The Leather Pipeline - 03.10.17
03/10/2017
The third quarter of the year 2017 ended last week and this means that the financial markets are beginning already to think about the end of the year and investors are beginning to think how they can either protect their positive performance so far, or still achieve one in the remaining three months of the current year.
In the past two weeks the information published could become important for investors and decision-makers. The big organisations believe that the global economy remains on a positive track and, in particular for Europe, forecasts have been raised for the year 2018 already. This is quite interesting when we consider how many political risks there are at the moment. However, neither Brexit in Europe nor the tensions on the Korean peninsula, nor American politics in general are having any negative influence on the mood of investors and analysts.
In the US tax reforms were announced: the rich around the globe will get richer on the back of rising stock and property markets and oil prices will continue their rise. The German elections confirmed another term for Angela Merkel, but with much more complicated conditions for the coalition.
Stock markets continue to advance and the US dollar took a small break. It traded below the $1.20 level against the euro and oil began to approach $60 per barrel.
The intensity of discussion about general global changes continues to rise. More and more media reports can be read and seen about artificial intelligence and the next industrial revolution, Industry 4.0. Everybody knows there are going to be huge changes, not only for companies, but also for the societies and individuals and the definitions of globalisation, privacy and personal freedom will have to be re-written.
The different understandings of countries and regions about the risk and opportunities, as well about civil rights and privacy, will also lead to major differences in the speed of change from place to place. Since all is connected these days, those countries and societies that are slower to change may have good arguments for their positions, but may find themselves in a difficult position in terms of global competition.
Market Intelligence
In the past two weeks we have seen no major changes as far as the markets for raw materials are concerned. We didn’t expect any and it might be time to walk away from the regular analysis of prices going up or down in any case, important as these are for players along the supply chain.
Regular readers know very well that we don’t care much about short-term fluctuations and changes in prices but prefer to deal more with trends and long-term developments that influence the leather pipeline. The fact is that nothing has really changed and this very traditional trade.
People, in particular in the beef industry, are happy with the usual ups and downs of prices; they always have been. At the same time, others have said there will never be a hide wasted or dumped. Maybe this is true too, but it is at least time to discuss the possibility that it could become wrong some time in the near future. We might point towards the market for sheep and lambskins.
Until some time in 2015 people were quite happy to believe that leather demand outpaced raw material supply, consequently guaranteeing rising prices. Huge tanning capacities continued to expand and high oil prices made the beef industry happy to believe that vertical integration would lead to expanded added values and profit margins. Anyone at that time sending out any kind of warning or criticism was just considered to be an unexperienced pessimist. For decades the same story was repeated: global consumption of consumer goods made from leather would support an endless price rise. Any correction was considered to be short-lived and not a break in the trend.
An expanding economy was always converted into more demand for consumer product and the idea that finally leather could be substituted was never really taken into serious consideration. This has to do with a certain arrogance of people related to leather because it was always described as a superior, luxury material. The material as such has never really been a luxury material. It just became one when it was used to make luxury products. Other than that it was just a material with fantastic and valuable properties, which has served mankind for centuries extremely well. For example, until relatively recently, people were convinced that for a shoe to be a real shoe, it had to be made from leather.
This was correct in times when plastic, canvas, felt or rubber first became available, but this has changed. It all started with garments, followed by rucksacks and luggage, shifting into upholstery before finally reaching shoe manufacturing and fashion. A lot of falling raw material demand has been compensated by the growth of automotive leather, but there have been times when even this growth hasn’t been enough to absorb the raw material that became available due to the decline in the other segments.
Hides and skins prices have been significantly lower than they are today and leather prices and leather demand too. This has happened in past and so it’s just the same thing happening again, some will say. This is true, but we see one major difference this time. In the past, business was cyclical due to price reasons, but with really influencing basic, long-term demand. Leather as a material was not in dispute and the price cycles were not triggered by big changes in consumer interest, but by economic reasons. If prices went too high, demand went down; if prices were attractive, demand went up. With better economic conditions, demand went up; with economies in crisis, demand went down. This was in keeping with the logic of supply and demand, the normal and natural driver of the markets. Hide and skin prices have also been a reliable indicator for the general economy, being always a frontrunner in the cycles of the economies.
We think that we have to accept that conditions have changed. While the decline in leather use and consumption in garment and luggage was easily compensated by expanding consumer demand in the emerging markets and rising consumption in the automotive industry, it seems we saw the climax some time in 2015. The simple truth of the need for growth among the brands and manufacturers led the chemical industry and consumer product manufacturers to consider using alternative materials. All this was supported by a change in the structures in retail and the globalising consumer markets where one product fits all.
In the beginning nobody took this seriously. Nobody was able to predict the enormous success of fashion brands and the change in dress codes that allow far more non-leather shoes to be sold. Shorter lifecycles, fashion and rising purchasing power have allowed an increase in the number of units sold and the latest forecasts about the global economy suggest there is no end in sight for this growth. At the same time, we see the standard raw materials struggling to find enough demand to get cleared. For at least six months now, raw material productions have consistently not been cleared and more and more material has begun to congest.
What are the chances of a fundamental change? In the meantime we have already reached the beginning of October. In a timeframe of another four weeks at most, plans and budgets for production this winter season will be complete. Consequently, the tanning industry will have at least a sizeable portion of orders in hand.
Something else that, from our perspective, is influencing demand for leather is Industry 4.0. Automated manufacturing, shorter lifecycles and consumer expectation that everything new has to reach the customer within 48 hours and can be returned for free if customers change their minds is hitting the competitiveness of leather as a material in a massive way. This may be provocative, but it is a necessary wake-up call. It is nothing new, but we cannot see that the leather pipeline has truly taken this on board. Conferences, seminars and speeches over the past 30 years have said the same thing. And even the creation of global organisations such as the Leather Working Group or Leather Naturally are dealing with symptoms or creating alibis. The same people with the same arguments in the same locations, speaking to the same people with the same opinions.
Ask the RIM, Kodak, Nokia and many others what happens if you do not recognise when consumer taste is changing, new trends are developing and copycat products become more successful than the original. The driving experience of the sports car with the petrol engine and a classic transmission might still be more exciting than driving an electric car, but if consumer opinion considers electric mobility more hip, that’s the way things are going to go, even before we know where to charge and how to recycle. It is so much easier to manufacture an electronic car, with such a huge reduction in components and parts, with the possibility of almost fully automated manufacturing, with such a massive reduction of engineering skills that almost anyone can do it anywhere. Components can be bought and assembly done with a fraction of the manufacturing expertise, R&D costs or skilled labour, not to mention the economies of scale.
Well, a shoe is not so complicated. However, we can still see what has happened. The dress codes have changed and the idea that a good shoe has to be made from leather has disappeared. Shoes made from artificial fibres are good enough to satisfy consumers who expect a lifecycle of just a few months. We have to be aware that what has happened to shoes could also happen to handbags, car interiors and furniture. Leather will never disappear, but it might no longer be needed in sufficient volumes to use up all the raw material that is produced.
A lot of people are now talking about fabricated leather, another alibi production that is about getting material on a roll so that it can be fed without any control or adjustment into an automated production process. Why deal with different shapes and the problems of structures and defects when you can get something uniform on a roll?
This road is being taken by shoe companies. FlyLeather (Nike) and Dyneema (ECCO) may just be two recent examples, but there are others too. They use the term ‘leather’, but if you look at the descriptions and advertising copy, the claim is that the new materials are better than the original. If the properties are what they are said to be and the price is competitive, it is only a matter of time before these materials or similar ones make inroads into the production of shoes, handbags and automotive interiors, where manufacturers are just waiting for something that meets their specs, looks like leather (and can even be called leather) and is easier to manufacture. There is just one tiny obstacle. Bonded leather fibres, which some of these new materials use, still need real leather to be made to get the ‘raw material’.
Whatever your opinion about this, it cannot be questioned that the future of leather is not going to be the same as its history. The old supply and demand cycles will not apply any more and new ideas and visions are needed if the beef industry wants an adequate return for their by-product.
Prices remained under pressure, in particular outside the US. The split market was once again a reflection of the general hide market. Specialty productions need to be fed and the flow along the supply chain remains intact. However, in general the split market remains in the same pattern as before, which means that specialties and high-quality splits can still find a home, while cheap product has got its issues.
The skins market remains in a two-tier situation. Fine and dense wool skins, double-face skins as well as superior quality nappas continue to find their markets and enjoy reasonable price levels. For standard nappa, though, things continue to be extremely complicated; we continue to hear about buyers who are willing to buy skins for speculative reasons. If there are bargains around, where skins offer a reasonable wool return and do not cost more than $2 delivered, there are takers around.
The coming weeks will be determined by the Lineapelle Fair in Milan. It will be once again a festival of fashion, design, quality and beauty and it will be a pleasure to be there and to enjoy seeing what can be made from an animal skin. We have no doubt that this show will see a large number of exhibitors and visitors, maybe even more than usual. In particular suppliers from all around the globe may be represented in bigger numbers than usual, because many see more business opportunities in Europe than in Asia. However, the big industrial manufacturers play no significant role in this show. Buyers and designers from global shoe companies will appear; we may even see representatives of the automotive tanning industry, but their decisions and programmes will certainly not depend on what happens at Lineapelle.
We can only hope that discussions and meetings focus also on the question of how a byproduct of the beef industry can once again attract greater market interest to ensure that the destruction of sheep and lambskins does not become a trend in other sectors too. No matter what people think about the consumption of meat, as long as this sustainable natural raw material resource is available it should be used with the best added value possible.
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