The Leather Pipeline - 08.03.16
08/03/2016
The financial markets are not too active at the moment. The main focus is on politics. In Europe the potential exit of the UK from the European Union and the refugee policy are the dominating media topics and a number of local elections will be monitored in the next couple of months to allow people to see if political leaders are in line with their opinions.
In the US the presidential candidates are campaigning to see who is going to be a candidate for the presidential election in November and it seems this is more important than what the current president is doing in politics at the moment. This is what generally is called a lame duck when the US president is in the last year in office and is no longer considered to be a man of power. Considering the present number of crises in many parts of the world, the timing is not particularly good.
In Europe everything is focused on the potential exit of the UK from the EU, which the British will decide in a referendum in June this year. Nobody has a clear picture of what the decision is going to be, but it would be a serious hit for the European community in very difficult times if the decision were to leave. Certainly many Europeans share a lot of the UK’s concerns, but it still leaves us in the dark about what the future would bring for the remaining member states and for the UK on its own. For business it’s hard to believe that it could be positive, except possibly for the banking system.
Globally one has to be impressed by the strong performance of the car industry, which is still running at high levels of production despite a poor performance in regions such as Russia and Brazil. However the US market continues to perform very well and China has delivered pretty impressive sales numbers too.
Talking about China, the situation is not as good as the numbers in the car market seem to show. The purchasing manager index is well down and the government seems to be worried about the state of the economy. It has decided to reduce the deposit rate for the banks by another half percent to stimulate investment. At the same time there is a lot of talk about overcapacity and massive cuts in the heavy industries. More than 4 million jobs could be lost very soon if the government is really intent on shutting down capacities in the steel industry as well as many others. The conversion of the economy from being a low labour cost production hub for the world to a service and high-technology driven economy will definitely be a massive challenge.
Stock markets have found a bottom in the past two weeks and in many cases have even rebounded quite nicely. Gold is climbing in value and oil prices have now defended the price level of $30 per barrel quite well, although many still tend to believe this is only a temporary rebound.
The euro, in view of much weaker economic data from the Eurozone, lost all the value it had gained and is now back at levels that it reached towards the end of last year.
Market Intelligence
The main focus in the leather pipeline in recent weeks was the Lineapelle exhibition in Milan. People still seem to expect shows of this kind to change the world or to offer some totally new insight to change the mood and levels of business confidence with the click of a finger. It never happened in the past and it didn’t happen this time either.
Everybody just repeats the same story. When we read all the reports about these shows it seems that people consider it to be a cocktail party and not a trade show. It seems to be enough for there to be a lot of people talking gently to each other for commentators to call an event successful and positive. From the perspective of the organisers this is totally understandable because visitor numbers and exhibitor booth numbers are the parameters they use to measure the success of their exhibitions. From the perspective of the exhibitors and visitors with a specific interest in the situation, it is quite a bit different. For the analysis of markets and trends there is a different set of parameters again.
Obviously reports are driven by special interest. We all know that business and the economy are definitely related to psychology and so the think-positive factor for many people is the most important public relation tool. Again we have to stress that we have absolutely no intention of painting positive or negative pictures, but we try to obtain the most realistic and representative impression we can get from trade shows.
In the case of Lineapelle in Milan in February, we would call it a mixed bag. Expectations were pretty high, but we would say the show was not a trendsetter for any major direction. From our perspective we would say that function has beaten fashion, which means that those leather producers who have a very strong foothold with their material within their customer and product range are the ones most satisfied with the show. Demand for these types of leather has always been far less vulnerable than the fashion section. Tanneries that are supplying these types of leather were almost entirely unanimous in reporting stable and, in terms of volume, steady business. This means side leathers for high-quality outdoor footwear, for example. We also include automotive leathers in this because of their high technical specs and limited supplier base. Upholstery leathers are beginning to arrive at the end of the season. High-end qualities are still doing quite well, but they don’t represent the big volumes, as usual.
When it comes to activity on the stands of the show one could easily see those who were busy and where the designers and buyers were active. Some stands were well attended over all three days and these were the usual strong performers – the good old names that have always been there and have already gone through the good and the bad times on a number of occasions. From our perspective this is a classical situation in difficult times, with fewer experiments and an attitude of ‘stick to what we know and who we can rely on’.
