The Leather Pipeline - 01.11.16
01/11/2016
The financial market is not very exciting at the moment. Almost all stock markets and commodity prices are range-trading and no major moves can be seen. Investors’ appetite to take big, market-rattling positions cannot be seen. Politics remain in the focus of interest for the short term.
However, the number of experts beginning to deal with longer visions is starting to grow. After a very long period of low interest rates several analysts are addressing the possibility of rising interest rates in the near future. While in the US, the Federal Reserve has already indicated that interest rates could be increased on the back of a growing economy there, one can also notice that consumer prices in other parts of the world may be set for a rebound. In Europe consumer prices are already rising again and many expect that this could continue to reach the desired 2% level pretty soon.
This is of course to a great extent based on rising energy costs and we must not forget that the price for oil is still reasonable at about $50 per barrel, but from the lows of about $30 the price has almost doubled and long-term hedging will also fade in its effect in many parts of the industrial pipeline. Rising manufacturing costs and a rebound in many food prices will definitely add to the trend.
There is no question that the general global economical growth for 2017 doesn’t look brilliant, but the low interest has also had only a very limited effect and what is good news for the finance of national budgets has become very bad news for people trying to save money and to build some financial resources for their retirement or to protect their families. In the end consumption is driven by good products, services and needs and not by people needing to get rid of money because it is not yielding any interest in savings accounts. This is only a short-term stimulation and is beginning to fade. At corporate levels, the situation is not much different. Certainly low interest rates are stimulating enterprises to invest, but in the end the same rules apply: you have to be able to move your products and your services.
Many are beginning to understand that a zero-interest policy cannot be a long-term solution to the structural and fundamental problems nations and economies have to deal with. The damages might be bigger than the advantages. Although nobody is at this stage already really convinced that interest rates might go up, an increasing number of experts is beginning to consider a scenario that sees interest rates rising and some are even considering that this could happen rather earlier than later. The biggest concerns are the consequences when interest rates go up sharply and quickly. This could be a big threat for many markets such as property and loans.
Experts in the financial markets are scratching their heads over what to do and what to believe. So far any rebound in interest rates was defended by the decisions of the major national banks. Only the Federal Reserve has said it is ready to raise interest rates, but has postponed that, possibly because of the elections there.
The US dollar has firmed up a little, but has failed to break resistance levels. Sterling rebounded, but continues to be weak. Oil is trading in very narrow ranges and precious metals are also moving up or down in small ranges.
Market Intelligence
We have to admit that we consider the present situation in the leather pipeline unusual for the time of the year. Why? Usually, by mid-October most decisions in the leather pipeline are made, articles are defined, orders placed, upholstery is at the beginning of the high production season, prices are set and volumes and productions are clear and are a predictable base for tanneries and manufacturers for the coming months. So, business might be good or bad, orders sufficient or not, margins positive or negative, but the majority of the important parameters for the business are clear and this applies to leather-related industry around the globe.
This year the situation seems to be somewhat different. Many players in the industry are dealing with a number of different problems. It may be just production-based, like the situation in northern Italy where the ongoing problems with the effluent plant continue to dominate day-to-day business. It’s difficult for a tannery when you don’t know how much of your capacity you are able to use during the high season of production in the winter half of the year. As if business were not already difficult enough, how can you plan labour, costs and delivery when you have no clear idea of how much of your production capacity you will be able to use? This becomes worse when we consider that customers these days expect flexible reaction and just-in-time deliveries.
Different places, different problems. Just to pick another one, we can have a look at China. Aside from constantly rising production costs, the currency there is beginning to be a serious headache for those in the industry supplying the domestic market. The RMB continues to lose value against the US dollar, almost 10% over the course of recent months. Generally currency is an issue for everybody in the world involved and import and export, so why is it a big problem for the Chinese? The RMB is of course one of the most important currencies around the globe, but it is still not totally convertible and for most of the small and medium-size enterprises in China currency hedging is not possible. Simply said, a container of hides became 5% to 10% more expensive from the day of purchasing in August to the day of payment in October. This obviously does not hit the entire industry, but those who have a customer base on the mainland have a serious problem as far as margins are concerned and the biggest concern is now that this trend could continue also in the coming months.
The raw material market does not offer any compensation. Quite the reverse prices for importing material on a dollar basis have stopped their descent (if we talk about upholstery-related hides), or are on a moderate rise (if we talk about the large industrial and uniform products, particularly from the US). So, a lot of tanners at the moment are caught in a pretty difficult trap over raw material cost for the coming months.
