The Leather Pipeline - 15.11.16
15/11/2016
The world has changed in the past week; one does not have to look very far for the headlines and the interesting subjects in politics and the economic and financial markets. The presidential election in the United States was the only thing dominating.
What some people considered impossible and the majority did not expect happened. Donald Trump won the election, even if he did not have very many supporters around the globe. However, the US citizens under their voting system have elected him as the new president and this has to be accepted. He has not become king; he has been elected for a term of four years. However, the past has told us that in four years one can create or destroy, begin or end important matters, for good and for ill.
The fact is that most of the politicians in the western world are not too happy about what they may have to deal with in the coming years. It seems many of them were not really prepared for this news and may now need quite a bit of time to get used to the situation.
The stock markets did not collapse and the US dollar did not show any immediate signs of weakness; quite the reverse (the dollar gained almost 3% immediately after the election result). However, it is definitely far too early to judge. The new administration still has to be nominated and the handover from the old administration still has to take place. In all fairness one has now to wait and see how the new government under the new president behaves and how many of the arguments during the campaign will really become part of the day-to-day political life.
The first marks will be made in the coming weeks and they are going to be interesting to monitor because it will certainly influence and possibly even change the world for a while. Let’s just hope that the usual rationalism returns soon and we don’t have any serious political surprises in the time to come.
As already mentioned, the financial markets have reacted pretty calmly. A very moderate and quick drop in stock market values and in the US dollar was quickly answered with a sharp rally and recovery in the days after the election. Only oil prices continue to slide and are now back to closer to the level of $40 per barrel, down from the $50 we saw some weeks ago. Industrial metals gained on the back of a stronger US dollar.
Possibly it will be the first quarter of 2017 before we see how the financial markets react to the new presidency.
Market Intelligence
We are in the middle of the last quarter, which means in many parts of the world that businesses and individuals are beginning to prepare for Christmas and the end of the year. One way or another the entire world is influenced by the Christmas season and the small break around the end of the calendar year. For many businesses it is also the end of their fiscal year. Accounts have to be prepared and the financial results of the past 12 months have to be analysed. This means that many businesses, and this includes those along the leather pipeline, are now checking to see if there is anything that can be done to improve the financial results. From a general wrap-up, which we had recently with our regular contacts, we noticed that the financial results this year are covering the full range. From ‘reasonably satisfied’ and ‘positive’ up to ‘disastrous’ and ‘one of the worst in history’, we got it all.
As has been discussed all year, this depends on which part of the leather pipeline you are connected to. It seems fair to say that companies that are related to the luxury sector and involved in automotive are those who will look back on a positive 2016. It might not have been brilliant everywhere, but all in all it was positive for these companies.
In the shoe business and in mass-consumer-facing upholstery the feedback is mostly negative. Most people along the supply chain have not been able to generate positive results. Only retailers who are not totally connected to leather are able to finish the year in profitable territory, and most of them are still complaining. This may not apply to everyone.
We are now entering the season when leather production and leather manufacturing is traditionally at its peak. At the beginning of the new year, the shoe industry will also switch from production for the summer to the winter season, which generally means consuming a higher volume of leather. We see the general switch from light shoes, which are not lined, and sandals to heavy footwear for protection against harsher weather conditions during the winter time in the northern hemisphere.
There was a desperate need for some uptick in the retail business, because in most countries September retail sales were disappointing. This was also reflected in the attitudes of the manufacturing industry, which took a much more cautious approach from late September. Regular readers will remember that around the time of the Lineapelle exhibition in September a lot more optimism was seen, but it cooled off when the orders from retailers and brands proved not to be as good as hoped. The weather in the northern part of the globe can change quickly and in October and so far in November it has not been brilliant and a lot of people have had to think about buying some winter shoes in the end.
There is no question that the seasonal rise in production is visible. The problem is just that it is not an even spread. When we look at the different sectors of the business none of the issues that we have raised in previous issues have been resolved. Activity in China, still the biggest leather producer, has gone up and in particular upholstery leather production seems to be at normal levels. This is also reflected in the strong performance of upholstery-related hides, which means mainly dairy cows. They saw a flurry of interest in October, which has not only stabilised prices but several supply origins have even experienced a moderate increase in prices. Having said this, we are hearing a lot of voices saying that the past two weeks have not seen the follow-up everybody was expecting and several pundits believe it was just short-term replenishment and not sustained market activity.
We must not forget that the summer was pretty quiet, with inventories at tanneries reduced. And for the sake of a regular flow of product, raw material destined for Asia will have to be on the ocean in November to reach tanners before closure for Chinese New Year. The Chinese New Year in 2017 is pretty early, January 28, and the time leading up to that holiday it is one of the busiest for shopping in China. Generally, demand and retail activity slow down after people return from the holiday.
One can sense a rising interest for speculation in the market. Knowing that we are now entering a phase of higher leather production and consumption, there are quite a number of people who think that it would be wise to own more material whether it is needed for production or not. We all know that we have a lot of gamblers in this business and, with low interest rates, investing in raw material as a commodity could generate decent profits; once again, this is beginning to influence commercial decisions.
If one looks at the global situation it might be wise to remain cautious. As mentioned, we have to consider the influence of the result of the election in the US. At this stage it remains unclear what the changes in the US will mean for global stability and global business, as well as for the US economy.
We have other issues as well. In Europe there is Brexit and the refugee situation, in the Middle East the conflict around Syria, in Asia North Korea delivers new surprises every day and the conflicts in the South China Sea are far from being resolved. Populism and nationalism are returning in many parts of the world and this has never been a positive foundation for global trade and uncertainty and instability have never been good news for economies. At this stage it’s at least advisable to take all this into consideration; there is definitely a more than 50% chance that we will not be able to count on the same levels of global stability as we have become used to over the past 20 or so years.
In the short term this means that the fluctuations in the financial markets might play an important role in the leather pipeline. Currency fluctuations and the changes in commodity prices will have the biggest influence on prices and demand for leather. One only has to look at oil prices, which have been falling back towards levels of $40 per barrel. We all know that synthetic alternatives to leather are, in the vast majority, based on the price of oil.
As far as currencies are concerned, trade is used to fluctuation. This applies in particular to major currencies around the globe, which trade every day on the markets and in which everybody in the hide and skin business is well trained and prepared for these influences. Sometimes people bargain and fight for 1% on the price only for any difference to be wiped out in a day on the currency markets. For the Chinese, however, it is not that easy because the renminbi is not freely convertible yet and hedging is never easy for small and medium enterprises.
In China there is a widespread conviction, that the Chinese government will allow the renminbi to go to a level of seven-to-one against the US dollar until the end of this year. This was part of the background of much more purchasing activity recently and the interest in having hides and skins shipped as quickly as possible. Many customers have been trying to get away from the traditional 90-day letter of credit and were offering quick payments instead. The possible change in the value of the renminbi is not really that surprising, but Chinese business people are extremely sensitive to changes of this kind and to the actions of their government.
The US dollar could see quick and important changes. For the moment the opposite has happened and the dollar gained value immediately after the election victory of Donald Trump. However, the dollar is also going to be a key part of the equation in the coming three to six months. The relatively narrow ranges we have seen for quite a while now could be broken easily and a completely new valuation looks possible.
Very uncertain conditions remain in the split market. Over the past month prices for suede splits have gone up and remain in good demand and the big stocks of lime splits in China have been slowly but surely absorbed. But prices are bad and many tanners have had to bite the bullet, but at least the congestion of material has been removed. In the meantime a new problem has arisen and this is the gelatine and collagen market and prices in Europe. Prices are dropping and the market is over-supplied, just at the time when output is at its highest. The coming weeks will show if the situation can be managed; the supply chain does not really have many options for buffering extra material.
The skins market is in the doldrums, as before. Standard nappa skins still generate no interest. The fading supply is starting to show but without making any real impact on the market situation. There is just not enough leather demand. Skins for the niches in interior design, lining and high-end luxury items can still find a home, though.
It is very difficult to come to a judgement for the coming weeks. Automotive leather orders are sliding, Italy is still suffering from restrictions in the wastewater plant in the north and a lack of orders. China seems to be stable, but possibly tanners there have covered their needs and new business as well as shipments may decline here too. The kill in Europe and the US remains high and the political situation is not clear. These are not really ideal conditions. However, the beef industry continues to be pretty stubborn as far prices are concerned and shows no sign of offering prices concessions. Currency is a strong factor, so much so that prices in the weeks ahead may be dictated more by the currency market than by supply and demand.
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