The Leather Pipeline - 23.2.16
23/02/2016
There are times in this section when one has to sweep the last corner of the newsroom to find something interesting to report, however, there is no shortage this issue.
The situation in the Middle East, particularly around Syria, is becoming more complicated and there are people including leading politicians from Russia who are mentioning the return of the Cold War.
Peace, trust, safety and confidence remain the pillars of stability and consumer confidence. The conflict in Syria, the Saudis in Yemen, the unresolved Ukraine crisis, the missile tests in North Korea and terrorist attacks in Europe, Turkey and Africa are all being felt in the markets.
Stock markets have been extremely weak the past weeks and investors were happy to see the Chinese markets opening reasonably stable after the Chinese New Year holidays. They then saw a robust rebound leaving ‘the experts’ wondering whether the storm is over or whether it is just a trap before it gets worse. This was even more remarkable after the poor Chinese import and export data which was published after the holiday break. While some say the numbers were low because of the early Chinese New Year break, others see the figures as a confirmation of the slowdown of the Chinese economy.
There has also been negative news from the Japanese economy and this triggered hope for more financial stimulus to turn the international stocks markets around.
However, there was better news from the US, where consumer spending in January rose 0.6 % and car sales increased 0.6 %. In Europe, car sales jumped by 6% for the month and in China by 12%.
Gold prices went up, oil prices stabilised and the US dollar lost a bit of ground against the euro.
The European Central Bank has indicated more quantitative easing - the purchase of securities to lower interest rates and increase money supply. The €500 note is being banned and cash payments further repressed, which the bank claims is a deterrent for organised crime, tax evasion and terrorism, but it could also be interpreted as not wanting people to withdraw cash from banks in response to negative deposit rates. It perhaps shows an inability to safeguard the monetary system.
Market Intelligence
The last two weeks have been extremely quiet. During Chinese New Year in the first week, nobody expected anything but the second week was also disappointing.
The explanations vary. Some are finding it normal and are using the various fairs as an excuse for why business is so slow. They believe it is normal that the leather pipeline waits before taking any new decisions as far as production and procurement are concerned. Others are of the opinion that this is all just an excuse and the doldrums are only reflecting how much leather demand has declined since last spring.
Leather and raw material demand fallen since the first quarter 2015. However, in the automotive sector, the latest production and sales volumes confirm there has been decent growth, in particular in the premium segment, in 2015 and when we look at the roll-out phase of new models for 2016 in combination with new premium brands one has to expect further increases. Whether that can be sustained for the second half of the year and 2017 is unclear.
The upholstery sector got a lot of support from improved conditions during the winter in China, which supported the demand for leather in this section and stopped the decline of prices for hides related to this section in the last quarter of 2015.
With the high season of production is coming to an end, most players are discussing whether the pipeline might be well filled already and whether volumes might decline as we progress into the year.
Footwear
Leather for shoes and handbags remain the weakest sector. Demand is fluctuating as a consequence of general patterns in fashion and consumer spending. However, despite the gloomy outlook of the global economy, the situation is positive. The sharp fall of energy prices has had a much bigger effect on disposable income than any tax cut would have ever generated and in the big markets the labour conditions are also not worse (yet) than a year or two ago. If we look at car sales it seems that people are willing to spend money on big ticket items.
It seems to be fair to say that the shoe and bag leather business is a bit of a boom and bust story. Boom until the end of last year, when brands were increasing retail space and production capacity. Those two parameters were most likely increasing much faster than the demand and are the reason raw material and leather prices were rising to excessive levels. The problem of overcapacity in China can also be seen in the consumer prices rises of almost 2% (mainly food) in January while producer prices fell by more than 5%.
The excessive leather prices coincided with falling prices for alternatives, which were readily accepted by the consumer markets. Consequently – as often happens in the leather business – all the budgets went up in smoke and the supply and demand equation had to be rewritten.
While many believe that this is just temporary, we believe that this has far more fundamental consequences. There will need to be a serious change in price and fashion for leather to be manufactured in bulk again.
The first leather-related fashion fairs were held in the past weeks (Pakistan, India). None of them has brought a breakthrough for leather as far as demand and general mood is concerned and so we think lukewarm statements about visitor numbers can be understood as a ‘think positive in difficult times’ message. The business parameters for the general leather business remain bleak but this does not mean that there are not successful enterprises.
The Lineapelle fair in Milan [February 23 to 25] might deliver a more pronounced feedback and the number of visitors is expected to be pretty high. In difficult times, people tend to go to the big shows; some trying to generate new business, others making sure they don’t miss any information that might could put their competitors ahead.
Many tanners are complaining about delayed orders from their customers. Sampling is keeping technicians busy, and everything looks very promising, but there have been no bulk orders yet.
There have been plenty of discussion about the rising cost of production in China and the closure of many manufacturing units, in particular in the shoe business. We are hearing that a good proportion of this business is looking at India. Manufacturers from India are said to be actively looking for material options.
Generally speaking, we have to accept that, with the exception of the automotive leather production, results are pretty disappointing considering this is normally one of the busiest periods in the year.
Splits and skins
After a much drama, the split market is beginning to send a few brighter signals. Splits suitable for suede leather production are definitely seeing a pick-up in demand, and prices are rising, although they are still one of the cheapest products one can get. Let us hope that this trend will spill into the rest of the market, because this would be good news for leather.
The skin market remains an issue. The stability in the wool market has created a bit of interest from China for European skins with good wool return. It is the season Chinese buyers prefer - big skins, long wool and temperatures which allow almost risk-free shipment to the Far East.
However, buyers are not fully convinced and so they still trying to negotiate prices that are barely covering the processing cost of the skins.
Skin processors have begun to charge for the collection of skins, because the average return does not cover the collection, grading, salting and storing of the material. With many types – in particular small and short wool skins – not even finding a buyer, it is quite understandable. Let us hope that more activity will arrive to create a minimum product flow.
Goatskins suitable for suede are facing a similar situation to the splits. There has been more interest, but buyers are still trying to knock prices down. One can see many more pickled skins in the market, from the Middle East and in particular from Iran, but they are not find not enough leather demand. Tanners find them attractive, but demand needs to be rebuilt.
For the next weeks few weeks, inventory is high and abundant for some materials (skin, lime splits, low quality bovine material) and in balance or even insufficient for others (heavy European males) and tanners are not yet confident about the orders for the coming months.
The rest will be decided during the fair in Milan. The number of tanners and the large number of visitors from all over the world and all fields (raw material suppliers, tanners, designers, shoe, garment, leathergoods, chemicals, accessories, machinery) will allow a full overview of the leather pipeline, with the exception of automotive. This should also allow conclusions and forecasts about what we have to expect for the next seasons.
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