The Leather Pipeline - 25.07.17
25/07/2017
A few issues have come to light on the financial markets that might have an influence on the leather pipeline as well as the general economy.
The first was the European Central Bank (ECB) decision on interest rates and, perhaps even more, comments from ECB president, Mario Draghi, in a press conference after the announcement. Interest rates remain the same but the wording of announcements like these is becoming more and more cryptic, which means can read into them whatever they like. The financial markets and investors will present these statements as support for their own positions and market expectations. A careful listener could not hear anything in the most recent statement that would make anyone believe that the ECB is willing to exit from its ‘cheap money’ policy. However, the markets are already positioned for a positive trend in the European Union and for a rise in interest rates. The market is taking the reverse position for the US; investors are not particularly impressed by the policies of the new president and the outlook for the US economy in general, even though the general data is not particularly bad and the labour market in the US remains quite strong.
In any case, the firmer trend of the euro was accelerated and the value of the European currency went to levels over $1.16 against the US dollar, an exchange rate not seen for almost two years.
In general business news, the diesel scandal continues to trigger further investigations and moves mainly from the EU against European (particularly German) car manufacturers. The European Commission is threatening now to revoke the technical licence of every manufacturer and car owner if the diesel software is not updated and emissions reduced. The idea is to have all the cars in question updated by the end of 2017 or off the road in 2018. In the US the discussion about bad loans financing the recent boom of car sales intensifies. A lot of research institutes are pretty clear that they expect car sales over the next years to moderate and decline.
The Chinese economy grew by 6.9% in the second quarter which is perfectly in line with government expectations, but once again a lot of analysts are questioning the numbers.
The oil price was once again on something like a roller-coaster ride; it reacted quickly and sharply to stock reports from the US and at the same time also to general economic data and interest rate expectations. The gold price continues to trade within a very narrow range with the biggest gold sales taking place in Asia, while India fell back to the surprise of many.
Market Intelligence
Europe and Northern and Central America are now entering peak holiday season. Despite the fact that the other half of the world doesn’t consider July and August as peak holiday season, global activity is slowing down. The big brands and retailers are also in slow gear and no new decisions that could move the markets are being taken for now. This means that factories are running for contracts agreed several month ago. One cannot expect that too much is going to happen, at least until the All China Leather Exhibition in Shanghai at the end of August.
However the leather pipeline has to deal with the facts as they are presented at the moment. Leather consumption in the shoe industry continues to decline. In particular in China tanneries and shoe factories are having to deal with the massive overcapacity that has been created in the past 10 or 15 years. Factories simply cannot find the orders to keep on running; only those that are tightly linked to their supply chain partners are busy. Talking to a number of pundits in China, almost everybody is confirming that the vast majority of shoe tanneries is running at the moment at between 30% and 50% of their normal capacity. Although we are in the low season in Europe and the US, shoe factories are normally pretty busy at this time of the year with orders for later in the year. This is worrying. A number of players will now mention that a lot of production has been shifted to countries such as Vietnam, but if one is putting all the numbers together the decline in leather consumption is obvious and should not be questioned. As a sidenote we would say that nobody does question this any more. The boom of consumption of artificial substitutes for leather is unbroken and the total number of shoes sold globally is not declining. Without a change in fashion and a recovery for leather it will also continue to be problematic in this segment.
As pessimistic as the outlook might be for the shoe segment, it is more optimistic for furniture upholstery in the eyes of a lot of pundits in China. For an outsider this is difficult to understand, because everyone expects an end to the boom in the real estate market in China and this will inevitably have a negative impact on leather consumption. However, insiders continue to be positive and this might also be the reason why they are reporting a strong shift among tanners from footwear into the upholstery market. It is said that quite a number of side leather tanneries will enter the upholstery and automotive market in the second half of this year. It is going to be quite interesting to follow this and to see if it really happens. It would not surprise anyone because we have seen moves of this kind in other markets before. The consequences have been always the same. An inflated interest in hides for the specific purpose and increased competition for the finished product, which is not really a positive condition for any market segment, except for the sellers of the raw material and the buyers of finished leather. Several other tanners are trying to escape through greater specialisation and production of non-standard raw materials. This might be a promising direction to take, but due to the limitation of non-standard raw material in volume it is going to be difficult for tanners to secure adequate volumes and it must not be forgotten that a change of this kind requires a great level of flexibility, which Chinese tanners are not really famous for.
Automotive and bag leathers are the remaining large segments that play a role in global leather consumption. Despite all concerns, car sales remain strong and most brands have performed well in the first half of 2017. Diesel scandals, new mobility concepts, jammed roads, environmental concerns – nothing has been able to stop the desire for individual mobility and the wish for a privately owned vehicle.
For a European this seems strange because there is a strong sentiment in the big cities against cars and most city administrations are making driving more and more uncomfortable, expensive and out-of-fashion. Automotive manufacturers remain positive and believe that the strong market performance can be carried into the second half as well. However, as already stated in our first section there are also quite a number of obstacles ahead. In general the industry has made its production plans already and it is unlikely that original equipment manufacturers will alter their plans and endanger their forecasts. It is likely that production will not rise further, but stay at the high levels of the first half.
Mainstream bag and accessory leather (not the luxury segment) is difficult to forecast. Fashion plays a very important role and the big brands and retailers are as sensitive to price as they are in the shoe segment. In this respect, artificial materials are attractive alternatives. However, in this segment image and the air of exclusivity is of greater influence than in shoe fashion. A real leather bag is still something more appealing to women than a simple plastic or canvas product. This is definitely playing into the hands of the leather pipeline, but it is also essential that the focus be on quality, fashion and exclusivity in appearance, including in the accessory sector for electronic gadgets. We would consider that this is possibly the segment with the best potential and outlook for leather at the moment.
We think we can actually skip the usual report about the split market. Nothing has changed and only specific and specialised articles and raw materials supplies are performing well while the rest suffers in the same way as the other bovine material. The very negative tone in the gelatine market is also worrying.
In the skins market, we just see the same trend and developments as reported a fortnight ago. It is fair to say that quality wool-on skins, no matter what they are used for, still perform very well and prices are going up rather than down. Even the declining supply of raw material has not had a stabilising effect on the skins that are predominantly used for nappa leather. We have no indication during the summer season that there will be any change in these market conditions.
We could also skip any predictions and forecasts for the next two weeks. We are entering the peak holiday season, which will last until mid-August, and only a miracle could change the general situation in the market. The only good news is that the low season is definitely going to be over by mid-September when leather production will resume and increase again. Whether leather can make a return as a material will also be decided in the near future.
And why shouldn’t it make a return? Leather is cheap and need not fear competition from plastic any more. The challenge is the ease of production and the flexibility that man-made materials can offer. The key problem remains that most of the decisions simply remain in the hands of brands and retailers. They need to be convinced of the attractions of leather and a positive media campaign to bring leather back into the minds of consumers would help. Looking at the premium sector of accessories, the consumer still seems to distinguish between the real thing and a copy. We just have to teach people to follow the same instinct for other products again.
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