The Leather Pipeline - 04.10.16
04/10/2016
September in general was relatively slow but the global economy and political activity are slowly regaining speed.
The biggest concern at the moment is a growing tension between the US and Russia with regard to the war in Syria. The tone between the two is becoming rougher and their relationship is becoming more and more difficult. The recent publication of a research report on the shooting down of a Malaysian aircraft over Ukraine in 2014 did not make it easier. Facts don’t count: the victims and their families are totally ignored and it is all becoming a media battle.
In the meantime the war in Syria is becoming more and more ruthless and violent and civilian casualties seem not to count any more. The parties involved no longer seem to respect hospitals or any other shelter for civilians.
Such local conflicts remained local for the last decades but with the situation in the Ukraine and Syria geopolitics are changing more than ever before.
OPEC members agreed in their meeting in Algiers for a production cut to stabilise oil prices. Speculators welcomed the decision and pushed oil prices immediately higher despite the fact that the fundamental balance between supply and demand will not change. There is still enough oil and prices are driven more by speculation than by the real supply-and-demand position.
In Europe there are rising concerns about Germany’s largest bank. The facts are worrying considering that any further taxpayers’ money to rescue banks will provoke a negative public reaction.
The US dollar continues to trade in very narrow ranges, in particular against the euro. However, several analysts are painting a grim picture for the European currency in the near future. The very fragile EU, Brexit, the banking problems and a possible downswing in the economy for 2017 and 2018 make analysts believe that the euro might have a difficult time ahead, especially as the European Central Bank has very little ammunition left.
Gold prices have remained weak and although oil prices got a boost (see above), it is questionable if they can really move upwards on a sustained basis. It looks more that there is a general and mutual interest to lift oil prices back to levels that will not hurt growth in the importing countries while easing the finance problems of the exporting countries.
Market Intelligence
The Lineapelle fair in Milan was Italy at its best. There was good weather and the Milan Fashion Week taking place at the same time, which meant beauty, glamour and attraction, boosting the emotions and boosting the leather industry too. All respect to previous host city Bologna, but one has to accept that Milan is for many reasons the better place for the event and those who have been stubbornly pushing it towards the fashion Mecca were right to go for it.
We do not really need the numbers of visitors and exhibitors and the statistics from the organisers to decide on the success or non-success of such an event. This is only part of the result; the impressions gathered by exhibitors and visitors are far more important.
We are late with our fair report and most other publications have already drawn their conclusions and reported what they got from their visits. In some instances we agree and in others not. Of course we have the benefit of having been able to digest and analyse carefully, but sometimes it is quite interesting how much the sentiment and the information sources differ.
There is no question that this fair in Milan is still the most influential exhibition in the leather world. There might be others that have a different timing and more local importance, but there is definitely no other event in the world that is telling the leather pipeline so much about fashion and the real sentiment for trends and the feelings of the leather-consuming industries. What had been in the past almost exclusively a fair for the shoe and accessory industry has now developed into a trend-setting exhibition for all industries related to leather.
The consensus is that the September edition of Lineapelle was a successful fair and success means for many that leather business is good and growing. Well, this is a pretty difficult statement to make as far as we are concerned. There is no question that there a lot of positive news and fundamentally the industry received confirmation that leather as a material has still a lot of fans in the consumer markets. However, leather has to be special. It has to be recognisable as a natural and special material in the finished product. This is relatively easy when it comes to the higher end of the quality range, where tanners use the best raw material to produce the most natural leather for the highest-priced luxury articles. Whether you talk to designers, brands, manufacturers or even raw material suppliers they do not even realise that there is a problem for the general industry. They are not touched, they don’t feel it in reduced demand or prices and so for them all the complaints and concerns play no role.
It would be very easy for the entire leather market if leather as a material were also recognised in this way in the price-sensitive consumer markets. However, price is a big problem and the mass consumption is happy to use substitutes that have a similar look and feel to the original. This is also where the problems start; if the consumer cannot be attracted back to leather it will be a problem until the alternatives become more expensive again or the global consumer demand is so strong that all available resources have to be used.
Talking during the show to many in purchasing and design management in the global shoe industry, it was finally confirmed that despite almost unchanged shoe production, the consumption of leather has been declining by between 5% and 30% depending on brand and market segment. Price and productivity gains play the most important role and this trend remains unbroken. This means that for many supply chains the volumes have gone down and we haven’t met anyone who was predicting any change in the short term.
Meetings with the representatives of the automotive chain delivered a bit of a mixed picture. Production levels remain high for the moment, but some well informed players said that there are warnings from some brands that budgets have to be adjusted by 10%-15 % and there are rumours that some European brands will close for an extended period of time over Christmas this year. Automotive remains a strong sector and in the short term not much will change.
For the time after it seems that the industry is entirely focussed on e-mobility and hybrids. A change to new energy concepts may be the biggest opportunity for the industry. In many countries the decline in sales of combustion engines is being discussed and one can see how quickly all brands are trying to present new models following the trend. It is pretty obvious that in the next decade across the world classic petrol and diesel engines will lose market share quickly and this is a great chance for the industry to sell more vehicles again. The big question is who is going to build those new vehicles and will new players gain market share? Also, there is the question of what the new mobility will mean for the car interior.
Let’s get back to the fashion department. Despite the general and positive sentiment we have to admit that everything has remained pretty much as before; we have not been able to trace any major changes in fashion trends. The successful companies and the luxury brands continue to focus on high-quality, natural leathers. Others have reported that their customers are still waiting for the final decisions of the design departments. Nobody wants to make a mistake and nobody wants to take too much of a risk these days. However, it is not a question of being scared about business, but just the question of trying to avoid mistakes. The courage and individuality fashion designers were known for has also faded a bit.
We have to admit that we cannot fully share the totally positive reports about the event. The business and the impressions one could take away from the show have to be called a bit mixed. Yes, leather is still finding its place, but it’s not for all, or not with the same level of success. We cannot just look at the high-street fashion brands and enjoy their success and generalise that situation for the whole industry. Many producers of leather and consumer products are still suffering from a massive price war and from low inflation, which is holding factory and retail prices under control.
As long as leather struggles to regain a special position as a sustainable and natural material it’s going to become a more and more exclusive product but at the same time with limited sales and market potential.
In the meantime the most active season of leather production is beginning, no matter how good or bad the general situation may be. After the long and quiet summer with major difficulties in the Chinese industry weighing on the markets, activity is beginning slowly to recover and production is on the rise. More production means more raw material needs and this has led to more raw material sales activity in the past weeks. Most suppliers convert that to an improvement in the general conditions but we still believe that this might be a bit premature. The big industrial supply chains, from big packers to big industrial leather producers whether for shoe or automotive, are doing quite well and in this market segment supply and demand seems to be in a reasonable balance. Looking at the leather prices and comparing them with raw material values in combination with low split credits it doesn’t seem that this can be a particularly happy time for anyone making leather.
The split market remains in a very difficult phase, but at least we understand that the demand for good-quality suede splits continues to improve. Even Chinese players are admitting that the splits from cows and heifers can be sold at the moment and prices have bottomed, if not already moderately improved. For other splits the situation is definitely not that easy and we would say we are not yet through the worst. We definitely do not need to speak about trimmings, which are finding it very hard to find any kind of outlet. As long as the market continues to be difficult for price-sensitive products it is hard to believe that tanners can count on better revenues for their by-products.
The skin market remains in misery and the number of sheep and lamb skins that are being disposed of continues to rise in many countries. It is really unbelievable that a valuable by-product is being destroyed because neither manufacturers nor consumers know how to use them. Certainly the leather industry does not have a fantastic reputation at the moment and the general trend against meat is not helping. However, all those who oppose leather products should definitely recognise that the alternative materials that are used in mass production are not the solution. The vast majority of tanneries today are producing according to acceptable environmental standards. There is still a lot to improve and we still have regions where things need to get much better, but change is under way. If there is any bright spot at the moment there we can definitely trace an improved interest in goat skins and there is definitely a rising interest in this material from the shoe industry. If it really is about price, there is no reason why goat, lamb and sheep leather should not be used again.
The next two weeks might become a period of settlement. The month of September has been very warm almost all over Europe and many retailers are complaining strongly about retail sales for the autumn-winter season. Every year the temperatures are declining later, but retailers expect the first run on apparel and shoes for the winter season already in September. They strongly believe that what is not gone by the end of October might end up in discount sales. Maybe it is generally a mistake to think about the seasons of the year. Many integrated production and retail organisations have anyway already walked away from the classic seasons and now change their offers much faster and according to demand. This is of course only possible for those who are able to react and produce quickly. For winter shoes and leather garments we are still far from such operations.
This coming week, a great part of Asia is on holiday and it seems that they have done what they had to do over the past two weeks. From China one hears on the one hand a lot of fear about a real estate bubble, but on the other side also the expectations for a strong performance of furniture and consequently upholstery leather this winter. The US market is pretty active too and the furniture show at High Point in North Carolina will tell us if the US consumer is expected to continue to buy. Europe remains pretty flat, Russia and the Middle East as well and Brazil is not likely to improve any time soon.
A lot points in the direction of steady and good demand in the high-quality leather sector in the coming months, while the bread-and-butter business will continue to struggle and be driven by price wars. We are into the last quarter of the year and it’s just eight or 10 weeks before the Christmas season. The performance of the leather pipeline will certainly be determined by Christmas shopping and by global stability.
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