The Leather Pipeline - 20.8.19
20/08/2019
The clashes in Hong Kong have made headlines and are having an effect on the global economy. Hong Kong is much more than just a former colony of the UK and although it has become part of China many still consider it a democratic and capitalistic enclave. Consequently it is not just an internal Chinese issue, it has garnered global interest and it will be an indication of China’s policy on protests. Military forces are training close to the border. If things do not cool down soon, it could spill into a security issue.
This has shifted several other important stories into the background. The conflict around Kashmir, the endless drama of Brexit and troubles in the Persian Gulf are among them. Protests in Moscow and the new government crisis in Italy have also created fewer headlines.
US President Donald Trump has suspended some of his new tariffs until 1 December to make sure that Christmas shopping will not be more expensive for the American consumer.
Politics is having an increasing influence on the financial markets, which are afraid of potential recessions. National banks have lowered interest rates and the US Federal Reserve System is expected to do the same. Injections of liquidity into the markets have triggered more discussions about what this will mean in terms of global stability.
Some believe we could be closer to the next series crashes than we think. Most agree the next crash could be far worse. With the next load of cheap money, politicians and national banks are hoping to push the drama a little bit further down the road.
The German economy shrank by 0.1% in the second quarter and China’s industrial output was the lowest it’s been in almost 20 years. Stock markets fell by between one and 5% around the globe.
Gold continues to trade around the $1500 mark. In view of the potential recession, oil prices are under pressure again and have almost erased all the gains they made since the last drop in June and July.
Mr Trump favours a weak dollar and tries to achieve this through lower interest rates. Although the Fed has indicated further cuts in interest rates the dollar continued to firm and is now slightly below the level of 1.11 against the euro.
Leather Pipeline
The leather pipeline continues to be in holiday mode. Aside from most Asian tanners, industry players continue to enjoy their annual holidays. Slaughter continues and this means that supply goes on, but manufacturing and retail are slow and in the northern hemisphere most of the shoppers are waiting for the summer sales, which will start soon.
Most European car factories are in holiday mode too. The busy people are the maintenance workers or the machinery suppliers installing new equipment.
We will have another look at automotive, which has been a stronghold for leather demand over the past years. Vehicle production has peaked and numbers are falling, but the market has thus far withstood a major slump in sales.
Vehicle sales are being affected by the uncertainty surrounding electric cars. According to some media, most cars within the next five to 10 years are going to be electric, but this is unrealistic. The electric offer is still very limited and are prices significantly higher. Globally, car sales will remain flat.
Most of the premium car manufacturers have a positive outlook for the rest of the year and this is reinforced by several rumours. Sources are reporting that despite the holiday season, the plans for leather in vehicle production are beginning to recover. We don’t see this as a signal of fundamental change, it might just be a trend for selected articles. We believe that the leather pipeline in automotive could be insufficiently stocked for better quality types and significantly overstocked for corrected and printed articles. We have no indication that the trend of substitution of leather in standard vehicles is subsiding.
We have been questioning the cutback of soaks and leather production for automotive which exceed the decline in vehicle production. One could easily justify the reduction by the falling use of leather in cars, but this would only be true in the volume types of vehicles. For the rest, there are only a couple of models where leather is being replaced in favour of so-called ‘vegan’ materials. We cannot see any significant numbers. This leads to the opinion that tanners have been very willingly reducing their inventories into the second quarter. The auto industry did not seem to give guarantees for leather demand after the holiday break.
The dust has settled somewhat, and tanners have realised there is a serious problem with hides and leather sales in the medium-low end. However, premium hides have also lost a bit of their value and they need to be bought when they are available because they cannot be easily substituted. Since automotive leather has a sophisticated pipeline, gambling is not a good idea in this field.
The worry remains the balance. Tanners may look for better quality hides, but you can never purchase just what you need.
The statement applies to all the sectors of the leather industry. No matter where you go, no matter which factory or warehouse you visit, the problem is the same from raw to finish. What to do with the surplus of poor-quality hides, defective semi-finished material, unwanted finished leather and finished leather trimmings? Without an answer, we cannot solve the problem.
The leather industry, alongside the machinery and chemicals suppliers, have spent a long time working out ways to cover natural and mechanical defects in hides. For a long time, it was the aim to present the manufacturer and the consumer with a flawless surface. ‘Defects’ or natural marks were considered the enemy, even though perhaps it was the industry that taught customers to be concerned, rather than the other way around.
Technology did a great job in covering marks, but this will never be as good as the artificial material and certainly not as cheap. We see leather today with finishing that people could only dream of 10 years ago and would have been considered the end of tanners’ problems. But today the number of people buying leather over plastic has unfortunately shrunk and in the global price war, leather with any kind of finishing has lost. This will apply until the superior functionality of leather is rediscovered.
The price of standard leather has fallen dramatically. After the summer break we will learn if global manufacturers, brands and retailers still fancy the material. If they continue to stick to price and production efficiency, we are going to see another tough season ahead.
SPLITS AND SKINS
The split market is quiet. The little flurry for certain suede articles in late spring has disappeared. Most suppliers of splits complain about insufficient demand. The gelatine and collagen segment has been hit by the holidays and we will have to wait until September to gain more insight.
The skin market is also a repetition, with falling prices for new-season lamb skin production in Europe. However, some of the preferred items for double face and linings are selling and prices are just about enough to cover the processing and transport charges. Here it is not necessarily the price that is preventing more consumption but simply the demand for the material. We will have a clearer idea after the upcoming trade shows.
Prices for raw materials are low and we are seeing some replenishment. It started in early summer in the US and is starting for certain items in other parts of the world. Once again, this is not the change. It is just a demonstration that we are not in a 100% situation in all market segments.
By the end of next week, many will be preparing for the first trips to the trade shows and will restart production. September and October will see a lot of exhibitions and might also clarify political factors. The threat of recession is throwing its shadows and cheap money is trying to blow them away. This is what we are going to monitor in the coming weeks and months.
Share this story:
