The Leather Pipeline - 18.09.18
18/09/2018
In the past two weeks many people have been thinking of the last big financial crisis, which celebrated its tenth anniversary this September.
Many publications covered the question of the consequences that crisis and asked if there is a realistic chance of a similar financial catastrophe happening again. Most experts are convinced that the present situation is more stable and safe, but history proves that the next crisis is always looming on the horizon.
Emerging markets have come into the limelight. Currency crises in Turkey and Argentina at the same time as falling currency values in other emerging markets, plus other factors such as the rising interest rates in the US, have made commentators wonder about possible triggers of the next collapse of the financial system.
Big banks and the international financial institutions are discussing the risks and publish their warnings, but nobody is really willing to predict the worst. This is left to some individuals who are at least considering serious problems in the near future. The question tjat is left unanswered is how best to prepare for anything bad. This is always the time for the gurus to pretend to have the key to eternal life, or at least risk-free protection of wealth.
In politics, the US appears to be run by nationalism and Twitter, China is seeing rising control by certain individuals and a silent economic imperialism, Russia works with old style tools of espionage, conspiracy and military threat and Europe is paralysing itself in the conflict between liberalism and nationalism. It would be naïve to think this is not going to affect global stability.
The financial markets continue be undecided. With the exception of oil, which continues to rise in price slowly, all other markets continue in very narrow ranges. Stock markets have corrected downwards, as did the gold price and several commodities. However, it is too little to call this an indicator of anything more serious on the horizon.
We are now heading towards the last quarter of the year and after the general silence during the holiday period we should all be prepared for more volatility in the markets until the end of the year.
Market Intelligence
Before the busiest production season starts and the trade gathers in Milan for Lineapelle (September 25-27) to see what the classy and fashion leather producers have to offer for the coming season, it might be time to draw a line under what has happened in recent years in the leather pipeline.
We could just sit back and watch the drama of leather in mass production continue to unfold, but this is not really an option. Nor is it enough just to sit back and wait until the oil price rockets, beef consumption collapses or somebody calls leather hip and cool again. The passivity of the leather trade in recent years is the reason for many of the problems we now face. Most did not anticipate problems or, if they did, we would have to ask what they did in response.
From our perspective, the industry has been looking at the problem from completely the wrong perspective. Everyone was too busy to worry that leather might have to face the fallout from animal welfare campaigns, from anti-beef trends or environmental concerns. All of this may have some minor impact at the edges of the market, but there is more raw material today because of a rise in beef consumption; on a global scale, the consumer has not been influenced too much by all those campaigns. One has to assume that anyone who eats beef is also willing to use leather. No matter what certain campaign groups may believe, a broad consumer base has no fundamental anti-leather feeling. The upper end of the market with higher-priced and higher added-value products is expanding and the automotive industry seems to accept that a leather-upholstered car is well appreciated and offers good potential for a mark-up. Some say it is even more simple. The car industry simply makes more profit on a car sold with a leather interior. Since no animal is raised for the use of hides and skins for leather production, not one animal less will be bred as a result of anti-leather campaigning. Campaign groups may attract a lot of attention but their impact on their real target has been nil so far.
However, the landslide decline in shoes has happened and the leather industry has not really developed any answer to it; many people are not even addressing the real problem. It is all about production costs and the margins a shoe brand can generate using specific materials.
This brings us back to not so long ago when the beef industry became more obsessed than ever with raising revenues through by-products,with hides and skins as the biggest constributor. The boom in prices after the 2008 financial crisis, driven by the massive expansion of production and consumption in China and the general global expansion of consumer spending, made them believe that there was more money to be made in expanding into producing wet blue and leather and take margin from the specialists who have been doing this work for generations.
This was obviously greeted enthusiastically in the meeting rooms of the large industrial groups because they believed it would make their procurement and control of the supply chain much easier. They completely ignored developments in athletic and casual footwear, with quicker and cheaper production set-ups and faster-paced changes to collections, all while using less labour. The falling oil pric was not planned, but it made things even more interesting.
The dream of partnership and a common interest to keep leather in play was a phantom, which was kept alive by the sports brands but never supported with action. Individual leather company success has to be admired, but cannot erase the general problem which, if it persists will hit them too in the end.
In conclusion, the volume shoe producers are not addicted to leather. Anything that is quicker, easier and cheaper to make, that offers more growth potential and better margins will be preferred. Nobody can blame these footwear companies for this. Why should they safeguard leather as a material? The expectation that they would start to use more leather again when the price became cheaper was another big mistake; still today you find many who think this is going to happen. It is all about what determines the price of a shoe at the factory door and in the shops.
We have learned that, beside material costs, manufacturing and flexibility play an important role too. Fashion, brand, model, lifestyle, comfort (weight) and price dominate. Lifecycle doesn’t play much of a role because fast fashion dictates the length of life of a shoe anyway. This is terrible because it kills the sustainability idea completely. A smart look doesn’t matter any more, and no one seems to care about protection of the foot. Theoretical the shoes can be put into a washing machine, but practically just look what the people carry on their feet. When shoes start to look dirty and ugly fashion dictates the purchase of new ones. This truth is a bitter pill for environmentalists and sustainability prophets.
Leather that is lighter and lends itself to quick changes in colour and appearance and to automated manufacturing would generate good demand. If leather has to match the performance and look of fabrics and mesh, why do we still bother about all the specifications that are still standard when it comes to leather in shoes. If the shoes are only going to be used for a couple of months anyway, why why bother? Why go to all that effort? Most young customers don’t care about any of that.
The accumulated stock of cheap hides, skins and splits cannot be expected to diminish any time soon, especially considering the high levels of cattle slaughter globally. Decisions about material use and designs for the coming season are made, and very little can be changed in the short term. However, the beef and leather industries should quickly start discussing how they are going to deal with this situation and, if they can, get into a serious discussion with the shoe industry about increasing the use of leather in shoe manufacturing again.
Splits continue to suffer in the same way as hides. The hope that collagen, gelatine and pet food would compensate for the decline in leather production has not been fulfilled. There are rumours that due to the low production volume of lime split leather in China a temporary shortage of supply has occurred. Some people say that prices for lime splits have risen as a result, but it is expected that this effect is going to fade quickly when winter production begins to rise. Other positive rumours are that one of the big sports shoe brands has displayed more interest in split than in previous seasons and this is exactly the news we are all looking for.
The skin segment is beginning to face problems again. In Europe the supply of new-season lambs has faded quickly and demand remains pretty slow. In the market for finished leather from skins we see very little change. The fashion for rugs is also beginning to slow down. The Lineapelle fair in Milan will certainly offer us more information. This is a very special section with a very special customer base and it is difficult to make any kind of positive projection.
The next two weeks will be most likely a period of expectation. The finished product manufacturing industry is collecting orders for the winter season and is discussing articles and prices with customers. To close on a positive note, the machinery industry is enjoying pretty decent investment and every tanner reports extended delivery times for new machines. This means the industry continues to be quite optimistic and is willing to spend money on innovation, increases in productivity and improvement of quality.
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