The Leather Pipeline - 6.2.18
06/02/2018
Politics and financial markets delivered more activity and interesting news last week than in the other weeks of 2018 so far.
For the leather pipeline, the biggest and import important thing is the currency market. The US dollar continues to decline and has lost further value against most other global currencies. One comes to the conclusion that the trend of the dollar is more to do with politics then economics. The general fundamentals would lead to the opinion that the dollar should be somewhat stronger if the parameters normally used apply. The strength of the economy, the outlook and the difference in interest rates usually play the biggest roles.
In the end, we can’t really be surprised. US President Donald Trump and the US government seem to favour a weak currency to support exports. The tax reforms and how to finance them, as well as the general demeanour of President Trump are weighing on the value of the dollar.
The economic situation speaks a different language; the faster rising interest rates in the US and the strong labour market with rising wages should normally lead to a strong performance of the US dollar. However, the financial markets have their own evaluations and they come to different conclusions, which can be seen and read every day on the tickers and in the financial papers.
The general outlook for the global economy remains strong. Estimations for the main economies published in recent weeks see growth rates in the range of 2% or more almost everywhere. This would make 2018 a similar or better year than the last one.
The slump of many stock markets at the end of last week is considered by the optimists as a normal and understandable correction, but pessimists see it instead as the beginning of the end of the long upward cycle we have seen for almost 10 years since the last financial crisis. Regardless of which group is right in the long run, it has definitely raised the level of alert and a growing number of people understand that the volatility of the markets is definitely going to rise.
The bitcoin hype also seems to be entering a new phase. All the school economists and investors are predicting the burst of the bubble. A number of governments are trying to hinder the use of cryptocurrencies wherever they can. On the other side, new cryptocurrencies are being created almost every day. Governments still have legislation in their hands, but it might be a bit premature to call for the end of cryptocurrencies already.
Blockchain is still in its early stages and could definitely become a revolution in supply and service chains. Political nationalism might be popular in political societies and this is powerful, but it is doubtful that it can stop such trends in a globalised world. A global cryptocurrency, or several of them, should at least be considered as an option. Nevertheless, this would mean many of the schoolbooks of economics would have to be written. Nobody has any experience of this, which is the dangerous part.
Oil prices remain strong; despite the small correction, we continue to trade at the upper end of the expected trading range. So far, the higher price for the barrel hasn’t yet reached the consumer because the weak dollar has wiped between 5% and 15% away from the price rise over the past year. Oil producing countries will appreciate the situation. As they always mention the price of $60 per barrel as the convenient one, we must assume that the present trading range suits almost everybody.
Market Intelligence
After a slow start to the New Year, it seems we are now entering a more exciting period with more information to analyse and to help forecast what will happen in the leather pipeline later in the year.
The next two weeks might still be a little subdued due to the holidays in Asia, which are going to reduce general trading activity and communication flow. It is the biggest family occasion in China; as much as business people might still be focused on their work and investments, they will definitely take at least a week think about something other than business. We have seen in previous years that work-life balance has become more important in society.
India on the up
After the break, the leather pipeline will quickly turn back and focus on fashion, trends and the impact on the use of leather in the future. The trade fair season has started with the India International Leather Fair (IILF) in Chennai, India. This event is certainly important, but it hasn’t had as much trend setting power in the past.
Anyway, the reports and feedback we have received so far are not completely depressing. It seems that the shift of low-cost production out of China is slowly starting to favour the Indian leather industry again. The main problems are politics and cultural factors. Since the Indian government decided to block cash business and as a result of cultural issues related to cow slaughter in various provinces, the leather business has gone through a difficult time.
The government is now trying to demonstrate more support for the sector and its efforts to invest in wastewater treatment facilities, to improve labour conditions and to focus on leather clusters around the country seem to have created more confidence in the sector. If well managed and controlled, the leather industry in India has a bright future, especially in light of general policy changes in China. This is opening many doors for the leather pipeline and production in the subcontinent.
In terms of general business, visitors and exhibitors were reasonably satisfied with the results of the show. For an external observer, the statement that almost everything is related to low prices leaves a bit of bitter taste considering that raw material prices have already reached levels where further declines should no longer be discussed. The good news is that there is no shortage of interest and of potential buyers, so it can be surmised that leather has not been completely wiped off the agenda of production of consumer goods.
Significant shows
Many are already planning their visits to the Lineapelle fair in Milan, which is the exact opposite of IILF; it remains the trendsetter and a sign of what should be expected in terms of fashion and trends in the leather industry. No matter how bad things have been for much of the past two years, the show in Italy is always a festival of taste and beauty. Without positive impulses that influence designers and retailers, it is difficult to revitalise the use of leather outside the luxury sector and high fashion.
It is necessary and important that leather is recognised as being the real thing, rather than the plastic imitation that discount retailers and many brands seem to feel is good enough today. As long as it is just the appearance of the material and not its full function, it will be very difficult to convince them not to take ideas from Milan and copy them. It might be a good idea for the quality tanners to show not just the beauty they can create, but to also focus on the display and explain the favourable qualities leather still offers the consumer.
When the trade returns from Milan, there is only a short period of time before they have to pack their bags again and hop on the plane to Hong Kong. The APLF exhibition is a totally different event and has a completely different function. It is a get-together, it is far more commercial and, more than ever before, it is the place for information of a far more industrial level.
The attendance of industry players from Asia is much higher and the percentage of the total leather pipeline represented in terms of volume is certainly significantly higher. As a result, the aggregate of Milan and Hong Kong will offer decent insight into what we should expect for the rest of the year.
In general, the level of excitement and expectation ahead of APLF is always higher than the actual results. When people come home from Hong Kong there is normally some kind of a sobering period, which is also related to the fact that the spring and summer months are generally the ones with lower production levels in the leather industry.
New dynamics
With regards to business over the past two weeks, the situation hasn’t changed very much. Raw material prices have not moved, and this is not the result of a market which is in balance. We deal more and more with politics and strategies rather than with a lively and dynamic marketplace. This is what we have been used to for a long time, but over the years the concentration process in the beef industry and the rising number of slaughterhouses marketing their raw material directly has led to a more static situation. Price management is no longer the result of day-to-day market analysis, but rather is the consequence of budgets and how strong the slaughterhouses feel by managing supply and setting price levels.
One can have plenty of different opinions and most of the more experienced pundits deeply regret this development. They were used to a vibrant marketplace where information, speed and relationships determined the success of trading. The industrials will favour the situation we see today. The major deals are done between the big boys and on a professional level in the supply chain. This might be favourable for many of the big players and they would consider this a more professional and adequate situation.
The problem is that this is neither clearing the entire production nor securing a continuous and regular production flow for all articles, all items and in all markets. It need not be discussed that the leather pipeline has been completely segmented in recent years. What used to be all in some way connected is now a number of multilevel, independent markets. It is not just value, luxury and specialty anymore; we are now dealing with an extended market matrix.
Shift in consumption
If we leave the question of prices to one side for a moment, it is quite obvious that the consumption of leather has shifted. There is no need to stress once again how much ground leather has lost in shoe production as this is now commonly agreed. The consumption of leather in the automotive industry has risen tremendously in recent years, but it is now in a settlement period which is independent of the number of cars being manufactured. At the same time, we can recognise that leather has, against all odds, conquered new markets. Surprise? Only for those who have not noticed how many premium smart phones, tablets and other gadgets have leather covers, backsides or sleeves.
Leather’s role in this market is different now; it adds to the image and exclusivity of the basic product. Some may remember the early years of mobile phones when phone bags made from leather were popular. They were mainly made from leather cuttings left over from the production of upholstery of car seats. It was readily available, quite cheap and offered good protection for the phone. At that time, the mobile phone was still quite expensive. It was not a mass product, either because of its price or because of the cost of using it. Anyway, the situation is different today and a certain phone and brand has become a social statement. With so many millions using phones costing more than $800, something is required to pimp the status; leather can do this.
Although leather is not specifically promoted, the manufacturers appreciate its function. Let’s not forget that the phone and the computer are now one of the most touched items during the day. In the case of the smart phone, it would be hard to find another item that people touch more during the day. Leather seems to have the best performance to handle this challenge. It might be good if some of the people in the leather pipeline recognise this and consider transferring their experience to the benefit of other sectors.
Splits and skins
The split market has not offered much movement or change either. We have been told by several international observers that the number of unsold splits continues to rise, particularly in the Americas. Some people are even talking about enormous unsold inventories in tanneries. We have to admit that these are still unconfirmed rumours, but the upcoming trade fairs are always a pretty good opportunity to check on the quality of the information.
General trends in the skin market remain the same. Certain skins offering fine and dense wool, lightweight lambs of good quality and specialty selections for decoration purposes continue to find good demand and regular sales. Several people believe that indications of a recovery for goat skins could be sustained as well.
Nevertheless, let’s not forget that prices are still at historically cheap levels. This is the good news, but for mass production, which is usually consumed by nappa leather, it does not offer any light at the end of the tunnel. We continue to waste and destroy valuable raw material in many markets because there is no demand for it.
Contrasting fortunes
The next two weeks should be reasonably quiet. Leather is still being produced and the decline in demand is creating unsold inventories, but there is still more raw material being sold and turned into leather than is being stored. This means the players that have the material the industry needs will continue to sell, and tanners will fill their drums for production. They will be busy, contracts will be renewed and the standard routine of trying to find a price and to handle the logistics will be the same as before.
It is going to be more difficult for others because it seems unlikely the materials that have failed to find a market over the past few weeks are going to find one in the weeks to come. The Chinese industry will be on holidays and we do not share the hopes of many that they are understocked and need to desperately replenish raw material in the weeks to come. We are of the opinion that large tanneries and organisations that have sales and delivery programmes for leather continue to act as normal. The decline is the result of many tanneries falling victim to environmental controls.
It seems most of the positive trends in the leather market have been grabbed by larger, well-established tanning business. This means that the big names are enjoying normal productions, with some perhaps even growing. Since they are the main buyers for the industrial suppliers of hides, the product flow in this section should be reasonable.
Supply production can find no demand at the moment and the main victims of this trend are the medium-size operators. In normal market logic the surplus situation should lead to falling prices, but, as long as suppliers choose to wait for the commodity leather demand to return to price ideas they have in their budgets, the stalemate will continue with less hides sold than produced and rising numbers of hides waiting for better times.
The premium and niche producers should continue to enjoy comfortable and stable business conditions.
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