The Leather Pipeline - 18.10.16
18/10/2016
The financial markets are presently not the centre of interest. It’s all about when and if the Federal Reserve is going to raise interest rates. But apart from these discussions which have now lasted for more than a year, not much is happening. The only topics which that be mentioned might be the slump in the value of sterling and the firm oil price.
The steep fall of the pound is directly related to Brexit and demonstrates that investors are not too confident that Brexit itself and the UK outside the EU will provide a good future for the country. As usual some are riding the wave and predict already parity with the euro, but the decline was stopped at the end of the period and for the moment a rate of £0.90 remains intact. However, the steep correction is making imports much more expensive, while exports have become more attractive. For a country that has lost much of its industrial base to focus on services, this is not a big help.
The oil price got another boost when Russia joined forces with OPEC for supply control and restrictions. The oil price has for the time being settled around the $50 per barrel mark and now investors are waiting for the details of the OPEC agreement, which are scheduled to be published in November. On one side you have those who believe in discipline and unbroken demand for oil and on the other you have those who think that oil-producing countries will not follow the agreement and oil will continue to be pumped to finance the needs of those countries, combined with dwindling demand for oil due to a flat economy and the expanding production of renewable energy.
Stock markets and gold were weakening moderately during the period, but not to any significant extent.
The main interest and headlines are still focused on politics. The war in Syria, Russia’s policies in the Baltic region, the presidential election in the US, and the threat of IS terror around the globe are presently attracting far more interest than anything else and – in fact – they will also have a big impact on the financial markets in the medium-to-long term. Interesting in this respect is the firming US dollar, which is climbing as the chances of Donald Trump to win the election are fading. Normally it is the opposite: a Republican president always led to a stronger dollar, while a Democrat generally led to a weakening of the dollar. The dollar closed the period against the euro below $1.10 and it will be very interesting to see what the trend will be from now until the elections and beyond.
Market Intelligence
We are entering the winter half which is traditionally the high season for leather production around the globe. Automotive leather industry returned in September after the summer break, followed by the shoe industry, although this is not the high-consumption period for footwear because summer shoes use less leather. Upholstery leather production normally takes off between October and April.
When we look at these sectors, little has changed and the general rise in activity is mainly related to the seasonal influences.
Automotive is still a strong performer, but information is now beginning to surface that some brands and models are beginning to differ in their performance. In particular, luxury and niche models are still selling well, but their total share of leather consumption remains pretty limited and the leathers they use have a pretty small supply base in terms of volume and alternatives. Even from the top end of the raw material options, only the better grades and selections perform, while the medium and low-end face the same headwinds as any other raw material option these days.
In particular, Ford and Audi have been quoted as thinking about production cuts for several models. Rumours have been around since the summer break about this, but have now become facts; cuts in production are already announced and agreed. This might apply so far to brands that are not meeting the demand and taste of the market, but it is eating into the budgets and production programmes of the leather industry and it does not seem that there are increased orders from other automotive companies to compensate.
The industry is now waiting eagerly for the auto sales for September in the US market. If monthly sales are now beginning to fall, this could be a trend for 2017.
Premium material continues to be in strong demand and cars in the $80k+ range sell well, with no sign that leather will be reduced or substituted in production. So far no other material has managed to become hip for the luxury and premium end. Even all of the plenty new mini-series from small hand-crafted workshops for the collectors’ market are still fully focused on leather, which is good for leather’s image in general. An expensive car for wealthy consumers around the globe still has to have a leather interior.
The less expensive sector is dealing with the same issue as we have seen with shoes. Price is a major factor and as much as leather is still promoted as a special option and feature, one can see the trend to reduce leather consumption and to use real leather in fewer panels. The development of better man-made materials, which are getting closer to leather and have a significantly improved ageing performance, allows manufacturers to use less leather and to keep the price pressure high on the real material. The really disturbing fact is that the automotive industry wants the image of leather to improve the image of its cars, but doesn’t want to pay the price to use the material and to give customers what they are expecting. In the long run, it’s a dangerous road.
The main question for the industry is how car production and sales will develop into 2017. If sales really begin to lose momentum, the pressure on margins starts, which always means that the automotive industry will look for further savings among component suppliers. For the moment we hear about adjustments to plans and budgets of between 0% and 15 % for the last quarter of this year until summer 2017 versus original plans, depending on the brand. If this happens at the higher end of the range it would mean something for the volumes and the demand.
We find the balance between prices and demand for the different selections to be far more important. Almost everyone reports steady demand for the premium selections while the medium-to-low end lags. This is mainly a problem for European manufacturers, who have to fulfil the upscale demand and cannot find the equivalent outlet at the lower end. Raw material prices are supported by high-end demand, but for remaining selections, demand does not absorb production and prices make it impossible to dump them. In tanneries and in the warehouses of wet blue and wet white producers inventories of medium-to-low selections are beginning to pile up.
This is beginning to mirror the situation in the shoe and garment industries, in which we have seen this same trend for a long time. Price and efficiency in sourcing and production are the driving factors and what this means for material sourcing everyone can see by looking at what people are wearing on their feet these days. Polyurethane has become common and for mass demand nobody cares anymore about leather as a ‘preferred material’. Until the use of leather becomes hip again or leather becomes comparatively cheap we might continue to see difficult times.
Many will now argue and point towards the situation that raw material hasn’t become cheap and so demand must still be sufficient. Well, we try to cover the entire pipeline and the total supply base and this includes origins and production that are not so much in the focus of the international reports. Looking just at the markets in Europe, the US, Australia and so on and their price levels, one might get the impression that all is in perfect order. Prices are not low and despite a few corrections many standard items still manage to hold levels at around the long-term average. However, if one looks at Africa, parts of the Middle East or sheep and goatskins, one can see how much the situation is spread these days. Many raw material types that normally feed the less industrialised leather productions are suffering and their prices are low and in some cases collection and processing does not even make any sense any more with the consequence that a good quantity of raw material is being destroyed. If rumours about rising inventories of lower grade semi-finished materials are true, it could become tricky. If the trend against leather in mass production persists and global demand in the strong preforming sectors declines, the situation might get even more complicated in the future.
Bag leather is still a good performer. Brands and fashion still generate a strong performance and it seems that strong consumer brands still consider leather as a valuable argument for their marketing and a confirmation of quality. Bags and leathergoods still see a middle price market with good sustained demand, in particular from women. In shoes, this applies to the top luxury segment, while in mass production or the middle segment, footwear is mainly covered by the big global athletic brands, which now barely use leather for their sneakers. This leaves little room for medium-priced leather. In upholstery the situation is not much different. The middle-price section has been almost extinguished.
In the day-to-day business of the past weeks we have noticed a certain seasonal uptick in demand and activity from Asia after their holidays. Tanners have booked their seasonal winter orders and need now to fill their raw material pipeline. In many cases this is not an easy job. Either the price is not right or the quality doesn’t match. However, for some production lines the uptick in demand has created a certain base and for UK and EU suppliers, weaker currencies have also assisted.
The split market is beginning to show some signs of revitalisation, which is very positive news. In particular splits for suede production are said to be in good demand and split credit for cows in China has gone up moderately. It does not seem that this has actually already spilled into the rest of the split market, for example for lime splits, which do not qualify for suede leather production. When the split market sees a full turnaround we can assume that things have turned for the better.
The skins market has also seen a bit of a recovery for certain items. In the double-face market more demand has been seen recently. In Europe the season for suitable skins has already finished and some of the interest cannot even be covered. Not that anyone is desperate for the time being and the prices tanners have in mind is not too inviting either, but it seems that several have realised that this material will not go any cheaper now. Nappa demand is still very low and even the rock bottom raw material prices are not triggering any interest.
Everything points in the direction of a two-tier market, with different market conditions for high-quality and medium-to-low end raw material. It also seems that our journey towards this two-tier market is accelerating. At the very bottom end of the range it seems that even price is not the issue. There is simply no demand and so any price can be quoted, but no business will be done or demand created; the material stays where it was. We have only two options. Either we enter into the two-tier market and the wide spread will be sustained, or the gap has to close, with cheap material going up and expensive material coming down, or both.
Share this story:
