The Leather Pipeline - 28.5.19
28/05/2019
The world of finance and politics continue to supply exciting news – although it’s debatable if this is good news; we would say it’s pretty frightening.
On the political front, two topics are dominating. One is the confrontation in the Persian Gulf and the other is the trade war between China and the US. Other big issues include the difficulties surrounding Brexit, which contributed to the resignation of the British Prime Minister Theresa May; the European, Indian, Indonesian and Australian elections; the political scandal in Austria; and the ongoing problems in Venezuela.
To blame the conflict in the Middle East on the tensions between US and Iran would be too short-sighted. It is a multi-faceted problem which includes Israel, Saudi Arabia, Turkey and Egypt, and is a fragile and dangerous situation. There are many players involved and it could intensify much quicker than people think. The world underestimates the risk, dismissing it as a localised problem.
Similarly, the trade war between the US and China is not merely a question of the trade balance between the two, but also concerns international security. The US seems to be focusing all its efforts on China; Russian hackers appear to have fallen off the agenda.
It is surprising that the price of oil hasn’t increased, and in fact it dropped a little. The global economy is seemingly more important than the supply risk from the confrontation in the Middle East.
The Japanese economy grew in the first quarter but in China retail sales and industrial production slowed. The European economy did not perform particularly well. Stock markets dropped, although mainly due to isolated drops of individual stocks.
The US dollar firmed a little, attracting investors with reasonable returns.
The price of gold continues to be glued within the $100 range.
Market Intelligence
Monitoring the leather pipeline is not much fun. Our regular readers will know we have been worried about the situation for a long time, for good reason. We felt pessimistic, but even we did not anticipate what we are seeing now. The surplus in the raw material markets has become frightening and we must acknowledge that things could turn worse before they get better.
There was an old saying in the industry that a hide would never be wasted or dumped. Well, we know now that this statement is wrong. Just because something was true does not mean it will stay true forever.
The biggest problem was that nobody took the risk seriously and despite all risk management and forecasts, nobody had a Plan B. It was even unpopular to mention today’s scenario. The reaction was generally ignorant or arrogant and that was mainly from the beef industry. We still know people sitting on piles of hides who believe the trend will change. Let’s hope they are right.
The industry is beginning to face the situation that hides are now going to waste and players and producers are starting to act. One of these actions is to stop collecting or processing hides and skins, a situation which is happening in the Middle East, Africa and Oceania. In many countries, renderers are not flaying the carcass, because the revenue doesn’t cover the cost and there is no market for the material. Everybody in the pipeline may regret to see raw material being wasted, but limiting supply is the only realistic way to solve the problem and to find a new beginning.
The beef industry is starting to worry and in regions where value is low due to quality and supply is high, alternatives are now being implemented. The vast drop in full hide values has squeezed the spread of the revenues by so much that the suppliers must try to reduce supply to the leather industry. The general concept to trim everything that cannot be used for specific leather productions as early as possible is a big step forward. This prevents waste along the production chain and the dream of many tanners to maximise cutting yields by reducing unusable input is beginning to be an option.
We must take another development into consideration. The African swine fever which is spreading in China and across South East Asia has led to a huge amount of pork being imported from other regions. Pork prices are booming. Since China consumes the entire animal, the balance of meat and by-products in many countries is also affected. It does not appear that the culling of animals in China will stop soon and the replenishment of the population will take some time.
The supply for lime splits continues to shrink due to the sharp decline of lime split leather production, something that pundits did not predict.
All the above shows us all that the old rules no longer apply, we have to create something new. There isn’t one solution that fits all and this makes it particularly difficult to decide what’s best. It seems obvious that the entire supply chain, from beef industry to finish product makers, needs to sit down together because the analysis of cost and waste savings, production needs and finish product markets are different and the solution can only be found in common discussions.
The pipeline is not used to this and we have seen big corporations acting with close partners, but not along the entire supply chain.
On the positive side, the surplus of supply is easing the competition for material. Everybody can consider that his interest can be economically met. We cannot remember even in previous cycles when raw material was in abundant supply and cheap. At that time, nobody was paying any attention to alternative solutions, because everyone was convinced that such a situation would be short lived and it would not be worth spending too much time and effort working on new strategies.
Another argument for cooperation is the massive demand for sustainable products. We would say that leather is a sustainable product already, but we have learned to our detriment that this is not the view of the mainstream media and public. We still have to explain that hides and skins are a by-product of the meat industry. However, if we can prove that we are wasting almost nothing, and that many sustainable products are made from the hide, this would definitely help.
The situation along the leather pipeline is more than problematic. The trade war, the grim outlook for the global economy, the decision of consumer product manufacturers to go for plastic due to cost savings and the high kill levels have created a lethal cocktail for raw material.
We have said many times that price is not the overriding factor and not many people were willing to understand that a year ago. Oil prices have been up since beginning of the year, but they are not moving further despite all the tensions in the Persian Gulf. Consequently, we cannot expect plastic prices to rise. Whether campaigners will understand the situation and stop their aggression towards leather is unknown.
Raw material prices continue to fall. Many tanneries are reasonably busy. However, this is not enough to use up all the raw material and the industry is now happily selecting the best options from their suppliers. This means that several suppliers are still able to sell a good portion of their production.
For others this means they can find hardly any buyers, no matter the price. Even the premium products like veal and heavy quality males must adjust.
The nightmare continues in China. Business in China is poor and the shift of production to India, Pakistan, Vietnam and Thailand is not yet strong enough. We are now in the low season, the summer holidays are in front of us and beef demand plus profits for the major producers continue to be favourable.
The split market remains difficult. Except specialties, demand is not good and many people report large stocks of wet blue splits. Lime splits in Europe continue to move and prices are firming. Demand for various items outstrips supply, prices are expected to move further upwards and relief is only expected from the summer break.
The skin market remains as difficult as it has been for a while. The usual early season price uptick for new season lambs is behind us and prices are falling again.
Demand for decoration skins from Poland is also faltering. There are not enough takers to absorb all the skins even at the below-cost price.
We have no reason to believe anything will change for a while. The entire concept and use of hides and skins needs to be rethought. There are so many arguments why people should buy leather again, but we will need to start from scratch, working hard to persuade designers, environmental groups, the media and the consumer. Without this, we fail to see any recovery in the short term.
Share this story:
