The Leather Pipeline - 07.03.17
07/03/2017
The world of politics is pretty exciting at the moment; a lot is happening on both sides of the Atlantic. In the US, things have already changed and it seems that in many countries in Europe too things will be different within the next few months.
The European Union is trying to reinvent itself by trying to find new strategies and to convince the remaining members to continue to support the European idea. Military forces are presently shifting to the eastern borders of the NATO territory. So far, the public is not paying too much attention, but if such movements are necessary it is definitely not a good sign for stability either.
Surprisingly, the financial markets have shown little reaction. Stock markets in general continue to rise; Wall Street and several other stock markets had reached new record levels.
The financial community is mostly excited about the return of inflation on the back of rising energy costs. With the traditional time-lag consumer prices for petrol and heating oil are beginning to rise. For the ordinary person in the street this is not good news because governments, with the assistance of national banks, continue to keep interest rates low to subsidise their budgets. This is nothing other than indirect taxation when savings don’t offer any yield and at the same time consumer prices are going up.
Apart from the immediate effect that there is less money to spend, it also has a serious long-term effect for lower-income families. Their ability to save and to build up funds for their retirement is being destroyed. In many countries, people are spending, to the delight of politicians who hope that consumption will support the economy, but this will only help where fundamentals and structures are intact too. In all other places the money will be missing one day.
The good news is that the markets remain relaxed and trade is in extremely narrow bands. This applies to energy, with oil remaining stuck in the mid $50s per barrel, stock markets with a generally firmer trend and currency markets also moving in very small ranges. Gold might be giving the only small indicator that people are concerned; it is trading more firmly and is close to a five-month high.
Market Intelligence
The Lineapelle fair in Milan closed its doors more than a week ago. However, as usual it takes a little bit of time for the bottom line to be drawn. Everybody is slowly coming to a clear conclusion about what this kind of show means for the leather pipeline.
The majority of reports and comments about the fair have been positive. It is one of the few occasions for people to meet in one spot and to obtain information first hand. However, we know that individual interest can influence people’s statements.
Because this fair is in Italy it continues to be the trendsetter in fashion and in general trends for garments, shoes, leathergoods and, to a slightly lesser extent, for furniture upholstery. Most of the big players in the automotive industry were present at the show too, but more to meet suppliers and to get a feel for the general market because this has an influence on raw material procurement and prices. The Tanning Tech machinery show, taking place at the same time, is another attraction for technicians and production managers.
For the medium- and high-end fashion and luxury sectors, the general mood of exhibitors and visitors was positive. The number of visitors and the level of activity was reasonable, but we had the impression that the general foot traffic was possibly down, in particular on the second day. However, once again it is not the number of visitors but the quality that counts and here the main players have not complained, which in this industry is already more than one could expect.
All this relates just to the response of leather buyers from the shoe and accessory industry to the new articles and the general forecasts they were giving by tanners for the next seasons. The stands were decorated as beautifully as ever in Italy and many of them were displaying new designs and fantastic stories and were works of art in themselves. On several stands, one could see certain mottos that were more about telling a story than displaying leather. In some of them you had to search for the leather on display. This is in deep contrast to the past when stands were already nicely illuminated and beautifully decorated, but with leather in the foreground inviting visitors to look and touch. Even in the leather industry it seems people are trying to put the story in the foreground and the product in the background.
The show in Milan confirmed that where leather is part of a high-end product offering that underlines quality, design and image, it remains as attractive and successful as ever. This is also reflected in the record price levels for the top-quality raw materials, in particular vealskins and top-quality origins. Most tanners operating in this field (a small and exclusive club) are more focused on securing sufficient supply for the coming quarter rather than trying to push raw material prices down.
It’s not that price doesn’t matter, but the reason for the firm trend and the return to record price levels is that the top luxury names are making it clear that they are not willing to support a never-ending run-up in prices. Several of the top names have clearly stated that they are happy about their businesses and positive about their sales prospects for 2017 but are not willing to spend more on leather. One brand was quoted as saying it doesn’t care about the price of raw material: from now on it will not increase leather prices by a single cent.
Such statements always reopen a discussion on whether this can be justified, looking at retail prices and the annual returns of these companies. However, this kind of reasoning never works; it it weren’t for their retail prices and margins, the price of the raw material would be far away from the levels that have been regularly obtained now for a while.
For anyone who is now becoming overly enthusiastic, it should also be mentioned that the same companies are also asking their suppliers to develop articles that will allow them to achieve further growth but with cheaper leather. No one likes to hear that; in private almost everywhere leather buyers are asking their tanners to create leathers that can be bought at cheaper prices.
Superficially many people see this as an attempt to make more money and to put pressure on suppliers in terms of price. However, it is much more than that. One has to understand that, despite their desire to sustain growth, there is a limit in the raw material available to the premium, top-quality end. More money would not be able to buy more hides and skins of suitable quality. Consequently further growth can only be achieved if lower-quality selections, which are available, can be turned into something unique and elegant. This is important if the top brands are to avoid spoiling their image and reputation.
