The Leather Pipeline - 02.05.17
02/05/2017
The markets are mainly watching politics at the moment. The conflict around North Korea and the French elections are the main focus, in addition to the analysis of the first 100 days of the presidency of Donald Trump in the United States. His achievements have been none too impressive and now talk of big tax reforms is making the markets worry. One thing is definitely for sure: it is far more complicated being a president than criticising one. The normal political routine and reality will catch up with him and it might be fairer to judge a year from now.
In Europe the presidential elections in France have dominated the headlines and most observers have welcomed the fact that the right-wing populists of Marine Le Pen did not win the first round. We will know by mid-May who is going to be the next president of France and which direction the second-largest economy in Europe is going to go in. The reactions so far have been positive and the euro has been able to gain a few cents against the US dollar.
We have more elections to come in Europe and in the last quarter of 2017 we will know what they mean for the big picture of European politics for the years to come.
The Brexit negotiations with the UK are beginning to materialise. However, in the meantime we have also to await the election results in the United Kingdom. It is obvious that the negotiations and the terms for the departure of the United Kingdom from the EU will be a very difficult and in the end very expensive adventure. The consequences are totally unknown and there is still a long way to go; a lot can happen, internally as well as externally.
Hardly a week passes now without news of some kind of terrorist attack in whatever country. It is amazing, but at the same time also very positive that people stick to their daily routines as well as being very clear all over that they are not going to surrender to the cowards who kill innocent people.
The financial markets remain trapped in very narrow ranges. The US dollar has lost a bit, but nothing special, the oil price has dropped moderately and stock markets, which got excited for a moment over the French elections, have fallen quickly back into the same range as before.
Market Intelligence
The leather pipeline is once again in spring mode and in this respect 2017 is no different to any other year.
The big news in the past two weeks has come from the luxury segment. This is exactly the part of the business where leather as a material still plays a very important role and the finished product prices allow an adequate valuation of the raw material. Little price competition and a very strong performance keep demand and turnover high. The big luxury groups continue to be very positive about the business and the growth of the middle class in particular in the emerging markets seems to support their position. Low interest rates and limited options for spending make them believe in further growth potential.
At the moment the general situation supports the leather products business. All the big fashion brands see their leather divisions growing and believe that, in particular, women’s collections offer them a never-ending opportunity of serving the market with new and attractive offers. One can only hope that this will last as long as possible. However, nothing lasts for ever and people should take the situation in the luxury watch market as a simple reminder that consumer tastes can change quickly. For the moment we should not pour any water into the wine and just be glad that this part of the leather pipeline is still running very well with a strong performance. All this is confirmed by the recent results for the luxury groups published in the past two weeks.
Almost every big brand is publishing impressive positive results and there is no indication that this is going to change over the rest of the year. As a confirmation of their confidence one can also consider the recently announced purchase of the Christian Dior brand by LVMH, which is once again investing in fashion and leather accessories.
So far, so good and for the regular reader of our publication nothing of the above is actually new. The trend that leather is today a material of two faces is something what we have recognised for quite some time. Actually one can find similar trends for other raw materials. Superfine wool is as precious today as top-quality calfskins, while courser types are far from being attractive and struggle to find enough consumption so that production struggles to be cleaned up. This sounds quite familiar when we think about the structure in the leather pipeline.
We come back to this fundamental problem. Consumers buy what they are offered. Even with all the attention that can be generated about trends by using social media, the industry and brands will still push whatever products they consider will have the most positive impact on their sales and their profits. Despite all the lukewarm statements about sustainability, it’s difficult to create a situation to make leather an attractive material for a mass producer.
Uncertainty of price, bad image in regard to production and pollution (right or wrong), anti-beef campaigns, technical challenges and so on are things that might not cause any headache in the luxury segment, but in mass production arena they play a very important role. Who wants to deal with all these subject when you can avoid them? So in the end nobody deals with them. You may not like beef and leather as a by-product, but you should also know that in a short time from now we could have more plastic than fish in the oceans and many of the statements regarding recycling are still not worth the paper they are written on.
Although the beef industry doesn’t like to hear this we are once again in a period when the leather industry has to drive bottom-line. Rises in costs have been mentioned and the decline in revenues from splits comes on top of this. There are only a handful of exit strategies that will bring back adequate profitability to those producing leather.
Number one would be a rise in selling prices. Number two would be a decline in the raw material cost and number three would be a rise in demand, with the acceptance of natural defects, which then would not need to be camouflaged at considerable cost.
For the moment we would say the easiest parameter to change would be the raw material price. Wherever leather prices are not sufficient and the material is in direct competition with attractive alternatives the price pressure on raw material continues to mount and has also already led to a remarkable correction in prices. This correction is never an orderly retreat reflecting the real value of the various origins and qualities the raw material market has to offer. In every region, the beef industry is stubbornly fighting against the trend and is happy to delay.
The main market in the focus at the moment is definitely the US, which is still the reference and anchor for the international price trends. The raw material from North America is still the reference for most big industrial, international leather productions. Prices have come down by 10%-15% from their peak and where the real price level is today depends on who the buyer and the seller are.
It could all be so much easier if the business partners could reach an agreement quickly where the valuation of the raw material for the time being should be set. We can feel a desperate wish to find a general agreement and to create a new level of stability for some time.
The split market is in a very difficult situation once again. This time it is more the byproducts that are used in gelatine and collagen production that are causing most of the headaches. Revenues have come down by so much that the calculations in tanneries are under pressure. In the leather business we would say that splits have found their level and those that are suitable for leather types that are in demand can find a home. Split leather is present in many collections at the moment and this means that demand should be stable for the time being.
In the skin market we have the impression that something is changing. However, the general pattern is once again pretty much like in the bovine sector. We have premium articles that are dominant at the moment: lightweight and fine wool skins, which have already gone up quite significantly in price. In Europe the production of new season skins has started and the prices quoted are all over the place. A range of €3 to €4 per piece is not uncommon. However, owing to the pretty cold weather in many parts of Europe, production of the skins is still low. Sellers realise the situation and although they have very little to offer they are throwing price ideas at the market to test the waters. Interestingly, it is not just China playing in the field at the moment, but even countries like Turkey are back on stage. The next six to eight weeks will tell us where this market is going to settle; we can only hope sellers do not push too hard as things are just starting to improve.
We would be more than surprised if much were to change in the coming weeks. We are certainly getting closer to the time when the tanning industry has to declare itself and replenish the raw material pipeline. We would say that it is a question of price more than demand. Just to throw a rough indication into the ring, we believe that at about 10% below the prices quoted at the moment for the main US, South American and EU hides sellers would have a fair chance of moving their stocks and productions for a while. It is only a question of who wants to be the first to fix it. If nobody moves we should see a very quiet next week due to holidays in Asia; the week after may be the showdown time when decisions may be taken.
Share this story:
