Leather Pipeline - 07.01.20
07/01/2020
Last year, 2019, offered many headlines mostly related to politics. The financial markets showed a surprisingly limited volatility and the amplitude of price fluctuations for the main indices, currencies and commodities was smaller than in any year we remember.
Few of the political events that we saw in 2019 had any direct influence on the leather industry. We cannot remember many years with so many protests and riots. From South and Central America to Hong Kong, from Europe to Africa, almost everywhere people took to the streets to display their displeasure. The reasons were different: social tensions, issues of freedom and liberty and the climate were the most important.
In politics the most influential subject was certainly the trade war between China and the US, which was part of a rising trend towards protectionism and nationalism. Brexit was certainly the number-two subject, in particular for Europeans. Only the UK general election in December brought some on how the separation between the UK and the European Union is going to progress.
For the leather pipeline anything that hits private consumer spending is no good, but in particular rising protectionism is bad news for the hide, skin and leather trade globally.
In the financial markets, politics did not make a big impression. With all the trouble for the leather pipeline in terms of demand, nobody could complain about strong influence from the currency or commodity markets. The largest bounces affected sterling, but all other markets, including commodities, did not show any major variation, which could have had a problematic influence on calculations and global trading.
The period of low interest or even negative interest rates continues. It remains an experiment with no experience or reference, which is intensifying discussions among experts about the final consequences this period is going to have. On the one hand we have experts who consider the endless flow of liquidity and rising debt as nothing to worry about. On the other hand, a number of experts see low interest rates and the endless flow of liquidity as toxic medication that will lead the global economy into the biggest collapse and crash ever. We will learn in the next decade who is right.
Market Intelligence
Last year was probably the worst year ever for the leather pipeline. The writing was on the wall at the end of 2018, but the reality in the end was even worse. For the first time ever, the leather pipeline lost confidence in the future of leather and as the year progressed, the clearer it became that things were different.
Demand and price fluctuations have always been considered to be temporary. Leather was always a basic material and the demand for raw material and leather would swing with the conditions in the consumer markets. What was different this time was that we had consumer spending at very high levels but a shrinking demand for leather. Yes, we know it was not a uniform trend across the entire range of leather types and finished products, but for the main part of the industry this was the situation they had to deal with. Simplifying and summarising, 2019 presented the leather industry with the bill it needed to pay for a good deal of ignorance in the years that had gone before. In short words, artificial alternatives got better and closer to the original, while the original continued to lose its identity and, for many reasons, the finished product manufacturing industry was happy to kill the real identity of leather.
In the end, all is a matter of economy and commercial success. If the consumer can no longer distinguish between the original and the copy, manufacturers, brands and retailers have all the aces in their hands and in many cases they will simply decide in favour of the cheaper option. The vast majority of consumers around the globe are willing to spend the same amount of money on a plastic product as they had to spend before for leather one. Large brands have been quite happy to take a great opportunity to make their manufacturing lives easier, speed up the supply chain and widen their margins.
Many were happy to blame the anti-beef and anti-leather campaigning for the trouble of the industry. However, the roots of the problem were there long before discussions about the Amazon rainforest and global demonstrations about the climate change began. It is true that several organisations took the leather industry as a hostage against the beef industry. Until today they fail to understand that not a single cow less is going to be killed if you campaign against leather. The facts are so obvious that one has really to wonder what the real intentions of these organisations are.
It is almost cynical that we have reached a market situation of which most of the global tanning industry was always dreaming of. Raw material prices at record lows and abundant supply. That was really what the leather industry was always looking for and so many tanners had been of the opinion that they should be rewarded for taking a waste product away and adding value to it. This statement was always extremely popular when raw material prices had been very high and nobody had ever been considering a situation where cheap raw material prices could meet and sufficient demand.
To make things worse 2019 has also been one of the years with the highest cattle kill ever. Beef consumption remains very popular in many parts of the world. African swine fever in Asia continues to spread and has added to the rising demand for beef. Import from the Americas and Australia continue to rise, so slaughter and the supply of raw hides have gone up too. Many hides from these origins are not of high quality and this resulted in a massive build-up of inventories in the second and third quarters, which didn’t find any home.