When we turn away from the top end of the leather pipeline, which is so dominant, the situation begins to change quickly.
The more you go down the retail price list, the more price becomes a dominant factor. Quickly changing collections and lower prices to allow more purchases with the same budget are the natural enemies of leather as a material. Conversations in Milan with people who work more in this segment confirmed that the trend to substitute leather will be unstoppable as long as the alternative products do not rise in price. Price stability, price levels, flexibility, gains in productivity in shoe and bag factories, combined with reduced costs and faster supply are presently unbeatable arguments for leather alternatives in the sector of mass consumption. Leather would need to be significantly cheaper to gain traction in this market. The situation is creating new challenges for the leather pipeline: it has to absorb and consume the full range of selections, all the leather types that tanneries produce every day. The problem is not only in shoe and bag leather production; upholstery and even automotive are beginning to suffer from similar problems now.
As far as the raw material markets are concerned we are in the classical situation at the end of the winter season. Most of the tanneries are now finishing their peak production season and, generally, leather orders fall significantly in the second and third quarter of every year. Tanners in Asia have covered their raw material requirements until the end of the season and must now return to the question of new orders for the next season.
We have seen a strong run on prices in dairy cows following a generally very positive upholstery market this winter season in China. Prices have gained anywhere between 15% and 25% since October and tanners continued paying more money as long as the cost-averaging effect was in play. However, today we have a different situation and the influence of cheaper hides from last year is fading. Every tanner now has to calculate leather prices on today’s raw material price levels and these are considered to be significantly higher in comparison to the leather prices that can be obtained in the market today. It is difficult because real leather orders will not be placed now before September. Anything in between will not really be an indicator of where we are heading. Presently there is very little optimism that leather prices can be significantly increased and so most tanners have decided to stay back and not to pay the ever-increasing asking prices of suppliers.
Many suppliers are also ignoring the fact that today’s purchases would be for shipment some time in April and consequently for arrival in May or even June to tanneries in Asia. With the reduced leather orders for upholstery from May to September, tanners do not only need fewer hides, but they will not want to build up inventory for the coming season at price levels that are simply not profitable.
In the shoe section the situation is pretty much the same. Higher production costs and a massive squeeze on margins are making the life of classic shoe tanners extremely difficult. They are already coping with a situation in which they are losing volume because of the substitution of leather. Upholstery tanners would be able to tell the tale of what happens when you have overcapacity and shrinking margins.
The beef industry is responding to the situation by painting a picture of general scarcity of raw material, which is not really true. As we have discussed above there is a limit to supply at the upper end of the quality range, as there has always been. However the further you move down the quality range, the more we see a serious surplus of raw material that cannot be used for price reasons. It remains an unpopular subject, but there are plenty of unused raw hides and even more semi-finished hides in stock around the globe. The end of the story is always the same. Either leather prices rise and make their consumption possible or they will have to be dumped at price levels where somebody considers it to make economic sense. With the situation in the leather market at the moment there’s not much hope for rising prices for commodity leather. We will have to wait and see.
The split market remains a pretty ugly story. Split prices, with the exception of specialties, have never really recovered and the split return for tanners is weighing on the calculation for grain leather as well. Gelatine and collagen, which were supposed to be in endless demand even at rising prices, have not performed particularly well in the past year. There are alternatives here too. Split leather at the moment is back on the agenda again to substitute more expensive grain leathers, but this is only true as long as the prices are cheap and the split leather can be offered at competitive prices. We have seen this a number of times before: split leather has made a return before because it was cheap and then, suddenly, too many were jumping on the same bandwagon and prices lifted quickly.
The skin market is fragmented too. Standard nappa skins are still available in huge stocks around the globe. This is all old material from the disaster of the past 18 months. For new skins the situation is a bit different. This was also confirmed in Milan: there is good demand for quality raw material if it is fresh and reliable. With record low prices many skins are no longer being processed and there is significantly less supply reaching the global markets. This is beginning to create much more stability for certain items and those that cannot be substituted are seeing price rises. Tanners needing the material are beginning to understand that it might be better to secure what they can, considering that many skins are seasonal products and can only be bought at a certain time. Prices for wool are beginning to recover slowly too and it might be that we have ended the downward cycle and started a rebound. It’s still early, but the indicators point into this direction.
It is obvious that tanners are not in any desperate need for raw material so it is likely that we will see a slow and moderate situation in the coming weeks. Hardly anyone is going to take a major position before the big gathering of the industry once again at APLF. Suppliers will insist on their price levels or even more until they have met their clients, and tanners who generally do not need to take any purchasing action during these weeks will also want to see the faces of their suppliers to avoid falling into any market trap. So, we would be surprised to hear of any major activity or price variations until the end of this month.
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