Leather Pipeline - 26.11.19
26/11/2019
In these final weeks of the year 2019 not much new has happened, but the tensions already in place have intensified, with people hitting the streets and displaying their anger in places where they are allowed to do so.
In many places the concerns are economic, mostly over the gap between haves and have-nots; in other places it is about freedom and religious conflict. Marking the present unrest on a global map it would not be smart to ignore this. The rising influence of populism and nationalism and the successful politicians creating and riding these trends threatens global peace and balance. Autocrats can wait until democracies forget to protect freedom locally and in their foreign affairs. In many countries of the free western world the understanding that freedom must be protected in all directions is fading, with the focus of national politics solely on domestic success. The biggest problem is the widespread and successful ‘our country first’ strategy; this is possibly the biggest threat to peace and freedom in the western democracies.
A second big subject for the future continues to be the low or negative interest policy which continues in the world of finance. The parallels to drug consumption are huge. What was used as an emergency cure in the financial crisis has become a drug, with all the side-effects clear to see; the dealers are the national banks and politicians. As usual with drugs, if you don’t stop early the later exit is accompanied by ‘cold turkey’, at least as long as no new medication has been invented. That’s what they are all waiting for and, in the meantime, the drug is needed in higher doses. This is curing the symptoms and not the cause and works much better for those who have access to the clean and good stuff (wealth and big national budgets) and much worse for the ones who get the bad, dirty stuff (poor and middle class households). It will destroy all of them in the end.
The parallels continue, because more of the drug is needed with the massive expansion of debt since 2008. If the medication had been used for curing and reducing debt, the drug (money) market would shrink and the disease be cured. If all this is right or wrong, time will tell. So far it is an untested and unproven theory, but in the meantime the reality of the drug market applies, from the producing cartel to the user with everyone playing a role.
So far, the medication is still working. The financial and property markets continue to stay stable and close to record levels. Oil prices firmed slightly in expectation of further production restriction and most other markets continued to stay in the very narrow and established ranges we have seen for a while now. This includes the value of the US dollar.
Market Intelligence
The leather pipeline has entered normal seasonal mode. Activity is rising and production is at the levels needed to cope with the leather orders that have been placed for the season. We will see fluctuations in business over the coming three months, with holiday periods in the western world and in Asia. The Lunar New Year festival comes relatively early in 2020 (January 25), which is good in a way because it compresses the time of lower production into a shorter period. Consequently shipments to Asia will take a break from the end of this month until the middle of December, bearing in mind that shipping times should be between 30 and 45 days from port to port. The shipping lines themselves are dictating the product flow in the pipeline as well, because everybody who is in business these days experiences the adjusted schedules when trying to book shipping space at the moment.
In Europe, where production is much more based on just-in-time deliveries, the break this year is mostly going to take two weeks. Week 52 in 2019 in week one in 2020 are mostly taken as a full holiday period by the tanneries we have been talking to. With the Christmas holidays this year falling right in the middle of the week, slaughter will be significantly reduced and this makes it much easier for the abattoirs and processors to adjust their just-in-time deliveries. In week two productions are going to resume and already today a number of suppliers are trying to get the green light for deliveries early in the week so as not to be the last one in the queue after the holidays. However, all in all, the holidays this year are definitely more convenient for the whole raw material supply industry than in many other years.
Discussions around the automotive leather industry continue. Despite all the problems and discussions about mobility, engines and the global economy, car sales have stabilised and in various regions even slightly improved. For the year 2020 we will see a lot of the old school car brands hitting the market with their new e-models. This applies mainly to China and Europe. Here politicians are pushing this kind of mobility concept aggressively and subsidising it wherever they can. However, customer reaction is difficult to predict. Car manufacturers have very little choice. The emission laws are forcing them to reduce emissions by so much that they have no choice other than to massively and rapidly expand production and sales of battery driven vehicles.
At the same time some of the enthusiasm around e-mobility is already beginning to fade. The superficial analysis on its effect on overall emissions, made a few years ago, is beginning to show some cracks. It is an extremely complex question and it is a multilevel and multidimensional problem. Battery production, the raw material resources required, recycling in comparison to advanced technology of the existing carbon engine don’t lead to a simple, one-sided conclusion. The penetration of e-mobility will still take quite a bit of time and, for the leather industry, the key questions still centre on how vehicle manufacturers are going to perform in general and if the new mobility concepts will also influence the buyer in terms of interior design.