Another big problem is timing. Chinese New Year in 2017 is pretty early (January 28). The bankruptcy of the Korean shipping company Hanjin has crushed the supply plans of many companies. Raw material for which arrival had been planned in time for Chinese New Year is either seriously delayed or is suffering from preservation issues or is still stuck somewhere on the sea or a wharf somewhere. With a totally unclear situation as to when material will arrive, producers have been waiting for more information and have consequently had to postpone alternative solutions. Time was and is getting tight. Quick shipments and fast voyages are no longer possible owing to the regulations and the bureaucracy related to shipment of products. From Europe you have to consider at least eight weeks if not more for material to arrive to China: two weeks until the next boat can be caught, a minimum of 40 to 45 days of voyage, plus import operations and transport to destination.
So, if missing raw materials need to be replenished a delay of eight weeks has to be considered, which is difficult enough for production, but considering that goods must still arrive in time for Chinese New Year and be converted to wet blue, they have to be on the boat by mid-November at the latest to arrive at the tanneries in time. That means that the leather produced will not be ready for the Chinese New Year holiday shopping season; what the consumer market in China and the currency market will look like when the material arrives is anyone’s guess.
We might all remember this year when the entire industry was very positive about the upholstery market in China after the Chinese New Year break, with active purchasing of the upholstery tanners until the break and the sharp change from April onwards with the concerns about the property market rising. The concerns about the property market are still the same, but so far nothing has happened and prices in the big cities continue to rise, which is setting up the same conditions as a year ago.
In the global shoe business price is the problem. From January, production for the following winter season begins. Winter shoes still consume more leather than plastic. However, the price battle continues and if leather is too expensive shoe companies try wherever they can to reduce the leather content. The simple rules of economics.
The general market uncertainty has created another problem. The raw material pipeline which has to be filled regularly and in a timely way has got a little bit out of rhythm. What needs to be produced in the first quarter 2017 has now to be bought and shipped reasonably quickly. This in conjunction with the early Chinese New Year has now created a short-term need to buy material and this means suppliers have got the upper hand when it comes to price negotiations.
The big problem of margins, the continuing pressure on leather prices combined with rising production costs and currency problems in some parts of the world make this an exceptionally difficult time for tanners these days and this makes it also dangerous for the markets and the industry in general. If margins do not return in the next year it’s going to be another challenging time for the industry.
In the past couple of weeks one could see a reflection of this in the raw material markets. Tanneries delayed their raw material purchasing. Shoes, upholstery and leathergoods are still influenced by seasons and this means that in uncertain times tanners are not replenishing on a regular monthly basis unless the raw material price looks attractive. This has not been the case since spring. Consequently a large part of the industry has postponed purchasing decisions and bought below average for a number of months. This has kept the raw material markets and suppliers in difficulty. With very few exceptions asking prices have not declined to levels at which tanneries are willing to buy.
The split market continues to be in the same pattern as the hide market. Splits that are of decent quality and can be turned into attractively priced finished product. Demand has stabilised, unsold stocks of splits have found customers again and the order situation for this type of leather is sufficient. Gelatine and collagen prices however continue to stay under pressure and standard splits that require expensive production procedures to make them look hardly any different from plastic have the same trouble as before.
The skins market continues to be determined by finished products. Good-quality skins with characteristics making them superior to artificial products are still selling pretty well. Dense wool, lightweight double-face material, interesting natural designs and others are making them attractive and they are finding enough consumer demand. Skins for simple nappa will not make any recovery until leather in garments becomes fashionable again.
The coming weeks will be quite interesting as far as the bovine raw material market is concerned. The window for shipments to arrive in Asia in time for Chinese New Year is beginning to close and in Europe the vast majority of tanners have already made all the necessary plans and arrangements for production until the end of the year. There might still be a few weeks, but not much more. As far as we understand it, not all tanneries have decided for how long they are going to close for the Christmas break. In Asia, the break time also varies from two to four weeks, based on rumours so far. However, the kill will continue; in particular in Europe one has still to expect a rising amount of raw material becoming available over the winter season and extra demand due to Christmas and New Year.
Tanning restrictions in Europe combined with the higher kill is already beginning to create issues for fresh, chilled material. It seems that there will be not enough drums to take all the hides. While this is not a big issue for dairy cows: people would love to deliver them to northern Italy but they can still be salted and can find adequate homes in Asia. For heavy bull-hides the situation is different, because they don’t have such a big customer-base overseas and there is a lack of infrastructure for salting and packing them.
Questions remain about demand and prices in the leather pipeline for the first quarter of 2017. By the end of November we should have much more clarity; this will also tell us where material markets are going to go and possibly the elections in the United States might have an impact on the commodity markets too.
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