The Leather Pipeline - 08.08.17
08/08/2017
With the start of the month of August the peak holiday season in the northern hemisphere and in the Western world has finally arrived. Even though investors, brokers and many other main players in the financial markets are now also on holiday, there is still some activity.
Most of the general economic data has been positive. On August 4, the US published strong data from the labour market. The unemployment rate is now 4.3%, close to what economists class as full employment. This supports the opinion that the US Federal Reserve is going to raise interest rates sooner rather than later. This has helped to address the seemingly endless descent of the value of the US dollar, which has been falling for several months. It has now fallen to almost 1.20 to the euro, one of the lowest levels since 2015.
The fall in the value of the dollar is mainly because of the chaos in the US administration, which to outsiders delivers a picture more akin to a Netflix series than the real administration of the leading economy in the Western world. Weaker currency always in some way reflects a lack of confidence in either the administration or the economy of a country.
We are also seeing better labour markets in many EU countries; Spain, in particular, is on the road to a good recovery. In France, the enthusiasm for the new president is fading a bit. Germany’s key industry, automotive, is having to deal with one scandal after another. The financial results of the big three premium car makers have been extremely positive, but the question now is what is going to come next? If customers around the globe shift from diesel engines to petrol it might be a manufacturing problem, but there would not be a serious hit for the industry as such. It could have a pretty strong negative influence on the German economy, however. In the meantime, the country is preparing for general elections in September, which will also provide a strong indicator for the economy and for Europe.
The consequences of Brexit are becoming more obvious on both sides of the channel. Politicians and businesses have to be aware that it is going to be a long and bumpy road with unclear impacts on economies and national budgets.
Oil prices have been rising to levels around the $50 mark per barrel, but this is generally considered to be just a short-lived flurry.
Market Intelligence
We have now reached the peak holiday season along the leather pipeline in Europe and several other parts of the world. Consequently, there is not much to report because we are missing too many players from the companies that are currently active. Although the Asian part of the industry is still quite busy, we have to realise that people in that part of the world, in particular in China, are also considering taking holidays during the hot season.
Well informed sources from China report that shoe tanneries are operating at between 30% and 50% of their normal capacity. Upholstery tanneries are also not working to full capacity, but this is due to seasonal influences more than anything else. As negative as most of the information is, the volume of sales into China from the US has been quite good recently. This means that at least some of the strong hands are willing to replenish their inventories at a normal pace. They are just focusing on the raw material demand and are purchasing the hides that offer the best deal in the price-quality-quantity analysis. The decline in demand is not hitting US suppliers because they have been willing to accept the market facts and have adjusted the price of their raw materials to competitive levels. In the end, the industry is discussing if the price adjustment is enough to match the increased slaughter levels but further declines will be necessary.
There are more worries in other parts of the world, which have failed to read the market messages or notice that the changes in demand and in the value of currencies have changed the price parameters. If nothing unforeseen happens, we anticipate the need for a major restructuring of prices for raw material around the globe.
Since there is not much to report from the general leather pipeline, we can focus a bit more on one of the sectors that is delivering information that could have a major influence on the leather market: the automotive industry.
At the moment, there are two big pieces of news. The first one has been making headlines for a while and it concerns the German premium automotive industry, which has been having a tough time. It all began with the diesel emissions scandal and there is now further news that the big names reportedly not only discussed details about emissions, but also formed a ‘cartel’ to control the price of certain components and technologies, including those related to diesel emissions. Few details have been provided so far, so it is too early to come to final conclusions. Nevertheless, the damage to the image of these companies is big.
For the leather pipeline, the discussion is only relevant as far as the total number of cars manufactured and sold is concerned. If people, in their wish for individual mobility, continue to buy the same number of cars of the same size from the same brands and just change from diesel to petrol, hybrid or electric, it will not mean much in terms of leather consumption. However, if the discussion is triggering a new sensibility for different mobility concepts or a trend for general downsizing, it could affect leather consumption in cars. We don’t think this particular subject will have a major impact on the automotive leather sector.
We consider another piece of news from the industry as far more important for the trend of leather production in the automotive segment. A number of our readers will know that Tesla has removed the option of a leather interior from their online ordering platform for its new Model 3. Insiders are telling us that this is not a decision taken as a general statement against leather, but has come after Tesla mentioned the possibility of a ‘vegan car’ and noticed a strong public pressure from their target group of customers to fulfil what had been said. Tesla sees itself as a trendsetting and marketing company rather than an automotive one so it became difficult to ignore the public response.
It seems that smart decisions have been made. Removing the leather option without a public statement works as an informal poll of customer opinions, which will be extremely important for the rest of the industry.
If the clients accept it and it is not going to raise complaint and impact sales, it can be seen as confirmation that the potential customers for such cars are sensitive to animal welfare and leather use. The decision would not cause an image problem; quite the reverse, it would confirm Tesla’s brand image as an innovative, environmentally friendly and hip company.
If the opposite happens and clients complain that they can’t design their cars the way they want, the leather option can be reactivated and the negative comments can be put aside because the company is just following the demand of its customers. Nothing can go wrong.
As far as general marketing activity is concerned, the focus of business was once again on the US. Prices are attractive and sale volumes were high and stable. Several big players in China were willing to react to attractive offers and so weekly sales for several grades were sufficient to stop the steep decline of prices for the moment.
The split market remains in almost total agony and we will have to wait for the end of the holiday season to see if anything new will happen. Apart from a recovery in leather demand, increased demand for gelatine and collagen derived from splits would be desirable.
The skin market is the one that is currently delivering the best news. It is fair to say that the demand for all the wool-on skins has recovered well. Prices in Europe have also returned to fair values. Lambs suitable for standard wool-on products are back to trading at levels of €4-5.50 per piece with specialities and high-quality skins substantially higher.
The nappa market remains in the doldrums. Not only is nappa leather still facing weak demand, but the dreadful situation for coarse wool is not helping at all. Calculations are difficult and the demand for these kind of products is weak.
We would say that there is not much to forecast or to expect from the market and the leather pipeline. It will get more interesting again in mid-August when the first people travel to Asia. It will be interesting to see if tanners are willing to purchase more material before the All China Leather Exhibition at the end of August. It will also be interesting to see if the various supply origins are willing to adjust their prices to achieve sales for shipments after the summer holidays.
We would be surprised to see any major price variation in the coming weeks. US prices seem to be attractive enough to meet any demand for hides in the quality range they cover. In other origins, sellers still have to deal with the questions of how they are going to react to the current price spreads and exchange rate issues. They either have to hope for a market rebound and an improvement in leather demand or prepare for price adjustments, which will have to be done at the end of August at the latest.
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