Leather Pipeline - 31.10.17
31/10/2017
The month of October is traditionally when a lot of political action takes place and this has again been the case in 2017. The past two weeks were dominated by politics. Several elections in Europe strengthened the hand of ‘Eurosceptics’ and supported the ideas of nationalism and separatism. In China, the Communist Party held its national congress, which takes place every five years.
In Europe, elections in Austria and Czech Republic saw strong performances from right-wing parties. They occupy anti-migrant positions and are sceptical about the centralism of European policies in Brussels. Looking at the map, one has to realise that there is now a fairly strong anti-European position in the east; Austria can possibly be included in this.
In China, the power of the Communist Party, led by President Xi, has been strengthened further. Many now consider him to be almost almighty in his position and his power to be even greater than that of former leader Mao Zedong. On one hand, this is appreciated because it offers stability. On the other, it means the number of mighty individuals dominating global politics is increasing. This could eventually become a danger.
The strategy for the coming years is to continue focusing on cementing China’s position as a superpower and increasing its political influence through economic strength. Huge infrastructure projects, such as the Silk Road Economic Belt, are the instruments to achieve these goals. Control of the people, a focus on environmental issues, further growth, and the move towards a high-tech economy are other commitments that China’s political leaders have put on their agenda.
In the US, criticism of President Trump, even from within his own party, continues to grow. The question now is what is going to happen to his big projects such as tax reforms and a new health care system. In the meantime, the financial markets are waiting for the new boss of the Federal Reserve. They were very pleased to see the US economy growing by 3%, above market expectations.
So far, the financial markets are not taking too much notice of the various political developments. Investors are quite happy with the performance of most companies and stock markets continue to show strength. Quarterly results have been mostly positive. Despite a number of warnings about potential assets bubbles or political risks, investors continue to be optimistic.
The European Central Bank (ECB) has decided to halve its bond-buying programme. The cut from €60 billion to €30 billion and the extension of the purchasing programme until September 2018 has not impressed investors either and can be considered as one more year of easy and cheap money. This is always good news for the markets.
Oil prices continue to trade in narrow ranges at the upper end of the range. There is no shortage of petrol, but OPEC has been successful in managing markets through production cuts.
There has been no excitement in the currency market either. The Euro lost a bit of its shine after the ECB’s decision, but one has to be surprised by the fundamental strength of the currency in the wake of the political developments in the European community.
Market Intelligence
In the last two weeks the leather pipeline began to discuss the market situations in more detail. A lot of people were trying to gather information in order to get a more rational analysis of what we will see at the beginning of the winter cycle of the general leather market.
Many were trying to figure out why in a period where the global economy is in such a positive state, raw material prices for leather production still seem to be declining. Once again, we cannot generalise because there are some raw materials that are successfully fighting off any kind of price reduction.
Let’s start with these. One just has to look at the results and growth rates of luxury companies around the globe. In general, they are enjoying higher revenues and profits. Studies predict further growth as the wealthy look for more and luxury brands start to target younger consumers. The brands and divisions working with leather are performing exceptionally well. As a result, it is not difficult to explain why high-quality raw materials are not showing any kind of weakness in their prices and have totally decoupled from general trends.
We find this particularly remarkable at a time when there is lots of attention on animal rights groups, ‘vegan’ cars and anti-beef campaigns. Top brands are noticing this and are trying to build safety nets by stressing their commitment to animal welfare and traceability. Their customers do not seem too bothered and are simply enjoying the exclusivity of the product, the material and the brand.
We think this should be a good example to those who have already touted the end of leather as a consequence of social trends. This might even be the moment to also stress that there is a big discrepancy between the media presentation and the real situation in the food market. We are far away from a steep global slump in beef consumption; in fact, beef production is rising in several origins. Even in Europe, where the anti-beef trend might be at its strongest, one can see delicacy burgers shops opening in all the big cities.
There are still enough people around who enjoy good quality beef, so we continue to believe that a lot hides and skins will become available. They should be turned into leather to make the best use out of them. It should be the aim of everyone related to the industry to shift this positive momentum from the luxury leather and quality beef segment into fields where the trend for leather is not nearly as positive.
Beef producers and tanners now know what it means for them when leather loses its attraction in shoe production and is taken for granted. For the manufacturers and retailers of shoes it has become too attractive to take the cost, price and productivity advantages of avoiding leather whenever possible. The consumer hasn’t punished them for doing this, so it will take a lot of creativity to stop or reverse this trend.
This could be the end of leather in the mass markets of shoe production unless the leather industry, and related parties, do something to stop it. The truth is that the industry cannot wait for the day the beauty and value of leather is rediscovered. If this take too long, the production facilities and know-how will have disappeared, and it will be too late to restore them.
It will not be easy to convince brands and retailers to make leather shoes again rather than their artificial competitors. This can only be done through a joint effort that leads to a common benefit for everyone. Those in the leather industry have the biggest interest in this fight because their businesses fundamentally depend on the material, while a brand, retailer or shoe manufacturer can theoretically run their business without leather. They will only join in if they make more money.
The other segments of the leather industry certainly have great potential for growth, particularly upholstery. Automotive companies could also consume significantly more leather. The question that remains is why they should do this unless leather is going to offer them either more sales or more profit. The situation is similar to that of shoes.
This brings us back to a complaint we have made a number of times. The more leather is made to look like its artificial imitations, the less sense it makes to use it. Leather must focus on its functions, its nature, comfort and singularity. If it does, it will be even more beautiful, and people will enjoy the smell and feel even more.
With regards to the current situation in the leather pipeline, the above gives some explanation as to why the raw materials markets have developed the way they have so far in 2017.
In our analysis of weakening raw material prices a lot is related to the environmental policy in China, which was confirmed at the recent Communist Party conference. China’s political leaders have realised that the people will no longer accept life-threatening pollution as the price for growth. As a result, a lot of industries are being more closely examined. This has hit a lot of small and medium-sized tanneries in the north of the country. Many have been closed down or it has been made almost possible for them to carry out production. The majority of these factories produced upholstery leather and, in some cases, handbag leather. This has been mostly felt by suppliers of dairy cows; Hebei province has been the main destination for their raw material for the past 10 years.
Several people are wondering if the production cuts that have taken place also reflect a drop in demand for upholstery leather in China. This question is proving difficult to answer. News about the general economy, the property market and consumer spending doesn’t suggest that the demand for upholstery leather has shrunk enough to explain the decline in sales of raw material. We believe the decline hasn’t been that great. Production has been relocated and a number of tanneries that had previously focused on shoe leather have concentrated on contract production or have compensated for falling sales of shoe leather by increasing their own production of upholstery and handbag leather.
The reduction of shoe leather production has not yet been compensated for, but it may be eased by the market potentials in other segments. As far as automotive is concerned, there is no question that the premium car market, including SUVs, continues to perform well. This is reflected in the great stability of premium male hides. For the mass market, the general consolidation of car sales has not allowed for an increase in the market share of leather so far in 2017.
We are now at the end of October, when the shoe pipeline slowly begins to fill up in time for winter production, which usually starts sometime in January. It is quite late for there to be further positive impulses in the upholstery sector. Chinese New Year will take place in mid-February, which means raw materials have to arrive at the latest by the end of January. For many parts of the world, there are only four weeks until the goods have to be on the boat. There is unlikely to be another big boost in interest or demand from the upholstery market after the Chinese New Year break.
In Europe, raw material demand is limited by tanning capacity. Ongoing water problems in the north of Italy are having an impact on production. The rising seasonal kill in Europe will be predominantly shipped fresh, which does not leave much room for additional salted material to be produced. Automotive tanners are grabbing whatever production capacity they can lay their hands on, regardless of demand.
We cannot report anything new from the split market. Certain sections and types are doing quite well but, in general, it is fair to say that not all the splits being produced can find a home in leather production at the moment. The situation in the gelatine and collagen market is not strong enough to absorb any extra quantity either.
Everything remains the same in the skins market; top quality skins that are suitable for a specific use are finding homes and the prices are quite impressive. This is the case for dense wool, lightweights and top quality nappas for the luxury industry, all of which continue to perform extremely well. Everything else continues to struggle and only the strong recovery of crossbred wools will be enough to trigger sustained demand for general sheepskin and lambskin.
It is difficult to expect big changes in the near future. Where leather is an outstanding product, tanneries and producers have got used to the price levels that have been valid for quite some time. The price of top quality veals and bulls is unlikely to change before the end of the year.
The surplus situation in the general market persists. The pipeline continues to be congested; as usual, this is the case in some segments more than others. It is fair to say that the problems rise as the quality falls. A number of raw material prices are starting to look quite attractive; this might prompt a few players in the market to consider speculation by buying more than what they really need. This might not be a bad idea in the long-term for the strong hands. For all the others, it might be better to think twice and carefully analyse if the leather from the hides bought can be sold. The natural demand for leather, which has in the past been able to absorb everything that is produced, might not exist in the market anymore.
Share this story:
