The Leather Pipeline - 11.06.19
11/06/2019
There has been no shortage of news and activity in the financial markets and in international politics over the past two weeks.
Despite many interesting subjects, everything is overshadowed by the various trade wars in terms of new tariffs and sanctions. Globalised supply chains are suffering because they react to the news immediately without waiting for the facts. Everyone who is in business today can feel the uncertainties weighing on corporate decisions and this is beginning to spill into retail and consumer markets. In countries where the consumer is directly influenced by tariffs and sanctions the people in the street are already trying to work out how best to deal with it. Tariffs can and will make products more expensive and so every consumer has to decide about purchases right now so as not to be hit by price rises later. Since the economy is, to a great extent, about psychology the biggest enemy for consumption and business is uncertainty. And we definitely have more than enough uncertainty at the moment.
With every announcement by Mr Trump he leaves limited lead-time for negotiations, which is in keeping with the limited dimensions of his deal-making world. The next two weeks will be decisive for the global economy. Final negotiations and decisions about tariffs will have to be taken and if they become valid it will certainly cause a pretty negative effect on global business. And this does not even include possible domino effects to follow.
National banks are beginning to realise that the outlook is becoming more gloomy. Even the Federal Reserve in the US has announced that interest rates could be adjusted in response to the situation. In Europe interest rates are being kept at record low levels and the stability of the euro is once again threatened by a massive budget deficit in Italy. With the Italian government not showing much interest in complying with budget rules and sanctions from the EU on their way, Europe too could quickly return to a vicious economic circle. With the present interest policy of the European Central Bank, private savers cannot look towards a bright future for their investments and savings.
OPEC has tried to stabilise and boost oil prices by production cuts, which worked for a while. However, for the time being oil prices have fallen back again on fears about the global economy. Many people are also raising questions about the validity of statistics. Prices for oil dropped by almost $10 per barrel in 10 days.
With all these uncertainties, very low interest rates and high risk for stock and other asset classes, gold has seen a decent recovery. The price of gold climbed by tens of dollars and quite a number of pundits are recommending holding onto it as a decent safety net.
The US dollar was at the beginning of the period considered to be a safe-haven investment and went firmer. However, when the Federal Reserve displayed its willingness to lower interest rates the dollar lost some of its shine and it dropped almost two cents against the euro from the highs of before.
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Thinking about the general global challenges at the moment the serious problems in the leather pipeline look pretty much like a micro-universe. However, we are pretty much in the middle of all the major challenges.
At least in continental Europe everything is about climate at the moment. ‘Fridays for Future’ protesters have caught so much attention that their campaign is presently topping the priority list of politicians and managers. Everybody believes that this is such a strong trend that this has now to be top of the agenda. In a country like Germany the Greens are presently leading the polls after the European elections, in spite of the fact that protecting the environment is only one part of politics and has to be balanced with other interests, as it has always been.
We don’t want to get involved in the philosophical and moral discussions about how and to what extent the world has to change. No matter where somebody is politically located there is no question that a population of 8 billion now and an additional rise over the next decades to figures that could reach 10 billion will be a massive challenge. It has been known for several decades that the success of the human species is a threat to the climate in itself. All those who are protesting today in the developed, saturated Western world should be aware that the majority of the global population still dreams of having the standard of living they have.
For the leather pipeline the subject has to be analysed for different timeframes: short-term, medium term and long-term. It is better to clarify at the very beginning that the times of growth, profit and easy adjustment are over.
Let’s have a look at the timeframes. The leather industry is not very famous for its analytical skills and most companies look after their own interests. Anyway, the short-term situation is actually the dangerous one. We still face a massive surplus of raw material and the only solution seems to be the destruction of this natural resource. It is ironic if you think about it; the leather industry has always complained about raw material prices being too high and presenting that as the one and only problem. All would be good if prices would go lower. Well, we have learned that this is not true. Prices are down, but the balance between supply and demand isn’t there and business is not sufficient. The demand for leather has been declining, against all predictions, while at the same time the supply of raw material has expanded and the pipeline is suffering from huge stocks along the supply chain. Those have to be cleared first and this is really what we think of as one of the biggest headaches.
