The Leather Pipeline - 22.3.16
22/03/2016
There has been a lot of political and economic news over the past two weeks, but it has not had much influence on stock markets. The US presidential elections campaigns, the difficult negotiations about refugee policies in Europe and Russia’s decision to withdraw troops and military aircraft from Syria have been the most influential.
In the US, inflation rose by about 2% and this is traditionally the level that national banks like to see in terms of desired inflation and price stability. However, the Federal Reserve kept interest rates the same.
A week before, the European Central Bank lowered interest rates to zero while increasing its asset-buying programme. This left experts scratching their heads.
Negative interest rates and the expansion of liquidity are not stimulating the European economy and observers are suspecting this is just an indirect taxation of the private sector to support those countries that have failed to get their budgets in order. Private investors and savers are footing the bill through savings and pension funds. There haven’t been the necessary reforms in many countries, and things haven’t improved for the average person. The asset bubble continues to blow up - the question is, when it is going to burst?
In the meantime, oil-importing countries will be happy that consumers are saving money at the petrol station and on lower heating bills. We can also see an indirect effect on consumer products that are based on related materials.
The euro strengthened against the US dollar and all the predictions about parity have gone. The oil price continues to be on a rollercoaster, but it is trading much closer to the $40 mark than to the predicted levels of $20 or below that many pundits suggesting during the first quarter.
Market intelligence
The leather pipeline is waiting for the Asia Pacific Leather Fair in Hong Kong (March 30 to April 1). It is more important for the raw material suppliers than for the tanneries, but they too will be interested to see what will happen in terms of hides and skins prices for the second quarter of 2016.
Over the past year, raw material prices for commodities have significantly corrected and this also applies to hides and skins. Oil prices, metal prices and many agricultural commodities are down. With the exception of the US, the global economy looks pretty vulnerable. The slowdown in China in particular has had an effect on the global commodity markets.
However, business is never at a standstill and so the leather pipeline continues to produce. Last year, the American suppliers were trying to defend their record high prices, which made it easy for other origins to take market share. This year, the situation is almost the opposite. US hides are competitive, the dollar has lost quite a bit of its value in the first quarter and this makes the competing origins for sales into Asia far less competitive. This has resulted in regular sales for US hides while other origins are struggling to move their raw material.
The situation is not easy because leather production and tanning capacity continue to shrink and the extra tanneries that had been built in boom times have been closed. Almost weekly, one can read about tanneries closing in China, sometimes for environmental reasons, other times part of the government’s plan to restructure industries they don’t consider to be necessary for the development of the country. This could be defined in a different way: the tanning industry is in a phase of major restructuring that we see once in a decade.
The anti-leather campaigners are another worry. In certain parts of the Western societies it had become fashionable to be a vegetarian or at least to condemn the production and use of leather. The leather pipeline is once again displayed as a crude, toxic and exploitative industry run by bunch of ruthless entrepreneurs. One of these articles recently appeared in an English newspaper and colleagues have been dealing with the subject too. It is amazing but also frightening with how little research takes place and how many prejudices so-called journalists have, and they are influencing public opinion.
At the same time the leather industry has to be blamed for not having worked well on the image of the product and the transparency of the production chain. The industry is touting traceability and it seems that everybody believes this is going to be the solution to all these problems. Your author is not sharing this opinion. It is not the traceability that is going to influence consumers’ opinions, it is more the campaign against beef in general. Since leather is the most valuable byproduct and used in so many branded consumer products it is dragged into the focus as being one of the major drivers of the success of the beef industry.
People illustrate the story with pictures from slaughter operations and unacceptable working conditions, which are far from standard and not representative of the production of the majority of leather around the globe. Quite the reverse: if we compare what the leather industry has achieved in the past 25 years, many people would be more than surprised. However, once again the leather pipeline is just a tool for a totally different intention.
What these people ignore is the fact that we have a huge number of people around the globe who consider lamb and goat meat as well as beef a serious part of their culture and food. One can of course always debate how much of something should be consumed and this could also apply to sugar, alcohol, drugs, salt and fat as much as it does to for meat and beef.
However, to ignore the fact that many people will not refrain from meat consumption is simple arrogance and as long as meat and the beef is produced, leather will continue to be one of the most sustainable byproducts.
CURRENCY EFFECTS
In terms of the situation in the leather pipeline, one can’t really say that there is much new along the supply chain. We are now heading towards the second quarter, which is traditionally the start of slowing production and leather demand before the third quarter, which is dominated by the summer holidays and a break in production.
As far as the raw material markets are concerned, only the core players are running reasonably steady and they are traditionally either the niche players or the big industrial corporations that are connected to large suppliers. With the recent movement in the currency markets, US suppliers are presently favoured. Consequently one can see the standard products shifting very well and sellers are claiming to obtain steadily rising prices. We have our doubts that this is true, but they do have the best value for money and the most consistent raw material sales.
The Europeans are beginning to feel the pain, with the only exception the suppliers to the premium automotive leather manufacturers.
The kill in Europe is still favouring female cattle and the supply of quality males is not really taking off like many pundits were expecting. We are seeing steady demand and slightly reduced supply so the prices for these types of hides continue to be comparatively high, with tanners beginning to see if they can use the other, cheaper raw material sources.
The market for females is a different story. One will remember that the tanners in Hebei province had been extremely active in purchasing cows for the upholstery market. Most sources in China were predicting that this would continue well into the second quarter. However, since the end of January the demand has vanished. Here and there we have seen suppliers accepting bids that are 10% or more lower than the prices before the holidays.
Taking currency into account, it is becoming a painful time for European suppliers exporting to Asia. They had a good fourth quarter of last year and so it might be the classic give-and-take that is frequently apparent in the raw material markets.
The Australian hides suppliers are also said to be disappointed with the market since the Chinese New Year break.
All this has made raw material origins drift apart in price and value. For those on the low side, the conditions look better than for those with relatively expensive material and so it has become old discussion of whether the low will go higher or the high will go lower.
The only hope the sellers have is the currency market, which can change so quickly and is so unpredictable.
SPLITS AND SKINS
There has been moderate improvement in the split market. It seems a number of finished leather orders, in particular for shoes, have been placed for split leather as it is one of the cheapest materials these days. This is not solving the problem and Chinese tanners are still complaining about insufficient sales, but market is definitely improving.
The same cannot be said for skins. In Europe, some the butchers are even being charged to take ovine product away. There are huge stocks of skins all over and the Easter chill will not make it easier in the weeks to come.
There are some smaller niches are gaining good returns for wool. There seem to be more leather garments in the spring fashion collections. Let’s hope this is the beginning of a new cycle, although it’s difficult to believe in a recovery without the Russian market. In current market conditions, tanners tend to wait too long to replenish their raw material stocks, which could also become a trigger for a better price situation.
The next report is due after the APLF in Hong Kong. The event is more a marketplace and an information exchange event than a place to promote leather. However, a big part of the international industry will be getting together at and around the show. Informal discussion as well as former meetings and seminars traditionally leave a very deep footprint. So we are eagerly awaiting the trip, because the last two months have not been very informative and we expect that by meeting so many people we can get a better feel for the realities in the leather pipeline.
At this stage one has to remain cautiously pessimistic about demand in the coming months. The real trigger for a turnaround hasn’t been determined and we hope it is going to be seen in the coming fortnight.
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