The Leather Pipeline - 24.07.18
24/07/2018
In the northern hemisphere the holiday season has begun. This is also reflected in the financial markets, but for entertainment we have, fortunately, a US president who delivers regular entertainment and information.
In Helsinki he met with President Putin of Russia in private. So far nothing really valuable has leaked from this and so the international community has had to make do with a funny and worrying press statement after the meeting. For whatever reason Mr Trump was praising the Russian president and even stating that he couldn’t see any reason why Russia should have tried to influence the most recent US election. This is in total conflict with his own intelligence agencies and global media investigations.
As usual, not a day had passed before Mr Trump changed his statement to the opposite.
Shortly after leaving the subject of politics he went back into economics and threatened almost everyone with a new round of tariffs, adding that China and Europe are also manipulating their currencies to the disadvantage of the US exporters. Well, looking at the currency market since he has been in office, and just in case anyone believes that the currency markets can really be manipulated in the long run, the trend of the US dollar does not confirm his opinion. Fortunately he was not just accusing others, but also the Federal Reserve for using the wrong interest policy. This was seen by the financial markets last Friday as an option to limit the independence of the Federal Reserve and so the dollar did what he intended and nosedived to finish the period back to levels above $1.17 compared to the euro.
Unfortunately the US President seems still to believe that political leadership of the United States is what he has seen in films and TV series. Unfortunately the world and global relations are far more complex and have to take into account a multiple number of relations and influences. For the time being the global economy had been quite resilient, but there are already comments that the high uncertainty that this is creating will have a negative impact on global growth eventually.
In the meantime the EU and Japan have signed a new free trade agreement and slowly but surely new relations and alliances are beginning to build. With the present US policy the global political and economic structure is changing and actions have to be taken.
In Europe the Brexit negotiations continue to be in the limelight. As time progresses it becomes more obvious what kind of extended impacts the decision is going to have for the EU and the UK. Large companies are voicing their concerns about the consequences for their investments and business decisions.
The oil price continues to slide moderately by the price of gold is falling more rapidly. This is a bit of a surprise because gold is generally considered to be the safe haven in uncertain times, but it seems that investors do not see gold presently as a protection against uncertainties and global risk. Stock markets are falling, because here the investors consider the rising risk for serious global trade wars as a threat to corporate investment.
All in all it might be fair to say that the risk of the general downturn of the global economy is constantly rising and investment money is well advised to watch carefully the direction it takes.
Market Intelligence
It seems that now more than ever before most of the players in the leather pipeline are happy to take some days off in the summer and possibly forget about the problems of the industry for a while. This means there is not much news in the leather business and the problems and daily challenges along the leather pipeline continue to turn in circles.
We have been warning of changes to the fundamentals for a long time and so there is little that comes as a surprise any more. Commodity leathers are in a downward cycle of demand, partly at least as a consequence of price, and the cycle doesn’t seem to have reached its end yet. As a reaction, we hear more and more information from many parts of the world that discarding bovine hides is already a sad reality, a painful decision taken by people who are related to the business. It means actually that their commercial base has been taken away.
When we consider all the discussions about sustainable production and we see the waves of plastic waste reaching the shores these days it is all a sad story. Although most of the plastic in the oceans derives from bottles and bags, the use of plastic and microfibres as an alternative to leather is a reality as well. No matter what people are discussing these days and no matter what several organisations claim, a long-lasting material or product remains the most sustainable and environmentally friendly, as long as manufacturers respect environmental issues. But if the focus remains on the small minority of producers of leather who do not respect the environment, and stories about fully environmentally friendly tanning operations remain untold, leather will continue to have a tough time.
Some in the industry are concentrating on the wrong issues. They react to campaigns and criticism instead of taking proactive steps to promote leather as a better and more sustainable option if the consumer is willing to use it in the most environmentally friendly way. We agree that it still needs a lot of explaining and education and the main focus has to be on the functionality of leather and not on achieving a flawless surface as the brands and retailers want it to be.
For the next three or four weeks the industry will need much less raw material because tanning drums are not turning, except for some selected contract operations. This has to be managed. It is true that many tanneries are feeling a lot of uncertainty, which is politically related, but also as a result of the major decisions about articles that are generally taken by mid-October for the coming busy season of production in winter.
With a general decline in prices, European tanners are taking more short-term than long-term decisions and, according to sources in the raw material business, that means the leather industry is just covering the immediate period after the summer holiday; they lack the confidence to commit to anything more than that. We are going through the lowest period of beef production in Europe and tanners may feel that the balance between supply and demand could turn in their favour when the killing season begins again.
In Asia the situation is a bit different and with mostly commodity productions in this region the demand for raw material is still subdued. On top of that we are presently facing one of the longest downward cycles in history. In the case of China, a weak currency is also making imports more expensive and this, added to the environmental policy of the government, is resulting in the most cautious and defensive raw material buying seen since the beginning of the new millennium.
Buyers in Asia believe that there is only one way for the market to go and that is down. Whenever you hear of bids from tanners other than the large industrial groups and regular takers the prices are always very low and not particularly tempting. Sellers have lost confidence and trust in their business with Chinese customers. With so many contracts not honoured over the past year most sellers see no particular reason to consider low bids. This makes it hard for serious, honourable buyers. Their fear is that if they buy at market levels and respect their obligations, a competitor next door might just walk away and buy later at lower levels.
The split market is a reflection of the hide market. Specialty and niche splits still sell, while all the standard items are difficult to move. What worries us most is the situation in the gelatine market where the poor situation for hides and the big stocks of finished material continue to be a huge burden for the marketing of splits.
The skins market continues to face pressure. The hype in Europe at the beginning of the new lamb season is fading. At the beginning of the season there was a lot of interest, but that doesn’t mean sales. Fundamentally the business is still the same as a year ago and, despite interest from China, there was never any real fundamental increase in business. The interest has disappeared and the sale of skins has become almost as much of a struggle as it was several months ago.
Chinese buyers are not considered the best buyers in a falling market. They want to hit the bottom, buy the cheapest hides they can in the biggest volume they can; the majority are rather raw material gamblers than professional managers of the supply chain. All the demand for raw material out there might not be enough to clean up the congestion in the leather pipeline now, but we think there is a need for replenishment for many higher categories of material. Quite a bit of business is in the pipeline, although buyers have to calculate a minimum of six weeks between purchase and arrival of goods and this should put a certain pressure on them as well.
We believe that the next two to four weeks could become pretty decisive, because this will be the time that Asian tanners see as the best period for them with their European colleagues on holiday. However, if the volume of business remains as low as it is at the moment, we could run into serious trouble from September onwards.
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