The Leather Pipeline - 16.10.18
16/10/2018
Commodity prices have begun to fluctuate and in the past week stock markets began to change direction too. Various international institutions began to send warnings and this was also recognised by investors. In the commodity sector the firm trend for crude oil was broken and the interrupted rise of the stock markets showed signs of fading. In just a couple of days the price for a barrel of oil fell by approximately $5.
The lagging price of gold began to change direction too, but in this case to the upside. Investors decided that it might not be too bad idea to own some of the precious metal, which is generally considered to be a defence strategy against major turmoil in the financial markets. This is remarkable because, generally, interest rates are on the way up and that is generally not always good news for gold. In the end the price of gold gained about $25 per ounce.
There have been quite a few topics that were market movers and shakers. On one side the International Monetary Fund issued a warning. It avoided talking about the budget deficits in many economies and the rising interest rates in general. Rising interest rates are not only hitting the private consumer, but also national budget deficits, which in many cases occurred during a time of low interest rates, something that is considered to be a toxic cocktail for the global economy.
Also politics played quite an important role. In Europe the deficit spending of the Italian government is breaking EU agreements. The situation in Turkey hasn’t improved either; sanctions against Iran are not only affecting oil prices, but also becoming a burden for countries trading with Iran. The elections in Brazil have been paving the way for another possible populist leader in the biggest country in South America. These leaders are unpredictable and the financial markets are shifting to cautious mode.
The trade war between China and the US is becoming no easier either. The war of words has become more severe and it doesn’t seem that there is any real solution on the horizon for the time being. Also here international institutions have become worried, because there is hardly anyone who believes that this trade war will do any good for the global economy. Climate change has also returned to the limelight with the latest IPCC reports on what might happen if global warming is not reduced soon.
The US dollar, which had been on its way up and began to march towards the level of $1.14 against the euro, reversed its trend slightly to end the period above $1.15 again. Economic outlook for the US was not as brisk, which made investors believe that the rise of interest rates in US could be more shallow than expected.
Market Intelligence
After the Lineapelle exhibition in Milan in September, the leather pipeline normally returns to a regular routine, and this means basically an uptick in production volumes. Production rises and people usually stay in the factories to handle the busy day-to-day factory business. We can’t see any of this this year. There is no sign of an uptick in production, in particular in Asia, and no real increase in activity can be seen along the leather pipeline.
Those who have been busy throughout this year are also busy now and those who have been longing for orders and struggling continue in the same situation now.
An additional blow for activity in tanneries definitely came with the holidays in China at the start of October. The whole country was on holiday for the whole of the first week of the month. In the recent past, being on holiday has never prevented Chinese business people from being active in the market. We couldn’t find anyone in the trade this time who was reporting any kind of activity from China during the vacation time. Quite the reverse: here and there, there were even people taking an extra day before returning to their factories and their desks.
Since we cannot report anything new or exciting from the activity along the leather pipeline it might be once again adequate to ask the industry how things might go in the near future. Unfortunately it seems that still no real plan B has been developed to deal with the present situation. It continues to be the case that the supply of raw material is not meeting an adequate demand for finished leather.
We have been complaining and warning about this for a long time, but most of the industry didn’t see it the same way, with the majority remaining in ‘hopeful’ mode that things would change for the better. Now, one can easily see how serious the situation at the bottom end of the quality range has become. For this raw material, visits to warehouses, a serious look at order books and at the outlook for leather and finished product manufacturing, things have become really frightening. And although market conditions are not too bad for leather in general, there is no sign for any improvement for the current season. This means the surplus will continue and this means the only choice for lower-quality raw material is to store it or destroy it.
We have said that the general market conditions for leather are not entirely negative. Oil prices are double what they were two years ago and, as a consequence, inflation is slowly beginning to return. In the old days of the leather pipeline, these were always two parameters that were a very strong indicator of a better time ahead for leather. There is no crystal ball that can tell us what is going to happen in the long run, but for the short term no direct influence can be seen.
Getting away from the leather pipeline, several people are discussing the old pre-indicator function of the hide market for the general economy and asking if it will be accurate this time or if the fundamental changes in material use have also changed the conditions in the market in general, meaning the indicator function that hides and skins, followed by leather, always had now can be ignored. In the past there has never been any real scientific evidence, but anyone can check the trends in the hide market and see that they have always been a very reliable indicator of the trends of the general economy. This was easy explained by the general lead time of production and the general cycles in the consumer markets. However, there was always a bit more to it than that and in a way it was sometimes even frightening how reliable the market always seemed to be.
Let’s hope that this time indeed the function doesn’t work, because it has never been as bad as it is now, with a grim outlook on top. If the situation is a reflection of what we have to expect from the general economy in 2019 and 2020, it will no fun at all.
The most frightening subject continues to be the absolute agony of leather demand in mass consumer products. As if that were not enough, the situation in the automotive industry, which has been for so long the strongest performer, has also become more unclear. In the US, the market may have peaked, while in Europe it is dealing with many other kinds of troubles. The German car industry is being badly hit by the emissions and diesel scandals.
Everyone is talking about the new mobility concepts for the future, but there is so far nothing fully convincing in the market. Electric cars still lack the range, and what happens with batteries in the long run continues to be uncertain. All other options are generally lacking in an adequate network for recharging or refilling. This leaves us with growth in the emerging markets and the fundamentally strong performance of China. Demand in the emerging markets could be hit by rising interest rates. The situation in China might be the most stable of all, but nobody knows if that will be enough to compensate for the problems in the other regions.
For the moment, a balance in the market can only be achieved if we consider the destruction of raw material. It has to be said once again, this is a similar situation to the one we have seen in the sheepskin market for many years already. The second option would be a stimulation of leather demand, but no matter how many good reasons we have for promoting the use of leather in finished products, we unfortunately fail to see it any reaction on the horizon.
In better news, and for perhaps the first time in mainstream media, London-based newspaper ‘The Telegraph’ published an article on October 11 questioning the shift by international designers away from leather to plastics. This article included a statement for the defence statement from a spokesperson for Stella McCartney. We can only hope that articles like this one trigger a new discussion and lead to a serious and honest debate about the production and use of leather. The existence and availability of raw material should lead to a fair coexistence between the various materials and not one excluding the others. The ideological exccess of some anti-leather campaigners certainly makes it more difficult to address the subject correctly.
As far as the present situation along the leather pipeline is concerned, we are still living through ‘Groundhog Day’. This means that at the bottom end of the quality range the big problem of excessive stock and diminishing demand persists. Step by step and region by region, the practice of recovering cattle hides from abattoirs is beginning to slow down, if not stop. More and more hides are being destroyed in Europe and more and more rendering plants have ceased flaying carcasses, because there is no adequate market for the hides anymore.
One can see almost every day offer lists from desperate sellers that hold high volumes of low-quality raw material and for them, because they have already incurred costs, the sale at whatever price is still better than paying for the disposal of the hides. So, they are testing the waters without really finding the bottom yet. At the better-quality end, the situation continues to be the same. So far, supply and demand continue to be in a fragile balance, but the medium section of the market is also beginning to feel the pain and the price of hides that are not suitable for use at the very top end is beginning to slide as well.
The situation in the split market hasn’t changed and we think it is not really worth repeating the same story every fortnight. Special material moves, standard material struggles.
What is true for splits and hides is also true for skins. The specialty market continues to run its course and here too there is no argument about leather. Standard nappa garment leather seems to be almost completely erased from retailer activity.
As we enter the winter season, the more we will either solve our problems or dive even more deeply into them. On the supply side, no decline in raw material can be expected. Even with the barbecue season over in the US, slaughter continues to be high and the demand for beef as well. In Europe we are now entering the busy season for beef consumption and only warm weather in most regions has delayed a rise in demand for beef so far. Several of our sources report a high level of slaughter of dairy cows, which leads us to believe that the slaughter rate, at least in Europe and Australia, could be significantly lower from 2019 onwards.
For the moment however, there is too much inventory around and it needs to be absorbed first before we can really think about any fundamental change in the market trends. As bad as it may be at the moment and as grim as the outlook for the short term may be, we continue to believe that there is a fair chance of recovery some time in 2019. It would need very little and only a bit of creativity to bring leather back to the attention of the consumer. We are just lacking the organisation or the individuals devoted to this, which is what could trigger a turnaround.
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