In the last quarter of the year the seasonal rise in leather demand revitalised some interest for raw material again. The uncertainty in regard to the trade war and tariffs had tanners, in particular in Asia, refraining from purchasing sufficient raw material in the summer and so they were rushing to replenish from October onwards. This was about clearing stocks because large volumes sold far below processing cost. Big stocks of wet blue material in China and very cheap offers of low-grade material from South America found buyers; the prices could compete easily with plastic again. This is a dangerous situation for a different reason. It is unlikely, that such prices can be repeated. It is difficult to say at this stage but selling the by-product at under-par levels could still be more attractive than paying to send it to landfill.
For the hides in the medium and higher-end quality range the situation was somewhat better. There, prices fell and in some cases to record low levels, but for them it was much easier to get back into balance and to find sufficient interest. By the beginning of December the market in the US and in Europe had stabilised and even several adjustments on the upside were made.
Something else a good number of people didn’t realise was that, in some cases, the recovery of prices was not a symptom of a better situation in the leather pipeline, but rather a readjustment of the real value these hides offered tanners. The market might be in balance for now but one should not consider the situation to be resolved.
The automotive industry continues to remain a big unknown. Car sales may have recovered in many regions, but the vehicle market is undergoing big changes. Automotive brands are experimenting with so-called vegan interiors and the massive pressure from politicians to switch to electronic mobility could cause further changes in interiors too. One thing is certainly clear is that a number of even premium car brands have taken the decision to reduce their use of leather.
In furniture quality still plays a very important role and, even in Asia, the interest in furniture made from leather continues to be there, but people are looking for less finished and more comfortable seating. Upholstery tanners, in particular in China, have increasingly insisted on better raw material to produce less finished and pigmented leathers. We find this not really frightening, but even good news. By designing the finish, by cutting, but being smart in camouflaging the natural defects there are plenty of options to produce a very attractive and comfortable material for the living room, the hotel lobby or even offices.
We are entering another very difficult period. We understand from many manufacturers in Asia that, at very low prices, leather can still be attractive in shoe manufacturing. However, when we study the price of raw material and the price for finished leather we find it difficult to see anything other than disposal rather than sales. If the beef industry has no other option, perhaps this is the way things are going to go. The belief of some in the beef industry that the worst is over and raw material prices are going to go up in 2020 could be a dangerous bet.
We are entering now into the last part of the busy season for leather production now and, by the end of April at the latest, leather production is going to slow down again. If designers, brands and retailers don’t fancy leather and continue to label everything as ‘vegan’ as a marketing tool, things are going to become tough again in the middle of 2020.
Consumers are not avoiding leather and many still appreciate it. Opportunities are still there, but tanners can only produce what the market wants. Among some consumer product companies there is a great desire to use leather again. Prices are attractive, leather as a material fits pretty well into the revival we are seeing of the 1980s and 1990s fashion and many have already understood that leather is also an extremely sustainable material.
One can see a massive offer in particular of leather garments. Fashion designers at almost every brand are putting a lot of leather garments into their collections. What catches our attention is the fact that they do not seem to be afraid of any public headwinds. Whether this will spread to the general consumer market is one of the most important questions we need to answer. If that happens it will stimulate demand along the leather pipeline for 2020 and 2021.
We are entering a new decade. Leather has to find new ways. It can still only be produced if meat and beef is produced. No slaughter, no raw material for the tanning industry. Simple as that. However, it will take another five years or more before slaughter sees a major downturn. This means there has to be a solution for the by-product and the best solution is still to make nice, performing and comfortable leather products. To be successful, it will definitely need a tighter link between consumer markets, manufacturers, retailers and the leather industry. At the moment there is a big gap and, with a few exceptions, there are more risks than opportunities. As critical as we have been over the past two years, we still remain positive. If an attractive, profitable product can be offered to the market and people can understand it, it will sell, for sure.
Let’s work on it.
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