Macroeconomics

News from the financial markets has been fairly negative over the past two weeks. An increasing number of forecasts have been revised downwards and the global economy is expected to grow by only 1.7% this year.

The stock markets and the commodity markets were down and the oil price is still set around the $30 level.

European stocks lost about 10% of their value during January. Some company results are fairly positive, but many are not meeting investors’ expectations. Most CEOs are not predicting a positive year.

Following China’s stock market crash at the start of January, the European economy is returning to the focus. Analysts are questioning whether the European Central Bank’s policy of injecting liquidity is the best solution.

Negative interest rates, seen in Japan, might not be far away for Europe. Avoiding or reducing cash payments now has the excuse it will help in the fight against international terrorism. However, it is obvious that governments want to gain more control over privacy as well as protect banks from the cash drain.

There is much uncertainty. There is serious pressure in the Middle East, including the migrant problem and the terrorist risk, and global demand is not strong enough to support the economies in a way that they can meet their obligations.

Production capacities, which expanded after the financial crisis, are reaching their limit and debt-laden companies all over the world could quickly run into trouble.

Market Intelligence

With China being so dominant for the raw material and production sector, the holiday break [Chinese New Year, February 8] is leaving large traps in the market.

However, this is only one side of the coin. The uncertainty about the global economy is making things pretty difficult to judge and so everybody is in routine mode. Sellers are trying to defend their positons with the usual arguments of supply, regular sales etc, and tanners in Asia are using the holidays as an excuse to gain time.

Many tanners in Europe are complaining about missing orders and say they are using all their resources to prepare samples without getting any real decisions from their customers.

Operations are running at a reduced level and this explains all the hand-to-mouth activity one can see in the raw material markets.

Tanners are buying the bare minimum, lacking a clear picture about their orders and are struggling to get the quantities for their sampling. So, wherever available they take small wet blue selections and run their beamhouse just on their bread and butter business.

The only exception remains the industrial sector, mainly the automotive industry plus some of the larger brands for shoes and other leather items. This creates this uncertainty, but it is also reducing raw material stock in the bovine tanning industry.

Fundamentally it will need very little to push the market either way and this will happen one day. We are in a fragile situation in the raw material sector while in semi-finished products there is plenty of stock stuck along the supply chain.

We continue to see the consequences of the shift away from leather in the shoe and leathergoods sectors. The sanctions against Russia and the Ukraine crisis have hit the industry in Turkey and China and a lot of businesses have closed.

The massive reduction of production capacity in China has not been compensated for elsewhere. Although everybody speaks about India, Pakistan, Vietnam and Bangladesh, so far only Vietnam has the infrastructure to take some of the industrial supply chains over from China. The shows in Pakistan and India [India International Leather Fair, Pakistan Mega Leather Show] did not deliver an indication of larger orders or any new infrastructures.

However, despite the sharp decline of business in China over the past months, the majority of the leading supply origins have still been able to move most of their articles sufficiently enough to avoid any significant inventories.

Lower kills in Australia and parts of Europe have prevented excessive inventories of cattle hides. That means that the soaking part of the tanning industry has been enough to absorb a portion of the raw material supply in the medium and higher end of the quality range.

There are decent volumes of wet blue and low grades in China. Wet blue prices are moderately falling and old stocks of wet blue and crust are everywhere, and wholesalers have plentiful stocks of leather.

A quick review of shoe retailers in Europe last week did not deliver positive news. Most of them are struggling. The warm winter before Christmas means only the high end is performing well, the rest were unhappy with sales and began their sales before Christmas to move stock.

The general threat of terrorist attacks is keeping tourists away from the main commercial centres, and shopping malls in France and Italy are complaining about fewer visitors.

We know that a number of the high street brands have advised their suppliers to plan for about 20% less business than in 2015.

Quite a few of the old pundits believe the hide market is a pretty reliable indicator for the economy and can give an indication of what can be expected from the economy in the following six to 24 months.

Most of our readers know we have been cautious for a while and even today we think we are not just dealing with general financial problems but serious structural changes. This will readjust eventually, but there might be a few casualties along the way.

SPILTS AND SKINS

There have been some positive indications from the split market. A number of producers and people related to the sector are reporting an increasing demand for wet blue splits, which are suitable for suede leathers in the shoe business. Sellers were able to move a bit of production and a number are also reporting that at the very low price levels, sales were easy and they were even able to increase prices by between 10% and 20%.

It doesn’t seem that this is mere speculation, and because the activity has come from producers themselves this could mean that the suede split is receiving more interest from manufacturers.

The next two weeks will be pretty quiet in the market, but we will monitor the situation, because this could be the first indicator for a better outlook for leather.

Skins are not seeing much change but could start to see more interest, because the prices are attractive enough to put them back into the material mix. We would love to see a return of leather in garment fashion as well, because that would definitely push things forward.

The leather shows in the coming weeks (Lineapelle in Milan, Feb 23-25, and Asia Pacific Leather Fair in Hong Kong, March 30 to April 2) will hopefully tell us a bit more. For the moment prices are still under pressure and stocks are all over the place. It would, however, not need much to trigger a wave of buying.

In the next two weeks we think the players will take a rest to analyse the situation and their expectations for the rest of the year.

Many will be busy preparing for the shows. Trading will be quiet due to the holidays in Asia and neither increasing nor lowering prices will stimulate demand. Buyers will continue to bargain hunt and sellers will try to hold prices at least steady during the holiday period.

By the third week of February one has to expect both parties to put their cards on the table and then we will have a clearer idea of what to expect for the rest of the first quarter.

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