At this stage the automotive leather industry has to be well prepared for a decline in leather consumption in the car interior. This is less related to the mobility concept than to the ambitions for cost saving, accelerating production cycles and easier manufacturing in general. We have tried to discuss this with automotive leather producers, but they have been very vague in their comments regarding what they know about the future of materials and their businesses.
For the moment the market for automotive leather seems to be in a state of consolidation. Wherever you go, production is increasingly focused on better articles and selections. Corrected grain types are still the bread-and-butter in this field, but manufacturers are doing everything to avoid lower selections. There are different strategies with some trying to improve on raw material sources, while others consider to emphasise purchasing better selections only.
Whatever we think and whatever we do, the supply mix is dictated by beef demand, where the beef is produced and where and how cattle are raised. With rising demand for beef, production has risen too, mainly in the countries and origins where more commodity types of raw material are produced. Consequently, the supply of low-quality hides has expanded while, in the premium origins, the kill is stable at best. This is not only keeping the general market out of balance, it continues also to be a massive problem for the lower selections deriving from the slaughter in Europe, for example. This means we continue in the same cycle: without an expansion in leather sales, lower selections will continue to struggle.
This requires new ideas. There might be great progress in finishing technology, but we don’t think that at this stage better finishing will entice the consumer to buy more leather or, even more importantly, invite manufacturers to use significantly more leather. It will work to a certain extent, because the general economic result with optimised finishing technology is shifting a things a little more in the direction of leather. This means some brands might be willing to reduce the plastic content in their products and to increase leather consumption a little. However the manufacturing technology, in particular in the shoe industry, makes it more of an ‘either-or’ discussion.
For this production season we can’t expect any new direction but we are sticking to the opinion that more creativity and intensified communication between leather users and leather makers could result in a breakthrough for leather again. For those who do not consider their marketing to be sufficient by putting a ‘vegan’ sticker on their packaging, leather still has plenty to offer.
The raw material market is bringing no real news at the moment. It has sorted itself out and prices have stabilised wherever product can be sold; some of the valuation gaps had been closed too. The surplus situation has eased a little, because the active winter season requires more raw material and hides that have no commercial value are being redirected either into waste or into alternative uses.
This means for the moment that whether the market is in physical balance or not, both sides of the table have taken clear decisions: not to test the market by too much and to accept the situation and prices as they are. Sellers are trying to get more money but find stubborn resistance from buyers. If prices could stay where they are until the end of the season it might give the entire industry the necessary stability to focus on the future. There are always some who will try to play with fire and we can only hope that they will not be successful.
The split market continues to be in the same paralysis as hides. Prices don’t change much, the hype in China for gelatine seems to ebb a little, because supply is getting better and in Europe the process of redirection and adjustments between supply and demand between leather, gelatine and collagen use is not finalised yet. But here too the big fears are behind us.
The skins market continues to struggle. There are still successful niches, but in several parts of Europe, for example, the abattoirs are having to pay to have skins removed. We have seen so much garment leather on the catwalks this year and the fashion magazines are full of leather jackets and other garments, but as has happened many times in the past, it doesn’t seem that the material is going to catch the attention of the big retailers or online platforms. Leather look yes, but leather use, not really. We understand that a lot of product managers would love to bring some leather back, because retro fashion and a return to the 90s looks would be popular. Many of them are also thrilled by the beauty, touch and feel of leather, but they are being stopped by commercial management teams that see leather as more of a risk than an opportunity.
We are now heading quickly towards the end of the year. The coming two weeks will be the last ones with full and regular production before the industry in the western world begins to wrap up. Beef demand in Asia is keeping the kill in the Americas high in their lower seasons. In Europe we are going now to enter the highest slaughter period in preparation for the Christmas season. With the increased price of pork, there is also a bit more room for beef sales too. We expect a pretty strong slaughter in the coming weeks, and with the present demand for and interest in the better end of the quality range, we would be surprised if the hides fail to find a home. Fundamentally we should expect another fortnight of relative stability, with the proviso that there are no interested parties who, for whatever reason, would like to see the stability disturbed.
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