The Leather Pipeline - 14.11.17
14/11/2017
The focus of the political spotlight shifted from the European separatism to US President Donald Trump’s trip to Asia. Some influential international publications say American dominance is dwindling and suggest we are entering a new era where China dominates. The American and Chinese leaders tried to present a platform of agreement and understanding and large deals were signed. They also discussed how to handle North Korea. Mr Trump’s visits to other Asian countries were not as well publicised, despite him meeting Russian President Vladimir Putin in Vietnam to discuss Syria.
Latterly, interested shifted from international politics to social affairs, in particular inappropriate sexual behaviour and sexual harassment. One can only hope this is not just a media campaign that will be forgotten about quickly. The subject needs careful handling.
Stock markets remained firm over the past few weeks and were not able to extend their gains. Cheap money and excessive liquidity keep the markets and property prices strong. An increasing number of analysts expect the asset bubble will lead to an end in inflation.
The publication of the Paradise Papers has once again triggered discussion about tax evasion. It demonstrates the discrepancy between illegal and immoral and this is leading to more philosophical debate. There is outrage in countries with relatively high taxes while others consider it just a simple economic decision. An agreement will not be reached and so it will remain an attractive field of investigation for the media.
Another interesting subject of discussion has been triggered by the substantial rise of the value of the bitcoin. A number of countries have banned trading in the artificial currency but this has not prevented the rise. Combine anything with ‘blockchain’ [a public ledger that records bitcoin transactions] and values shoot through the roof.
The oil price continues to rise. We are now trading around the $60 per barrel level, the highest since 2015. There is has been no big change in supply and demand but the conflict between Saudi Arabia and Yemen is supporting the present levels. Saudi Arabia is the world’s biggest oil supplier and its domestic politics are scaring investors.
The currency market continued to be reasonably boring and the value of the US dollar didn’t change much. Despite positive economic data, investors are waiting for US tax reforms and to see what steps the government will take next.
Market intelligence
We agree with our sources who are saying they haven’t seen such steady and stable conditions in the leather pipeline for a long time. Some consider this a positive, while others wish for more volatility.
As far as general news, the big brands and the premium car manufacturers have mainly been publishing excellent results for the divisions related to leather.
Where leather is directly connected to the image of the finished product, adding value because of its unique appearance and properties, the situation is good and has been profitable for a while. The people in these companies would be happy for things to remain the same. Of course, they think materials should be cheaper and growth bigger, but there is a great deal of stability in the supply chain which allows for planning and the shaping of brands.
Those who are more negative are the ones in sectors where leather can easily be substituted. Here we have seen a decline in consumption for almost two years. Cost is not the only issue – there has been a decline in production, in particular in China, as tanneries have closed. It is this combination that has affected raw material demand and prices.
This sector has changed from being supply driven to being the victim of demand. There is not one single condition but multiple factors affecting the market, including:
• shrinking leather demand
• shrinking production capacity
• aggressive anti-leather campaigns and
• raw material supply exceeding finished leather demand
There is also anti-beef campaigning which might affect some parts of the world but globally there is no indication that protein production will decline.
Even the artificial ‘leather’ development - Zoa by Modern Meadow - might have some success eventually, but why copy it when the original cannot be absorbed? This trend might look attractive for leather users to escape public pressure, but as long as beef and meat is produced there is absolutely no reason to waste the byproduct. In the case of cattle hides we must also accept that as much as beef producers may complain, the prices still leave a lot of room to be adjusted. Just ask those dealing with ovine skins.
LEATHER’S IMAGE
For the foreseeable, all efforts should focus on stimulating leather demand and to check tanneries are complying with environmental protection standards. This is not a challenge – environmentally friendly production is readily available is already standard in most tanneries around the globe.
It would also be good if this would be mentioned much more in public by companies using leather. In many parts of the world there are high standards. For those who have a fundamental problem with the consumption of meat this will never be enough. However, for many, as long as acceptable standards are followed there is no reason to be ashamed and not to promote the use of a sustainable and natural material.
For the moment there are plenty of discussions and those negatively influenced by the present market conditions are trying to turn things back to their favour. Many are studying the daily and weekly reports which are published around the globe and every uptick is considered the long-awaited turnaround. As much as we would like to be positive and support good news, we have to question the situation.
Supply of raw material continues to be more than sufficient and the biggest problem remains the stocks that are available around the globe. If hides move from raw material to semi-finished ones they might cease to be the burden of the raw material supplier, but then become a problem for the wet blue trader or tanner.
This is worrying and we are missing reliable data. We live on rumours and we are not seeing a rosy picture. The more you speak to people, the more you hear about physical stocks lying in many parts of the world. The businesses that own them are not comfortable and so will not disclose their situation.
There seem to be larger stocks at origin, and some people talk of large stocks in China, from wet blue to finished. Buyers purchase hand to mouth. There is no real market confidence.
SPLITS AND SKINS
The split market is delivering similar news: producers sing the same song as everyone else. Selected items perform well, but the standards are suffering and tanners are struggling to move the splits they produce. Stocks are piling up and hopes are low, because we are already in the middle of the season.
The situation is mirrored in the skins market. Skins suitable for double face and decoration do well while those related to nappa struggle. New Zealand wool auctions went up in the past two weeks and some hope this could be a trend for better wool returns. It is too early to tell, but we will monitor the situation.
SALES MOMENTUM
For the coming two weeks, many expect a bit of activity. In the US, sellers are trying to transfer sales momentum into the market. This is difficult because buyers know the shipments are not matching the sales. This does not provide much confidence.
However, for the moment the market is steady and the season lets some buy. What will happen when Chinese New Year and Christmas approach is another story.
In Europe, the higher kill is sufficient to fill the available drums with as many fresh, chilled hides as possible. Salted hides struggle to find a home and are still too expensive. Those offering salted hides are finding it increasingly difficult to find enough takers.
So, we might take a break from the steep decent of prices, but we are not convinced that the commodity market has seen the end of the cycle. For the quality and specialty products the year seems already over and we don’t expect any big changes until the end of the calendar year.
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