The Leather Pipeline - 21.03.17
21/03/2017
Elections in Europe are dominating the political landscape. There were worries that the right-wing populist party, Party for Freedom (PVV), with anti-Islam and anti-European Union policies, would win the election in the Netherlands. Although it recorded a solid result, it was not enough to transform the political situation in the country. Many consider this to be an indicator of what is likely to come in the forthcoming elections in France (April) and Germany (September). The polls suggest that the rise of right-wing nationalist parties has been curbed. They are likely to achieve reasonable results, but it seems that it will not be enough to gain power in their respective countries and bring about the changes they desire.
The debate surrounding constitutional changes in Turkey that would give President Recip Erdogan almost unquestioned power is spilling out into Europe. The Netherlands and Germany have restricted public appearances by Turkish politicians in an attempt to prevent the unrest spreading to their countries. The Turkish government, under the guidance of President Erdogan, has reacted aggressively to this, making the situation difficult. There have been fears that this would benefit populist and nationalist groups.
The financial markets have been awaiting a decision by the US Federal Reserve on whether or not to raise its benchmark interest rate. As many expected, the interest rate was increased by 0.25%. There was no drastic reaction from the markets as this move had been widely forecast and the dollar unexpectedly fell rather than rose. Discussion has now turned to the speed and extent of rises in interest rates during the rest of 2017. It also raises the question as to whether the European Central Bank (ECB) will do the same, and what this will mean to the emerging markets that have financed their budgets with cheap US dollar loans. The price of oil continues to slide and is now trading at close to $50 barrel, down from the mid-fifties of recent times. The next move by the Organisation of the Petroleum Exporting Countries (OPEC) is much anticipated as the supply of crude oil is still more than sufficient. The production cuts made so far have had only a very limited effect on price levels. Some experts are predicting that prices could fall back to the low forties per barrel.
Market Intelligence
The period between Chinese New Year and the APLF exhibition in Hong Kong (March 29-31) is typically slow and uneventful. The only interruption was the Lineapelle exhibition in Milan (February 21-23). Although an important event for fashion and general trends, the timing of this show makes it pretty meaningless from a volume point of view. The focus of APLF is much more on business, with the number of big players meeting at the exhibition and in private much greater. They will be monitoring each other to assess price trends and demand so they can decide what this is going to mean for their own prices.
Leathergoods and furniture continue to perform extremely well, as long as high-quality leather is used. This is being encouraged by low interest rates and wealthy people being willing to spend their money freely. There are so many high-end leather users that demand is currently outpacing the supply of adequate raw material. Many tanneries are also feeling the need to produce leather with greater added value. The growing number of producers trying to get into this thriving segment is increasing the demand for raw material, although this isn’t being shown in the demand for finished products. It is almost impossible in the current financial climate to make any money from producing leather at the finished product prices the big manufacturers and retailers are demanding. This is leading to a two-tier market, as we have seen since last summer.
The automotive leather sector continues at a steadily high level, but automotive manufacturers are unwilling to pay more for finished leather. There is pressure to find new products and solutions to bring down the price of leather for car interiors. There have been new experiments with splits and manufacturers are also examining wider use of artificial materials for rear seats and headrests. This is not an issue in expensive luxury cars and SUVs, but price is still the most important factor when it comes to high-volume models. Automotive leather production has increased its market share and although the price is being discussed, there has not been any significant change in demand.
The shoe sector is the major concern. The big brands and manufacturers are pushing consumers to increase their consumption by frequently releasing new models. This has worked pretty well in recent years, but not to the benefit of leather. Most of the growth has been achieved by non-leather materials and one could go as far as to say that leather has lost out in this sector, with prices meaning the majority of tanneries do not have any profit margin. This has actually had pretty deep consequences. With the focus on high-quality and high prices, the demand for larger yields and more natural leathers has constantly risen and can now be barely met. At the same time, low-quality raw materials have lost their market share and many hides have been left unused in factories around the globe. It is difficult to make a serious valuation of these materials but it appears unrealistic that they can be sold at cost price. They could simply be disposed of.
