The Leather Pipeline - 08.01.19
08/01/2019
The first edition of 2019 must start with the best wishes to all our readers for a happy, healthy and prosperous New Year!
Since our last edition just before Christmas, not much has happened. The wrap up of last year and the forecasts for the New Year have been made and circulated. We tend to think that the forecasters have become much more prudent and much less aggressive in their predictions. Apart from a much smaller range in the extremes for price and index targets, one also senses that many have become much more cautious about the future of the global economy.
At the end of 2017, most people still took a very positive view. Low interest rates, a cheap and abundant supply of money and very positive statements for corporate earnings meant many investors were very positive. The beginning of 2019 is painting a different picture. After a year-on-year decline for most stock indices, the New Year also began with negative news.
Most stock markets opened with further declines and not many stock picks were recommended as a positive investment for 2019. Companies handle negative outlook very carefully so as not to scare investors away, but one senses that CEOs are entering the New Year with a lot of talk, but not too many positive hard facts that suggest growth or profits The rebounds at the end of the first week need to be analysed to check if this was just a hiccup or a demonstration that investors are not so negative and that a market crash can be avoided.
China delivered a negative start to the New Year with the indices for business sentiment and purchasing managers falling below the critical mark of 50. This is generally considered to be the line between expansion and contraction of the economy. The indices fell across the board for both small and large companies.
In general, the trade was between China and the US is being blamed, but this might be just one reason as consumer spending and investments are also shrinking on the mainland. China’s President Xi has again stressed that Taiwan is a Chinese province and that re-integration is being considered among the options.
In Europe, the New Year started with falling stock markets and a decline of the IHS industrial purchasing manager index. It fell to 51.4, the lowest level for almost two years and 7 points lower than a year ago. The government shutdown in the US, which has been in place since before Christmas, is also weighing on sentiment with several analysts afraid that under President Trump the normal routine of shutdown, compromise and re-opening could be broken. However, the labour market continues to perform strongly, with more than 300,000 new jobs created in December.
The oil price has continued to decline, reacting to the possible slowdown of the global economy. The slide was reversed at the end of last week thanks to easing concerns and the effect of production cuts by OPEC. Gold, on the other hand, began to prove a safe haven again, rising moderately as concerns grew.
We have come to the conclusion that the global economy is still in a reasonably healthy state but that many have been spoiled by the risk-free growth we have seen for so long. Politics have become dictated by egos. We are no longer facing conflicts, but the big egos dominate the headlines. Growth and private spending have slowed after many positive years with strong labour markets in many regions. Europe is weakening, with more nationalism and uneven economic trends. Added to this are the unclear consequences of Brexit.
Market Intelligence
Not much has happened in the past two weeks as most of the world either took holidays or had a period of low activity. For the leather pipeline, not much has happened since our last edition. It has been a very slow start to the New Year with the majority of the Western world only really returning to their desks on January 7. As a result, we can dedicate more attention to the general outlook for the coming year.
The statistics show that beef production didn’t decline in 2018. The number of beasts that were killed is a couple of per cent more than in previous years. There are some areas and regions that are reporting minor reductions but the overall number is up. This is remarkable when we think about how the global community is promoting vegetarianism and veganism. Looking at the situation from a European perspective, one gets the impression that there is a wide gap between the media campaign and the reality.
The anti-beef campaigning, which also impacts leather, is massive. If you didn’t see the expansion of burger restaurants and steakhouses, you would think everyone is going to become a vegetarian very soon. The behaviour of the normal consumer speaks a totally different language, at least as far as food consumption is concerns.
In regions like the Americas and Asia, one cannot trace any sign of a willingness to reduce beef consumption. Whether this is welcome or not, every indication suggests that the consumption of meat and beef is not going to decline, at least for the next few years. The logic consequence is that we have to expect more hides and skins to be produced and to become available to the leather industry.
This would have once been considered good news for the leather industry, but it is now a burden instead. We are producing more raw material than is needed for the quantity of finished leather products that consumers are willing to buy. People eat more meat because they like it, but they don’t wear more leather shoes, because nobody has been able to develop the same satisfaction as an alternative to artificial materials.
Some say it is because of price, but in the end the answer is very easy. Manufacturers prefer easier manufacturing and far better margins, while the number of consumers who purchase based on ‘value for money’ has shrunk. Rising income and strong labour markets have made shoppers less concerned about quality and happy to purchase faster and more. Instead of buying one product that lasts, the average consumer is happy to buy quicker and cheaper, with no intention of using the product for a long period of time.
This does not just apply to shoes. Who needs a new smart phone every year or two? Who needs so many garments from the fast fashion chains? Who needs a new pair of plastic sneakers every three months? It is a classic reflection of prospering economies where people no longer worry about future income.
Consumer education
In any case, if the global consumer is not yet willing to dump meat from the plates then the same consumer is still willing and ready to buy leather products, if they are offered and if it is explained why they should be considered.
Under the present conditions it is difficult to promote a material like leather. The durability, the value and the functionality are not considered and the consumer is not being educated that it is a natural resource that would otherwise be destroyed. Only a change in consumer attitude would force suppliers back to leather again. Until then, there is no option but to work hard and to take every opportunity to bring leather as a material back to the attention of the average consumer.
The good news is that the niches are still performing very well. We also have to talk about the great success of leather in the luxury sector. We have lost not only the brand, the design and the image, but also the material which qualifies a product. We have to transfer this message to the buyer. This is what the leather industry and manufacturers have destroyed by making leather look and perform more like plastics. The consumer doesn’t recognise the material anymore, so why should they bother. The industry hasn’t accepted that in order to secure sales of leather for the next season they have surrendered to requests from manufacturers to produce ‘the lowest headache’ material possible.
Unpopular opinion
We also have to consider a different trend. Many in the international leather manufacturing scene believe that traceability and animal welfare play a big role in the marketing of leather. It takes up a large amount of management resources and shifts the focus in the leather making industry. We know this isn’t a popular position, but we consider this to be a waste of time. The respect for the creature is not something that needs to be talked about. The beast is slaughtered as a result of demand for beef. To target leather is pointless.
Standards around the globe are completely different; what is requested by OEMs is simply to cover what they consider to be dangerous for their image. They are simply afraid of becoming a target for campaigns with their final products. The logic is very simple: leather is a by-product of the meat industry. If you can no longer sell leather and the industry dies, it is the farmer who suffers. A natural resource should never be wasted, under any circumstances. Stop making excuses and be proud of the product you make.
If there is no meat of beef consumption, then leather production also disappears. However, trying to kill the monster by stepping on its tail is naïve.
Splits and skins
The split business has also fallen into agony. The serious cut of regular production and soaks in Europe has started to affect the supply of the regular gelatine and collagen producers. It has had no extreme impact yet due to the Christmas break, but plans have to be made for January and February. In the leather industry, the problems remain the same as for grain and regular leathers.
In the skin segment the situation remains unchanged. Specialities remain untouched and run their course. Light weight, fine wool and specific skins for double face, shoe lining and top end nappas continue to find enough buyers. For the rest, the problems rise again and in Europe the larger winter lambs with heavier pelts begin to face serious problems again. In several countries the price has fallen back to zero and more skins are being destroyed.
Questions to answer
Over the next two weeks, the industry should return to normal gear in the Western world while Asia begins to prepare for the Chinese New Year break. This will affect nearly the entire region. As a result, we will have to wait and see what the coming weeks offer.
How much will leather production recover? What will be the results of the upcoming fairs for upholstery and shoes? How will the beef industry deal with the market conditions? How will EU prices react to the global situation? How will the general trends in global economics and politics affect consumer spending? Have Asian tanners got sufficient raw material for after Chinese New Year or will there be a flurry of demand before they depart? It is enough to be ready and sensible for the weeks to come.
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