The Leather Pipeline - 11.7.17
11/07/2017
The two big topics this fortnight were the launch of an intercontinental missile by North Korea and the G20 summit in Germany. History has taught us that big egos can become a problem for peace and political stability. North Korea is beginning to play with the fire. It is quite a dangerous situation and can only be resolved by diplomacy and if China and the US can act together to work with North Korea. One can only hope that it does not end up in a personal conflict of egos and revenge.
With the situation around the Gulf, in Syria and the Ukraine we have to accept that peace has been threatened for a long time. The questions over climate and the global economy are moving into the background.
A lot of people were hoping that the G20 summit would be a chance for superpowers to discuss these challenges. However, it became obvious that individual interests are so far apart that no real results can be expected. One has to hope the informal encounters and private discussions can create better results.
The financial markets remained reasonably quiet. However, stock markets began to drift lower and investors are concerned about rising interest rates. People were looking forward to a period of low interest rates and liquidity in Europe, but when it comes they fear it.
Oil prices have been on a roller coaster. Tensions in the Middle East, lower stocks in the US and positive news from the Europe economy were able to lift prices back to levels above $50 per barrel. Prices remain around the mid-$40 levels.
Precious metals came under pressure with rising interest rates and, in particular, gold has lost a bit of its shine. Not long ago it was trading around $1,300 per ounce while it is now approaching the $1,200 level again.
The US dollar is not rebounding, because the financial markets are not convinced about the trend of the American economy. This means the expected rises of interest rates could either be delayed or not implemented to the extent expected.
Market Intelligence
The summer holidays are approaching and this can be sensed in the lack of activity along the supply chain. This is not unusual and cannot be considered a reflection of the business climate.
With so little happening we will try to summarise some of the facts.
Business along the supply chain runs in cycles. However, the fundamental structure of the industry has changed so much over the years that it is difficult to understand why certain cycles repeat.
The general pattern is as follows:
• The shoe business stagnates and leather as a material loses ground in production
• Automotive production was high in the first quarter, but began to fade in the second
• Furniture upholstery also had a strong performance in the first quarter (the positive real-estate market in China helped). The second quarter saw declines, but this could be entirely seasonal
• Bag leathers performed well, but some of the volumes of previous seasons have gone
• The luxury market for any kind of leather use does not appear fatigued so far
• The beef industry has seen a few scandals (mainly in Brazil) and intensified activity in terms of anti-beef campaigning. Production is shifting with rising slaughter in some regions and falling in others. In India, political decisions have limited supply
• Ovine raw material is slowly improving. After more than two years, a slow recovery for goat and some types of lamb and sheep is apparent
• Tanning capacity in China continues to shrink due to tighter environmental controls and rising cost of production
• Further shift into online marketing of consumer products reduces inventories along the supply chain.
Most of the above explains the problem of margins along the supply chain. Leather is also in competition with alternative materials. For commodity consumer products we still don’t see any inflation and that means the price war to be the cheapest continues, which is mainly the burden of the manufacturers.
It is too early to draw any major conclusions for the rest of the year. This will require a bit more input from retail and will depend on brands’ and retailers’ orders at the end of summer. We will deal with this subject when we have more information.
In terms of raw material, demand remains limited. High-quality calf skin producers and the beef companies that supply high-quality hides to the luxury vegetable tanners and automotive tanners are enjoying stable revenue for their material, but they are the exception.
The sluggish demand for leather continues to restrict raw material demand. Business has not come to a standstill but it cannot use all the raw material that is produced around the globe. This means that not all the hides coming on to the market are sold and turned into leather.
Depending on origin and type, the raw material moves into stocks. If the rumours are true, specific inventories are rising, mainly low-quality selections in semi-manufactured state. At this time of year it is unlikely that they are going to be absorbed and it is more likely that the volume will continue to grow.
Given that standard leathers continue to be highly price sensitive and the price of oil hasn’t risen significantly (the base for many alternative materials), it is unlikely the prices for leather can be raised. There also no hope for any decline in the cost of manufacturing and transportation, so logic states that returns for raw material will stay stable at best. One could even expect to see them fall over the second half of the year.
Considering the circumstances, we need more than ever to re-establish consumers’ desire for leather.
The split market mirrors the situation for hides. Extra heavy and extra thick splits and high-quality suedes are doing well and might even be in shortage. This sounds positive but it is the minority. The majority of splits are doing badly and this includes gelatine and collagen. Demand for finished products is simply not sufficient. The split market is also in low gear.
The skin market is possibly the only one delivering a reasonable amount of positive news. We had a long period where skins were in limited demand. However, the moderate recovery at least for wool-on products continues. Linings, double-face garments, decoration and luxury fashion nappa are improving. With several skins types only seasonally available, they need to replenish and this converts into higher prices. In Europe new season lambs are enjoying good demand and one can only hope that the excitement is not killing the recovery by price rises that are too fast and too large. Goats are also faring better.
For the weeks ahead, we don’t think we can expect big changes. This will be slow, decisions in the leather pipeline will be few, and buyers will not consider any higher prices before they confirm better leather sales. Sellers continue to believe (correctly) that lower prices will not stimulate demand by much and a big part of the industry is on holiday. This means that none of the problems can be resolved, and new directions can only be expected from mid-August onwards.
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