The Leather Pipeline - 02.04.19
02/04/2019
The past two weeks have been reasonably quiet in the world of finance and politics. The only exception is possibly the continuing drama in the over Brexit. The best screenwriters in Hollywood would have found it difficult to come up with a more entertaining soap opera. The only unfortunate side-effect is that this is, unfortunately, real. It is just another example of what can happen when politicians are more interested in their own egos than in the nation and the people. Although nobody knows what the final decision or consequences are going to be, UK politicians have definitely failed to protect their people from a bad outcome. Also for the rest of the world it remains completely unclear what is going to happen next and what the extent of the negative consequences are going to be for people and businesses who have relations with the UK.
Other than that, we learned from the US Federal Reserve that they are holding interest rates stable and postponing any possible further rate-rises into 2020.The Fed considers the present status and trend of the US economy to be uncertain and the time not right for putting economic brakes on. Consumer spending rose in January only by 0.1 %, but at least consumer sentiment rose by 4.6 % in March.
In Germany the labour market continues to be very strong with unemployment falling to 5.1%. This came as a positive surprise since the engine of the European economy is presently facing a number of issues in core industries, in particular in the automotive industry.
In Turkey is president Erdogan is struggling with the economy and in local elections. The value of the Turkish lira continues to be under serious pressure and the national bank is struggling to stabilise it. Elections are also going to take place in other countries in the near future; the most important ones could be in India and the Ukraine.
The trade talks between China and the US are continuously said to make good progress, but so far any kind of public confirmation is missing and it remains completely unclear what the final outcome is going to be.
Stock markets have traded mostly in a sideways range, as did most of the currencies. Although gold and precious metals were pretty much promoted as an investment, their price trend was mainly downwards in the past weeks.
Oil prices continue to remain very stable and trading is at the upper end of the recent trading range since the sharp rebound after the plunge into January 2019. President Trump is trying to get OPEC members to raise production to keep prices under control, but so far this hasn’t had much influence. As usual in today’s world the developments in Venezuela have already lost quite a bit of the global media attention although the final outcome could have a major influence on the oil market.
Market Intelligence
The leather pipeline behaved as expected over the last fortnight. Most of the global trade returned from trips to Asia and the visit to the APLF exhibition in Hong Kong. The show in Hong Kong continues to be the midway point between the busy winter season and the slower summer season in the leather industry.
Traditionally, production begins slowly to fade into the summer holidays in the northern hemisphere. Starting in April and May, this slowdown generally decelerates further in June and July to end in the paralysis of production and most people going on summer holidays at the end of July and for the major part of August. We don’t see much of a change in 2019, with the only difference that the level of activity we are starting with is already substantially lower than what it was in the past.
Everything has already been said about the shoe industry and the decline of the importance of leather as a material in shoe manufacturing. We have to look at other sectors for any potential changes. What we see at the moment are two extremes. On one side we have slowing car sales and a very uncertain outlook in the car industry. Superficially everything looks like business as usual and, even in the past weeks, new models have still come into the showrooms. However, with the long cycle of development we are seeing now what was decided several years ago. Consequently the vast majority of the cars continue to be SUVs with traditional engines. Car sales continue to be depressed almost all over the world and in particular the markets in China and the US continue to underperform. The uncertainty of consumers in western markets about the future of individual mobility continues; this is making people postpone decisions about their next car.
However, as depressed as the general mood may be at the moment, car sales may drop but the extent of decline will, in the end, be limited. What we see at the moment is a correction in production as a consequence of the over-ambitious growth plans that most of the international car companies drew up. This means that the present reduction in demand for automotive leather is definitely being exaggerated on the downside, just as it was exaggerated on the upside until the summer of last year.
When we assume that the decline of vehicle production is going to be within a reasonable range we have, at the same time, also to assume that the demand for leather in this pipeline will only decline in the same range (as long as the automotive industry does not walk away from the material). This can only happen when new models and interior designs are decided. What is going to be put on the road in the next year or two is mostly already decided and it is unlikely that leather demand in the automotive industry is going to be influenced, except by the volume of units produced. It is difficult to get a clear picture of what the car industry plans to do next. It may have to surrender to public opinion. The change to electric mobility seems to be unstoppable, although there are plenty of arguments to believe that this is not the only alternative, or even the best one. However, most of the global car companies are focusing on e-mobility and have given up defending and fighting for traditional engines.