Everyone is talking about the raw material surplus. Yes, every day more hides and skins are produced in the abattoirs as the by-product of beef production. Certain processing takes place, which is, for the most part, still traditional salting. Our concern is much more on the use of inventories that have built up in semi-finished material, wet blue, wet white or crust, and even finished leather. Here it’s not just about existing stocks, but also about hides being added on a daily basis. Although they can be kept for a much longer time, their lifecycle is still limited. In several countries the disposal in landfill is permitted with special licences. This applies not only for shavings and dust, but works also for full hides and skins. This is not making any major difference. Environmentally this is not a good idea, to say the least. Other ways of destruction such as incineration would require specially equipped waste treatment plants, which are also not available everywhere. De-tanning is also an option to recover tanning agents, but very expensive and realistically only possible with government subsidies. If the present owners are asked to pay for it, it is unlikely that many of them would survive. If anyone thinks this is a strange description of the situation a trip to one of the big tanning centres and warehouses might be enlightening. We must not forget that we are not just talking about full hides and that we need to include splits too.
It’s easy to see how desperately we need to restore demand for leather. Action is required now, because unless there is stimulation for demand, the existing stocks will last quite a while. We are actually very concerned that all the well conceived activities are working far too slowly. They seem to celebrate themselves more than taking action where it is needed.
Medium term, which we consider to be a timeframe of between three and 10 years, we will have to watch and hope for a new balance between supply and demand. Everybody speaks about the great success of the company Beyond Meat, which went public and has in the meantime increased its value by fourfold. Whether or not it becomes a commercial success is not really important because most of the big food companies are preparing the launch of meat their own meat-free products as well. Even beef lovers agree that the alternatives are getting very close to the original. The alternatives will be soon mainstream and, with the skill of economics and falling prices, they will also be successful. As long as the public has no reason to campaign against this kind of industrially fabricated food we have to expect a rising market share for these products and a falling one for meat. For the leather pipeline this means in the medium term moderately falling supply, which could help to rebalance the market.
From the point of view of the production of leather we will also have to watch what the new finishing technology is going to mean. Without mentioning names, the business insiders will know, there are already new technologies on the market that are able to handle all kinds of grain defects in one production flow. There are hardly any restrictions on what the finished leather should look like. Cutability will be raised to the maximum and the lowest-quality raw material can be used. This will make the yields of leather and the price definitely far more attractive, but in particular breathability is less than brilliant. This means leather will look nice, but in the end it will continue to be in a direct battle with plastic, which it is going to lose if we cannot preserve or improve the image status of leather. However, these options will certainly improve the competitiveness of leather and help it recover some market share.
When we come to the long-term view, and that means beyond 2030, it is definitely all a bit like checking the crystal ball. However, if the fundamentals work we should see declining meat production and a higher rate of substitution. Consequently supply of animal by-products will shrink, which will allow what remains of the leather industry to focus long-term on the exclusive image and performance of leather again. In the end, this will mean making leather natural again.
Everyone could and should agree on the fact that immediate action has to be taken and there is no time to be lost.
In the meantime, the day-to-day situation in the market has not changed in the past two weeks. Prices continue to fall and if you love horror stories there are plenty of them in the leather pipeline at the moment. The US is reporting for almost a month now pretty impressive export sales numbers. Some people are questioning them and believe they are wrong and others see it as a signal that the big players with sufficient cash resources are making offers that their large customers cannot resist. Everybody agrees that these deals are not a reflection of leather demand, but rather a speculative gamble on better times to come with most of the hides adding to the semi-finished inventories already existing.
The number of hides already going for destruction is now quickly rising all over the globe wherever the cost of collection and processing no longer covers the returns.
The split market is a copy of the hide market and so we don’t have to make any additional comments. Niches and specialities can still make it, but that’s it. The only thing we are really monitoring now with great interest is the next step in the collagen and gelatine industry. In particular in Europe and in China, a reduction in the production of lime splits and trimmings has had a sharp impact.
The next two weeks we will see most likely the final decision on tariffs. Mexico and China play such a massive role in business decisions that whatever happens will have a strong influence on what is going to happen next. The seasonal pattern in the leather pipeline is clear and not much will change.
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