stop dreaming. With most sellers being adequately positioned and most buyers adequately covered nobody was in any rush and this kept business activity pretty quiet. Most would call price levels moderately higher, but we don’t see the trading volume to call it a real market and a reflection of the balance between supply and demand.
The situation in the split market continues to be disastrous. Just a few niches such as high-quality suede and heavy, flawless, high-substance splits are still developing enough interest and demand to offer some kind of product flow. For the rest the situation continues to be absolutely dreadful and many large producers have decided to move away from full substance tanning and to change to lime split to have at least the opportunity to shift the splits into gelatine and collagen productions. However the consequence is that prices for these products also continue to face serious pressure and it hasn’t really curtailed the offer of splits enough to support the market. In particular in China the inventories of splits across the country remain high and tanners in the majority do not really know what to do with their production.
We find a similar situation in the skin market. Skins for interior design, luxury double-face, nappa and some lining leathers are still running at steady levels. The bread-and-butter business for lamb, sheep and goat continues to be in the doldrums. If the skin still has a decent amount of wool they are bought for the sake of the wool return and the pelts are available for free in stock. We are missing any rebound in the demand for garment leather and the hope that more sheep leather would make it into shoe production due to very competitive prices has not really materialised in volumes yet. In several countries lower-quality skins and shorn materials are already being destroyed or buried in special landfill sites. It’s a pretty worrying situation considering that in only a few months temperatures in the northern hemisphere are going to rise again and the time of easy storage will be over.
For the coming weeks expectations are quite low. China is winding down for an extended new year holiday and in the rest of the world people are dealing with the uncertainties of the general economy, while everybody is hoping for positive results of the upcoming exhibitions. Sometimes it needs very little to trigger the turnaround, but at this stage we continue to miss the respect for leather as a material. And so we continue from week to week to monitor fashion and general trends trying to find the stimulus that could excite manufacturers again to turn their attention back to leather.
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