This sounds unbelievable but it should not be forgotten that we have already seen a similar situation in the market for sheep and lambskins, as well as for a section of the split market. Materials of certain quality retained their value, while a massive surplus of unwanted skins piled up as buyers were not interested in them or were not willing to pay an adequate price. The consequence of this is that a number of skins around the globe are now being destroyed or sent to landfill. Others have stayed in warehouses for a long time. In the case of splits, a lot of cheaper types that were once used for work gloves or insoles are being incinerated and sent to landfill.
There are those who would call this an exaggeration, but it is a fact. The bigger players don’t see it that way, but smaller manufacturers in a variety of countries will agree. The larger companies seem convinced that this problem will never affect them, and this might be the case for a while yet. However, it would be naïve to ignore this issue. But, we remain optimistic; a lower-priced shoe made of leather that is used for its full lifetime is still the most sustainable footwear product you can buy.
There is an interesting trend emerging, which has seen attempts being made to give low-quality leather the appearance of textiles. This reverses the trend of making synthetic materials that look like leather. The rugged, vintage look of textiles is extremely forgiving where natural defects are concerned and the lack of finishing required reduces the cost of production. All it will take is for the consumers to decide they prefer it, or to be told to like it. These materials could also be used for furniture. With even dyeing and interesting buffing, they can be given extremely beautiful surfaces. They can be made to look like textile fibres and with the right colours and two-tone effects, you could get a very nice appearance for a large sofa. Considering the price of these materials and the reasonable production cost, it is easy to see how this could be a success story. It would be nice to see a move away from mass-manufactured products that all have the same artificial appearance. Who is going to have the courage to combine leather’s superior qualities with an individual appearance, rather than trying to win the lookalike contest? We saw nothing like this in Milan and this will not change in Hong Kong due to the nature of the show there. It will all depend on whether the designers have the courage to suggest the idea and if the marketing and sales people have the courage to offer it to the public. If it is done well, there is plenty of money to be made.
Away from this philosophical discussion, there are also some hard facts to be dealt with. Shipping has become a serious headache; the shipping companies that have been trying to impress the world with bigger and bigger ships and increased capacity on the assumption that global trade would fill all the containers and vessels have discovered that although big is beautiful, it is not necessarily successful. Massive losses have prompted them to reduce shipping space and aggressively blackmail shippers. All over Europe there are silly surcharges and no guarantees that fixed booking are going to be sailing. It is becoming increasingly common for companies to need to book five or six weeks in advance, even though many ships are leaving port without being fully loaded. They are also having to contend with surcharges of between $500 and $1,200, which were not factored in when sales were made. There is no doubt that shipping companies have lost a lot of money, but they should acknowledge that this was due to bad management. Several years ago, there were several warnings that the expansion of shipping capacity would not necessarily be rewarded by higher demand. Shipping companies need a fair revenue for the service they provide, but this should not be achieved by blackmailing their customers.
There is not much news from the split market. Premium splits for suede, heavy vegetable products and other special uses are still performing well. APLF could be a very important event for splits because it is there that the decisions about volume are made. There has been little activity in the skins market, which is disappointing as it was hoped that the winter production of skins in Europe would attract Chinese buyers, who typically buy in the first quarter as this is when they will get the biggest skins with the highest wool return. The market for coarse wools is pretty bad, however, and standard nappa leathers for garments have not made any progress. Calf skin prices are high but sheep and lambskins are struggling. Goat skin prices are a little better and there has been slight improvement on the lows of last summer in many countries.
Next week, the majority of the industry will travel to Asia. The exhibition in Hong Kong is dominated by global suppliers that use the exhibition as their showcase for making sales. There will be plenty of people from various countries insisting that business is fantastic and that there is no way raw material prices will drop. It wouldn’t be a surprise to learn that suppliers have been building inventories in recent months in the hope of cashing in in the months ahead. It would seem likely that we will see the same pattern as in the last year, with much lower demand in the summer half and a struggle to get all the raw material that is produced successfully sold and shipped.
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