At the same time, it also becoming chic to play around with the ‘vegan’ argument, used in so many consumer products these days. No matter what the general position is, some marketing managers have decided that only ‘vegan’ will offer growth potential and sales. If it’s needed to meet sales targets, companies will follow it, no matter if it’s right or wrong, if it makes sense or not. At the same time, it should not be under-estimated, as many people in the leather industry seem to be doing at the moment. The fear is real, but the growth potential is only from a very small group. If you look at the world as one, the percentage of consumers really making decisions based on a product’s ‘vegan’ credentials is still small, but companies may still want to offer that option and this is the risk.
Whether the leather people like it or not, we have to be aware that serious discussions are going on, in combination with some prototypes to check what would happen, just in case. As long as leather is a strong profit generator the pressure may not intensify as much as many people are afraid. But we must also accept that leather is not a material with a very large fan-base when it comes to finished products.
On the other side of the range we still find strong performers. Just last week one could read another article about the success story of leather handbags. For the luxury brands handbags made from leather continue to be one of the biggest cash cows ever seen. All of the big brands continue to expand their manufacturing capacity, either in France or in Tuscany. Buyers all around the globe raise no questions about leather if the profit margins from a well made bag, in combination with the right brand, is simply too inviting. All the big brands are expanding manufacturing, realising that their customers are still willing to spend and to buy more. Consequently more money can be made, which is attracting more companies to try to win a share of the market and of the profits.
In this segment, alternative materials (in particular all kinds of plastic) don’t play any role, except in the copies. The only way to distinguish your brand from the competition is to use top-quality, distinctive leather. With the brands continuing to expand into the supply and manufacturing chain, the risk of any sudden change is relatively small. Variations and declines in demand can only be expected if global consumers change their minds and close their wallets.
We should learn from this and, although you cannot transfer the marketing logics from the luxury sector into mainstream, it should still teach the leather industry how to manage current problems: make sure leather stands apart from the alternatives. The more successfully producers of artificial alternatives copy leather, the more the leather industry must do to develop new articles that distinguish leather further. This cannot be about using more finish and more corrected grain; these options have become so widespread only because of blackmail from finished product manufacturers, whose main focus is cutting yield.
The general activity along the leather pipeline has been pretty subdued over the past two weeks. People were returning from their trips to Asia. Most of clients there will now have seen their suppliers and had their demands satisfied. This, traditionally, does not leave much activity for the weeks immediately following. We have also to take into consideration that, with the end of the first quarter, activity along the supply chain begins to dwindle in the run-up to the summer holiday. It seems that we are pretty much in the same pattern also in 2019.
The big difference this year is that we have to deal with a situation in which the raw material market continues to be well out of balance, with supplies exceeding demand. There may be an exception here or there, but fundamentally almost everyone who produces or markets hides and skins at the moment is struggling to clear what is being produced.
The split market continues to have a few isolated areas of interest. Despite being still in the same situation as the general hide market, we still see several sectors that are doing better than one would expect. Athletic footwear and fashion brands have been placing orders for cheap suede and it seems some vintage styles are back on the shelves. This has to be considered as good news, because it shows that the designers and the marketing departments see sales potential in leather as a material again. Let’s hope that their ideas are rewarded with sales and it might create some more initiatives to use leather in shoe production again, before more of the factories that can still make leather shoes disappear.
The skins market continues to be as compartmentalised as the other raw material markets. We continue to dump a significant portion of the production of skins at the moment. From the UK to New Zealand, from Africa to Eastern Europe certain types of skins, which are mainly only usable for nappa and leather linings, continue to be sent either into rendering or into landfill. Fine and dense wool skins still find enough demand in high-quality shoe linings, and certain origins continue to be fancied in the interior design sector and for high-end accessories and garments. All of these still find sufficient demand and acceptable prices. Those producing these skins will be pleased, while others will continue to struggle to avoid too much cost from getting rid of the by-product.
For the coming two weeks we can’t really expect any change in the general situation. In North America the barbecue season will start, and demand for beef in Asia will continue to be high. In Europe, slaughter will begin to go down. However, raw material supply from the beef industry will continue to be high in the second quarter. It is unlikely that, with seasonal trends and the general market circumstances, raw material supply can be absorbed by the tanning industry. The simple economic consequence is that, for the majority of raw material, the surplus situation is going to persist. Lower prices have failed to stimulate demand. The struggle will continue and suppliers around the globe might be forced to think about alternative plans.
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