The Leather Pipeline - 22.8.17
22/08/2017
At the end of last week, terrorist attacks in Spain destroyed the relaxed holiday mode and dominated headlines. Visitors from many countries were among the casualties, and this is what the attackers were aiming for: to destroy the feeling of safety in areas where people can travel to, enjoy and meet others. Once again are our thoughts with the casualties, their families and friends. We join the community on the Plaça de Catalunya in saying: We are not afraid!
Despite the holiday period, the flow of data continued. Most of it has been positive and despite the number of political issues, the global economy continues to grow.
In the eurozone, a number of countries including Spain delivered positive GNP (gross national product) data. However, in Germany, which is reliant on the automotive industry, several pundits have warned the economy could enter into an overheating cycle.
While we could be sceptical about statistics from China, the news from the mainland has been positive. However, there is still the fear that the state-owned companies and the real estate market could prove the big risks for the economy in the long run. The country has put some pressure on North Korea by suspending the imports of iron and iron ore.
Japan reported impressive exports.
Low inflation rates continue and make interest rates rises unlikely.
In the currency market, the US dollar is under pressure due to worries surrounding the stability of the US economy under President Trump. However, some companies in the US are appreciating the declining value of the dollar because it is making exports more competitive.
The oil price remains in narrow ranges, around the $50-a-barrel level.
Market Intelligence
The past two weeks have been the peak holiday period in Europe. The leather pipeline in this part of the world has been quiet and tanneries have been closed. Those tanners who required a steady influx of material and did not want to lose any of their preferred raw material – as far as fresh hide supplies are concerned – tried to use as much as possible of the contract tanning capacities to keep the material flow uninterrupted.
The slaughter numbers have fallen to annual lows so the unsold inventory has not increased substantially in August.
European suppliers are relaxed about falling sales in spring and summer and accept changing market conditions until they return from their holidays. Generally, the big slaughterhouses in Europe try to get into a sold-forward position in May/June so that the summer holiday period does not hit them too hard and leave them with unsold inventory.
For the heavy hides, which go into the automotive supply chain, into shoe upper leather or vegetable-tanned leather, demand has been stable and it is more of an issue to find sufficient supply to fill the drums.
The situation is different for all other hide types, which compete in the global markets and follow the price trends. Dairy cows have seen a reasonable demand from upholstery tanners in China and contracts signed in spring have kept suppliers reasonably busy with shipments into July. The problems started when the US dollar lost almost 10% of its value [since January] and international prices made it necessary for sellers to lower bids.
The decline of euro revenues for hides accelerated into the summer. However, this was not reflected adequately at the abattoir gates. The lower kill gave butchers a strong position compared with the hide processors and traders, who are fighting for the remaining hides and market share. The strong demand from automotive tanners gave the beef industry a strong position to squeeze deals from the market, which did not reflect the real market levels.
The general feeling is that if one butcher hears about a price the other is not willing to consider anything less. The market for standard European hides hasn’t acknowledged the price changes in the global marketplace yet.
Suppliers in Europe have reacted in different ways. An increasing number of suppliers began to check around to see if there would be traders interested in buying stocks. A lot of people we spoke to said since mid-July they have received an increasing number of emails from smaller and less known collectors with offers of hides and/or the usual proposals for collaborations. This is nothing new and for the pundits it is always a sign that routes that these hides normally go down are blocked and sellers are fearing they might lose money.
Various sources from China have reported agents of some of the larger European suppliers are inviting customers for bids and price discussions. Some suppliers were travelling around China in the first half of August, which confused buyers and tanners even more. Not that buyers were particularly interested in purchasing, as prices (with the exception of heavy dairy cows) are far too high in Europe when they have plenty of cheaper options to choose from. Several agents reported a wide range of asking prices which were also changing from day to day. This not creating the level of confidence buyers need in a weak or at least uncertain market. We don’t have the impression that European sellers had a lot of selling success in the first half of August.
The situation is different for US hide suppliers. The trade is debating whether the market has found a bottom or if it is still in decline. Most of the demand for standard commodity raw materials from Asian and Italian tanners has been satisfied by US hides, attracted by competitive prices and a weak currency.
The weekly export sales figures might not be on record levels, but they are at good levels and there is a constant flow of shipments.
As far prices are concerned nothing is guaranteed, but even if some larger deals are only achieved by private discounts, the US hide suppliers seem to have the most successful sales people at the moment. With the high kill they also have abundant supply and it would take a pretty strong increase in leather demand to leave much room for other countries to grab any significant part of the business.
The only risk the suppliers from the US could face is with the more expensive contracts that they still have in their order books. Everything would look different is sales were renegotiated and contracts resold, because the letters of credit did not arrive. Only the directly involved parties will know what the truth is, because we have learnt in the past that corrections of such kind are never really made.
The big question for the start of the winter production cycle is what leather demand will be. In general, supply of raw material is far more inelastic than the demand for leather.
In the last quarter of the year, leather production tends to increase. Upholstery sales are always more active in the winter six months and we could be a bit more positive due to growth rates in many economies.
However, leather has lost a lot of market share, in particular in the shoe industry. Leather consumption is affected by material decisions much more than by the normal fluctuation of product demand. Brands and retailers want to bring their products to store much quicker and this is a big obstacle for leather as mass manufacturing is concentrated in Asia with long lead times for US and Europe.
Another difficulty is pricing. Although raw materials have corrected quite significantly in price we have to assume that leather is still not the cheapest product. For the tanning industry, there will be difficult price negotiations ahead, because the leather buyers see the raw material price corrections too and history tells us that they become extremely ambitious in regard to how much this should be recognised in their prices. With rising production cost, in particular in China, there might not be the room to manoeuvre that many of the leather buyers expect.
The normal annual cycle restarts at the end of the holiday season and by the end of September we should have more clarity about leather prices and what brands and retailers plan to put into their stores for the winter season. We are not concerned about high quality leather but for standard leathers we will need a real push from fashion.
SPLITS AND SKINS
In terms of the split leather business, it is low season and suffering the same problems as the grains. We fail to see any segment in the leather business that could increase the demand for split. Specialties like top-quality suede, heavy leathers or maybe in some areas of automotive leather production might have a bit of potential but a fundamental drive for split demand from leather consumption does not seem to be on the horizon. As grains get cheaper it is going to become more difficult for splits. The gelatine and collagen segment is not performing brilliantly and one can only hope that the food industry is also going to stimulate demand a little in the winter season.
For the coming weeks, everybody is awaiting the results of the trips to Asia and the All China Leather Exhibition in Shanghai (August 30 to September 1). As far as the show is concerned, people would be well advised not to expect too much. Previous years have shown us that it is not as relevant as it used to be, because the big decisions for leather sales are taken elsewhere. These kind of shows are a meeting place, they deliver impressions of the market, they accelerate the information flow along the supply chain, and seminars and presentations deliver decent information for the industry, but they don’t generate business.
In this respect we prefer the upcoming shows in Italy (Lineapelle, October 4 to 6) which for the leather business, fashion and trends are much more meaningful.
We would be surprised anything happened in the next two weeks. Any big decisions will be taken in private and during the face-to-face meetings. While the US hide prices are more than ever the benchmark for the raw material markets, it will be interesting to see whether the other origins are in the position to include themselves in that range.
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