Leather Pipeline - 17.10.17
17/10/2017
Europe has keeping a close eye on developments in Spain and Catalunya. Despite the region’s vote for independence, its status remains unclear. The financial markets did not react dramatically, but the outcome is very important for the European community, which is facing increased nationalism in a number of countries. The Brexit talks did not make any major progress. After several meetings between the EU and British representatives, one has the impression that they are no nearer to an agreement.
Generally, the global economy remains on track. In most countries, GDP forecasts have been raised. This is reflected in rising stock market values around the globe with many indexes achieving record highs. This is potentially a bit too optimistic, because it is ignoring the risks presented by politics.
We must not forget that after the crisis in 2008, all the recovery was and still is based on an “easy money” policy, which has created asset bubbles and a vicious circle for the decision makers as to when and how to collect the excessive liquidity from the markets. The decisions to increase interest rates are taken slowly, although everybody is aware that this is necessary to prevent another financial crisis.
Oil prices continue to rise, mainly as result of the hurricane season. The balance between supply and demand hasn’t changed much. Levels around $60 a barrel are lining the pockets of the suppliers and not overburdening the consumer. Slightly higher energy prices also give inflation a boost, which what many want.
The correction of the US dollar as a consequence of the Trump administration has ended and we are trading within a narrow range against most major currencies.
Market intelligence
As we expected, Lineapelle in Milan was considered a success. However, it is just the shop window, displaying what can be made from the material when you use the best techniques.
This might be the problem of the industry. At such an event, you speak to the crème de la crème and you don’t just see manufacturers, but also designers and influencers of fashion. This inner circle and micro cosmos creates a feelgood factor, in particular for those struggling to find enough customers for their raw material.
In summary, it’s fair to believe that leather used in the luxury sector and in the niches of durability, comfort and natural beauty still has a strong customer base and plenty of potential. We didn’t meet anyone who was concerned about the volume of business or about leather’s future in general.
When it comes to economics, the situation is different. Those working at the top end of luxury products are having to pay record prices for either raw material or finished leather. The record raw material prices are a problem for tanners, because it is they who shoulder the risk, as far as selection and market is concerned. But they cannot complain about luxury performance, following strong demand from the top brands.
Several tanneries - such as those that are flexible, innovative and/or supply niche markets - can even take advantage of the downward trend in raw material prices and are seeing widening margins. However, to be in these supply chains takes a lot of commitment and investment, which are correctly well rewarded.
The industrial sector is not hugely represented at the show. There are several big industrial tanning groups that run businesses covering fashion, which is why they exhibit. But generally it is thought the big industrial tanners are enjoying a good time, too.
Rapidly falling raw material prices from the Americas and Australia are widening margins and reducing the need for capital investment. People complain, as they always do, but generally leather prices never fall at the same speed as raw material prices. Those complaining are pointing to the devaluation of stocks as well as the risk of falling leather prices. Generally they are correct, but if one looks at the alternative situation with steeply rising raw material cost we know which situation they would prefer.
The perfect world of relatively stable raw material prices and an acceptable margin in manufacturing does not last long, unfortunately. But at the moment, business for automotive tanners and some of the conglomerates for shoe leather can be considered positive.
How tricky it all can become was evident on the first day of the show in Italy, when the financial problems related to automotive leather group GST were published. The company’s US arm has filed for bankruptcy protection, meaning it will not have to pay its debts while it restructures and looks for a buyer.
The company has very specific investors and financial conditions, which are a big part of its problem. Several pundits say it is always difficult when growth is more important than profit. The good news is that its foreign divisions are not involved so far, as they continue to meet their financial obligations.
This shows hides suppliers must remain sceptical about clients, even the large ones operating in successful sectors. It is unlikely GST can continue as before and so some changes to the entire sector can be expected. It will not have any impact on the consumption of leather in vehicles, but it is likely the new owners will manage things in a different way.
Lineapelle was pretty much a European event, as it was a holiday week in China. We heard people saying the number of visitors from Asia seemed higher than in previous years, but we disagree. The final statistics from organisers will reveal the truth.
CHINESE DEMAND
Business from Asia the past two weeks has been low and there hasn’t been a rise after the holidays. China’s economy is not worse than a year ago, in fact we are now at the beginning of the production cycle and we would normally expect a significant rise in activity from that part of the world. Domestic consumption in China should be at at least the same level as a year ago, especially given the strong property market and its knock-on effect for demand for furniture leather. It is difficult to get a clear picture of what is going, in terms of both manufacturing and consumption.
The tanning industry in China is facing ongoing issues in terms of its environmental impact. The government has become strict on water pollution and air emissions and factories that do not meet targets are closed. While this has been the case for the past two years, it is continuing to affect production, in particular in the tanning clusters in the north (Hebei), producing upholstery leather. Usually the Chinese industry is flexible and creative when there is business to be done. If there is demand there is usually someone to supply it and some tanneries have switched from producing shoe leather to upholstery leather. But since this has not happened recently one has to assume that the demand for upholstery leather is not the same as a year ago and it is unclear why.
HIDES PRICES
All this is affecting the raw material markets. Demand and prices for the classic upholstery hides are declining and nobody is forecasting any recovery. Considering that we are already in the middle of October, and taking into account shipping times, it does not seem that we can expect a strong upholstery leather production season 2017/2018 in China. This is surprising, if one believes the statistics on China’s property market, which show real estate prices are stable or increasing. Construction is continuing and people are investing in apartments. If the situation is a good as a year ago, it is unclear why we are seeing reduced production of upholstery leather. Either leather is out of fashion, the statistics are not correct or people have no money left to furnish their apartments. We should also remember that about 20% of the property is estimated to be empty. If consumers buy a lot of cars they might not have enough money for upholstery, and if they buy more apartments there might be a lack of money for cars.
PRODUCTION LEVELS
In Europe, leather production has returned to seasonal levels but with big differences between the clusters and market segments.
The tanning industry in northern Italy continues to suffer from bottlenecks in effluent treatment. All tanners in the area are busy, but they cannot put into the drums what they would like to. This applies mainly to salted hides, which consume the most water so tanners are trying to focus on fresh, chilled material or buying semi-finished product wherever possible.
In Tuscany, only the producers of top luxury products are busy - the others are complaining about a lack of orders. This is reflected in the raw material markets where the premium fresh hides for automotive leather production continue to perform well with reasonably stable prices. For the rest, prices are erratic.
SPLITS AND SKINS
The split market continues in the same pattern we have seen for a long time. Top quality material and niches are doing well, but standard articles and gelatine continue to suffer. However, people who visited the Micam shoe fair in Milan in mid-September reported seeing a lot of shoes made from suede, which would allow more splits to be used.
In the skin market, the hype we had seen during the summer is fading. There is a reduced offer of lightweight, good quality lambskins in Europe and an increasing number of heavy lambs, which creates the problem of where to sell the skins that are not suitable for double-face production. Many are reporting that prices are beginning to see headwinds. There has been no recovery in demand for coarse wool skins for nappa leather production and with the tanning problems in China it is difficult to see where a recovery would come from.
The next two weeks will be decisive for the markets. The demand for leather and raw material has to be revealed within that timeframe to meet the high season of production, which is October to April. If purchasing activity is not positive there might be a difficult winter season ahead, particularly for tanners who are fighting for orders.
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