The Leather Pipeline - 19.04.16
19/04/2016
The past two weeks have been pretty uneventful. The financial community has no big story to focus on and this means that the movements on the markets remain within narrow ranges.
There was better news from China where exports in March rose; this made several people hopeful about the short-term recovery of the Chinese economy. However, one month in particular after the Chinese New Year break, means very little and we still have to wait and see how the economy will perform.
In Europe the handling of the refugee problem continues to dominate the headlines, but also Greece is back in focus because creditors are travelling frequently to Athens to discuss how the country is going to meet its obligations in the near future. There’s also a big conflict between the ideas of the International Monetary Fund and the European Union. The IMF is proposing a haircut that is being strongly resisted by the EU under the lead of Germany.
In the United States everything is dominated by the upcoming presidential elections, which traditionally makes governing difficult for the present administration. Usually no big decisions are taken in the final lap before the presidential elections.
Oil-producing countries are negotiating hard about supply and pricing policy for the near future, but generally markets expect stable-to-higher prices for the rest of the year. We all know how fragile these forecasts are. The oil price has climbed back to levels well above $40 per barrel, which is still pretty cheap. It’s helpful for the consumer at the gas station in importing countries, but not really what exporting countries need. Venezuela is facing a serious crisis and many other countries that depend on export revenues from oil see their budgets in trouble, which could quickly turn into another global economic and political crisis.
The decision in the UK about EU membership is getting closer and the discussions about the consequences are becoming more intense. Global leaders are meeting more frequently at the moment for various summits and in many countries the experts are beginning to play around with scenarios of what it could mean for their economies should the UK actually leave the EU.
Although it looks pretty quiet at the moment the underlying tensions are reflected in the price for gold, which has seen a decent rise in 2016 so far. Stock markets have pretty narrow ranges but have been generally in positive territory over the past weeks.
The currency market is a rather less active and the US dollar rate to the euro, which is the one we follow most closely, has been trading for almost 10 days just below the mark of $1.14 before falling a fraction. However, any trigger for a major move and a new direction is still missing and the financial community is just waiting for the next decisions on interest rates on either side of the Atlantic.
Market Intelligence
The market fundamentals have not changed in the past two weeks. The supply chain continues to be separated in several streams as we have seen now for almost a year. The performance of the automotive industry continues to be strong and car sales in the first quarter of 2016 rose in Europe by more than 7%. In particular the premium brands continue to publish record sales numbers and, with all the new models they are going to put on the roads in the coming months, there is very little reason to believe this should change in the next quarter. Interest rates and fuel prices are low and private and corporate buyers are willing to spend on new cars.
Despite many markets being in crisis (and we may just mention again Russia, Turkey, Brazil to name a few), other destinations are easily compensating for the decline. You have to wonder how the car industry would do and what the delivery times would be if all markets were performing well.
Questions remain about all the suggestions that cash rebates, daily registrations and other marketing tools are boosting sales numbers without really putting more cars on the road. We have only two options: one is to believe that car sales are good, and the other is to think that the marketing divisions of the car companies are just trying to paint a positive picture to attract new buyers. We have to watch the second-hand market reports because old cars are traded in and they have to find buyers too. Sometimes second-hand car dealers’ lots give a much better impression of the real situation in the automotive business than registration numbers of new cars that manufacturers are reporting. However, for the time being the performance of the automotive industry continues to be strong.
The upholstery pipeline is now waiting for the results of the big and very important furniture shows, Salone del Mobile in Milan and High Point in North Carolina. Phone calls and impressions from Italy at least have been quite positive. Quality furniture seems to be receiving a pretty good response from the markets at the moment and we may see, with global uncertainty, a new trend for ‘cocooning’, with people spending more time home and making their nest more comfortable and pleasant instead of spending money to go out.
At least in upholstery, leather could good potential for a serious recovery as a material. This applies to the better qualities and the more natural types. In any case this is what most of the people we spoke to were reporting: a good number of pundits got the impression that design, comfort and superior-quality materials were playing a very, very important role on the stands. Speaking to tanners who were present, they came back with the same story. Those who are supplying superior-quality upholstery leather had joy in their voices when they were talking about the Salone del Mobile. The suppliers of commodity upholstery leather, who today are mostly located in China, have tried to depress the market as much as possible. Before travelling out to the High Point show in the US they were trying to depress the market for dairy cows and bidding in all the major supply origins at significantly lower prices. Perhaps this was just a test to see what they could do about their leather calculations before meeting their customers in North Carolina. Perhaps it’s really a reflection of less demand. This needs to be carefully analysed after the shows have closed their doors.
Most suppliers of dairy cow hides were pretty shocked and were not really sure how to deal with the situation. One thing is definitely true: tanners in Hebei province are no longer the market drivers. they have been for quite some time since October last year. One gets the impression that finally in upholstery the gap between leather as a luxury, quality material and leather as a standard material continues to widen into totally different market segments.
In the shoe sector not much is happening these days because the winter season production is now in full swing. Many shoe producers have complained about a delay in orders, but the orders have finally come and now the shoes are being produced. Volumes are certainly less than hoped for after the mild winter, but things are moving. Some business seems to have moved to India, mainly from China.
Although not new to many, adidas went public with its plans to produce shoes from recycled plastic collected from the sea. Many consider this more a marketing gimmick than a real and influential new trend. In any case global brands are trying more and more to shape their image to become more environmentally friendly and sustainable in the use of their materials and their production. We have to face these influences; they can be seen in food consumption, in demands for fair labour conditions and so on. The main question is how the leather pipeline is going to deal with it.
So far, the consumer has not complained about more and more non-leather shoes being offered. As long as the consumer makes no complaint about the quality of the product the door is wide open for an increased use of plastic in shoe production. With plastic being mainly based on oil the big brands are aware that the use of plastic could swing quickly back in their face. However, it is too tempting at the moment because it is so much easier to manufacture shoes from non-leather materials than from leather. Considering the push towards fully automated manufacturing, this trend is most likely to intensify. The easiest way to combat any criticism they might receive for using oil-based materials is, of course, to recycle. From this perspective move of adidas is pretty smart, but it does not change the fact that leather is still the more environmentally friendly product.
The problem is the leather industry must build a good strategy to counter the trend. If you want to sell more shoes and you want to grow, your shoes have to be cheaper and the customer has to be willing to change shoes more frequently. Changing models can of course be handled by fashion and marketing, but to deliver them faster and to make them more cheaply will need new concepts and production methods. Supply chains have to be modernised and accelerated, which could become a pretty serious obstacle for leather as a material in mainstream production. Big global fashion chains, with their constant changes of collections thanks to smart manufacturing and quick delivery, are an example of what is coming.
If tanneries and shoe manufacturers cannot speed up their supply chains, modify articles and leather types (including colours) and meet the price targets, it’s going to be difficult for leather to maintain its position in mass production, at least as long as plastic remains cheap. Leather as a material continues to be valued, but it has to find its new niche and position within the material alternatives in the shoe industry, unless one believes that the growth in shoe consumption is going to be so strong that both materials will be needed.
The recovery in the price and demand for wet blue splits continues. The big names for splits around the globe are beginning to position themselves and the product continues to move, with prices slightly getting better. Again this is good news for tanners who have to sell splits and to include their value in their calculations. It’s also interesting that some players are buying hides today to get the split and sell the grain side on. Not that this is unheard of, but it is noticeable in times like these.
The skin market continues to run in the same gear as the bovine one. High-quality skins are doing well and are still in demand in the luxury sector where leather is a must. We continue to see leather garments in many spring collections, but all this is not enough to clear the entire production of skins and, in particular, the double face the Russian market used to buy. Warmer temperatures in China are not helping, although the wool business continues to support fellmongering.
For the coming weeks a lot will depend on how leather demand in China shapes up. The market for heavy and good-quality side leathers, as well as automotive, will take up all the quality heavy hides that are available. The critical section remains the female market, so dependent on demand in China. It is certain that most tanneries hold little inventory at the moment and they will have to take a decision the extent to which they want their drums to keep turning over the summer. The Chinese government wants more local consumption to reduce the dependency on export sales. However, the property market in China is still a big mystery, although a determining factor for the consumption of upholstery leather.
The automotive industry will require at least the same volume of leather as in the first quarter. There is possibly a price issue, but not really a volume one. This might change after the summer break.
Consequently we could see a strange trend with some bovine materials seeing a firmer undertone while others may move in the other direction.
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