Those who are more ‘fashion riders’ and surf on the waves of retail demand seem to be finding it much more difficult to find buyers and to obtain the necessary interest to fill their production capacity. Here you found far less activity, complaints about numerous sampling and no follow-up orders, massive issues with price and great uncertainty about the future.
What was seen in terms of fashion and or new articles? Not much that hadn’t been seen before. However, light calf leather was discussed a lot, not a surprise after the sharp decline in prices and considering how desperate raw material sellers are. Again, it is a classic cycle: everybody piles in when it is cheap, everybody pulls out when it is expensive. Several of the extra light calf articles have reached price levels at which they cannot really go much lower, a bit like lamb and sheepskins. These skins have a historical price cycle and we are at the bottom of it. Some of the big boys have realised the situation and we have heard of large contracts being signed for delivery over the coming months. Whoever has the money and appropriate warehouse facilities cannot go wrong here.
The increased presence of Indian tanners and shoe manufacturers was also interesting. It seems that shoe production is definitely moving out of China in various directions, including India, with producers there now actively sourcing raw materials for the shoes and uppers they have to deliver. Turkish tanners were desperately looking for substitutions for the business lost in Russia. Many tanners are closed or idle, but the remaining ones are searching with great ambition and energy for new export markets to compensate for their main market, which is unlikely to return soon.
Fashion Week in Milan in the last week of February offered hope to those in the long-suffering garment leather segment. Quite a number of super soft and beautiful leather outfits were seen. Even knee-high boots and over-knees were seen. Fashion shows and designer dreams do not necessarily make it into department stores or large fashion chains, but it could serve as an inspiration and the price of garment leather cannot really be prohibitive to any business any more. So, we could take this as a good sign and something to work on. The first spring collections also offer some classical leather jackets. Prices are affordable and now it just has to catch the attention of young consumers and fashionistas; this would definitely be a great help to battered garment leather tanners.
Raw material business was not too intense during the show. Tanners were more in a wait-and-see mode and they did not feel that there was too much risk in letting suppliers wait. The Italians were waiting for the performance of the Chinese and the Chinese were waiting for the results of the Lineapelle fair. Only the regular programmes in the high-quality section and automotive were concluded while the rest remained very sporadic. After the show the situation in China began to deteriorate, in particular in the Hebei area, which had been the bright spot for some time. We are not able to verify any of the bad news stories of low prices and cancelled contracts that have been spreading in recent days. On the other side of the coin many sellers from various origins have reported good sales and moderately higher prices, low kills and high hopes. Well, we will not comment on this, but a number of tanners consider this as the usual pre-Hong Kong advertising to prepare for visits and discussions with their suppliers, who will begin their Asian tour in the coming weeks.
The split market continues to show some signs of life. This might not apply to all suppliers; Chinese tanners in particular are complaining that they cannot get rid of their lime splits and still hold large inventories. However, standard quality wet blue splits are bringing more interest and suppliers of standard quality and reputation confirm that their sales and shipments are beginning to pick up and that things are no longer as bad as in the last quarter 2015.
Although we have seen some positive sign for garment leathers, this has not yet spilled over into the skin market. All kinds of cheap offers are still circulating in the trade and everybody has horror stories about big-volume offers and cheap prices. However, people who have proved to be a reliable source are reporting better interest and sales, despite prices being very low (in many cases not enough to cover processing and freight charges). Reliable sources are in a position still to move skins before Easter, but are still not happy as prices do not offer an acceptable return.
In private conversations, quite a number of people call the present PR campaign about a firmer market with higher prices and well sold positions just propaganda and say that they remember the same situation last year at the same time. We tend to agree, with the additional comment that the balance of supply and demand, as well as price levels, is not as problematic as it was a year ago. However, it seems that it would be very ambitious to say, looking at demand for raw material, prices of leather, the demand structure in retail and the general global economic situation, that leather demand is on the rise and raw material is in short supply.
The market for leather and raw material is not uniform. This is creating small bright spots and bigger dark spots in the market. It is also true that several raw material prices (such as those for lime splits and skins) have reached levels at which they cannot get any cheaper and some bovine raw materials are also in the bottom section of their historical cycles. There are also still a number of raw materials that are still overvalued and in dangerous territory when we consider leather demand.
We consider the present situation still to carry considerable risk potential.
Share this story:
