The Leather Pipeline - 26.07.16
26/07/2016
Macroeconomics
Normally we should be in the low season as far as activity in politics and economics are concerned. We are right in the vacation period in from this week onwards and most of the players are leaving their desks and only an emergency staff is trying to keep business and the information flow running.
This would definitely apply in a normal world. However, the world is never really normal and at the moment it seems that almost all insane people around the globe seem to want to get rid of their frustrations by taking up guns and shooting innocent people. In our part of the world we are just not used to this and when it gets closer you fear more of it.
The biggest problem is however that the attacks come out of the blue. If you compile a list, the risk of dying from a terrorist attack or from a shooting is still pretty near the bottom. However, this does not make it any better. We are just not used to the fact that it is not safe to go out to watch a football match, go shopping or just meet in public with friends.
The military coup in Turkey failed and the country, which has been one of the best performers in terms of economy for quite a long time, is beginning to sink. Democratic rights and freedoms fade and the country seems to be moving closer to autocracy and dictatorship. Considering the position of Turkey, considering that it is still a member of NATO, considering its importance with regard to so many conflicts in the region, this is really bad news. If add the important function of Turkey in the refugee policy of the EU one can be afraid that the present situation will run the relations between the West and Turkey into a (let us hope temporary) dead end.
The financial markets have begun to react to the various problems and if we take the price of oil as an indicator we see the price once again falling. Not even the risk of political tensions in the Middle East were able to support the price, which is now back in the mid-40s for the barrel.
The banking crisis in the EU and in particular in Italy has become another worry again. More than €300 billion in bad debts and a critical capitalisation of the Italian banks might be needed once again, with taxpayers’ and governmental support to prevent them from failing. Those responsible are desperately trying to find solutions, but taxpayers are beginning to worry that it could have an effect on their personal accounts. In addition many critics of the EU are seeing their positions supported.
General financial data from the US has not made the markets believe that the Federal Reserve will raise interest rates very soon, but the US dollar made moderate advances, maybe just for the reason of its safe heaven function.
Market Intelligence
We are right at the beginning of the summer holidays in most parts of the world. This is normally a time when people don’t bother very much about the leather pipeline since most of productions are closed, decisions about the new season are not yet made and most players are waiting to talk and meet with their business partners towards the end of August to get a clearer picture of the programmes for the rest of the year.
The situation is pretty much the same this year but fundamentally we are, in 2016, in a situation that is slightly different. Globally, economies are in a situation of uncertainty. As already discussed above we have quite a number of problems and decisions to be taken, which are going to influence global consumer spending by quite a bit. And in this respect the security problem might be the least of the issues. We are far more concerned about the geopolitical situation and the fundamental changes in political leadership. Whatever individual political position one has, we all know that freedom, peace and democracy are actually the key factors for stable economic conditions and growth.
It might be worth reminding ourselves that we are presently dealing with more problems than ever before. They may not all make the headlines any more but many of them remain unresolved and new ones are adding to the burden. The Ukraine crisis with the sanctions between Russia and the rest of the world, the fight against IS and the war in Syria, the present changes and political instability in Turkey, the return of the banking crisis in Europe, the Brexit, the crisis in Brazil and the presidential elections in the US are all important challenges. And this does not even include a number of other issues such as the economic crisis in Venezuela to give just one example. It’s not an easy task to run a business under these conditions.
As far as the leather pipeline is concerned we don’t believe that the summer will change many of the general fundamentals.
While high-quality leathers and the automotive industry are still performing very positively, the situation in the mass market is much more complicated. Leather has definitely lost its position as a material and is suffering on top from structural problems like those we see presently in China. China had built up such a dominance in the leather production and manufacturing over the past 15 years that the massive environmental in general political decisions in the country are causing serious problems. This doesn’t really change the global demand for leather, but the shutdown of tanneries owing to environmental issues, plus the substantially rising cost of production in China have influenced the price of leather globally. Leather has become more expensive in mass production and also the use of leather into consumer products is no longer as cheap as it used to be some years ago. Consequently products made from leather have to reposition themselves in the price priority list of retailers and in the budgets of consumers.
For some products, leather is attracting no bonus from the consumer to allow a premium for the finished product versus man-made materials. This means that leather has to come down in price to gain market share again and the big trouble the market has at the moment is to figure out what level of price this should be. In the end it is a balance between raw material price, the production cost to make leather and the manufacturing cost to get the finished products made.
Beef producers with a byproduct of premium quality can’t see a problem and assume the positive performance of this high-quality material will apply to other sectors too. From our point of view this is a big mistake.
In the market for lamb and sheepskins this can be seen best already. Sales for raw material have become very low. At first sellers were storing, then they began to produce semi-finished products and in the end many skins are not even being preserved any more because the returns do not even cover the cost of preservation.
We would not go that far yet for bovine material, but we are already finding low-quality origins for which one begins to trace similar conditions although at the same time you find hide types that have barely changed their price levels for the past two years. The demand and the price spread between raw materials has possibly never been larger than now.
The most remarkable situation is that even the large spreads and the very low prices for low-quality material are not stimulating demand. We think that this is a consequence of leather not finding its way back into manufacturing and raw material suppliers and leather manufacturers failing to meet to discuss what can be done to handle the situation.
Environment is not only an issue in China. Also in northern Italy water supply and effluent treatment have been the subject of problems for a long time. Some beamhouse production has shifted to Tuscany or other regions with free capacity. This is hindering normal production and many tanners are complaining about more stringent controls by the authorities than normal. One commentator has said tanners’ image is low, even though tanning and leather are also part of the success of Italian fashion and design.
The split market remains the same as before. Specialty raw materials for leather production are enjoying regular demand and market conditions. Heavy veg leather, high-quality suede and heavy splits are doing well. Collagen, gelatine and lightweight, low-quality splits are suffering and no end to the situation is in sight.
The skin market faces the same problem as it has for the past year. The situation in Turkey is not making it any easier. Tannery closures in Hebei province and the extreme heat this summer (with the problems this causes for preservation) are also making skin tanning a challenge. Prices of skins remain at record low levels, but this is not helping.
We have no reason to believe that in the month of August anything fundamental will change. Too little activity from the demand side and no intention to adjust raw material prices before the All China Leather Exhibition at the end of the month will most likely paralyse market activity.
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