Macroeconomics

It seems the world has just one problem; everything else has been covered up by news around Corvid-19. No environmental activists, no war in Syria, no weapons tests in North Korea, no campaigning in the USA, no Trump tweets, no Brexit negotiations nor anything else has been able to wipe the daily counts and news from the front pages.

Indeed, that may be the biggest impact thus far on global politics and economies. The way the virus is dealt with by governments might be a bigger threat to the global economy than its actual spread (and spread of the virus seems possibly unavoidable now). The enemy is the unknown, and that makes it so difficult for every responsible person or organisation to take appropriate actions and decisions. China has become the example of treatment, which means closing down most public life wherever a cluster of the virus is detected.

However, it is difficult to understand how this can work. Testing is still being carried out on a very limited level in many countries. Travelling continues and closing down schools and universities will not take students off the street. People are scared, and scientific and proven facts about the virus are still very limited. It’s anybody’s guess as to what it means to one’s self and the people around. The mortality rate is, as far as we know today, still pretty low. Unless something new becomes known, the virus can’t be the biggest worry in mankind’s history. It is not leprosy, polio, tuberculosis or Ebola. 

The financial markets have reacted like a rollercoaster ride in many areas. First steep falls, then prices rocketed up, and then they plunged again. The national bank policies continue to be the same; interest rates were cut, with more expected. It remains unlikely that lower or even negative interest rates can solve the fundamental problems created by the outbreak. The cost of money was not the problem before the coronavirus, and it will not solve the issues created now.

There are fewer consumers on the streets, and the concern of the ordinary people in many countries goes far beyond shopping. Production cuts – in particular in China – will be difficult to recover in the short term, and disrupted logistics will play another very important role.

Oil prices, which were already under pressure, tumbled and almost collapsed in the past two weeks – only to drop more precipitously on Monday. Airlines are cutting flights, the end of the heating season is close, and individual travel is likely to drop.

The US dollar is normally the safe haven in such conditions, but it fell sharply because investors realised that the gap of interest rates is going to close versus the main alternatives.

The only commodity really benefiting was gold, which continued to rise in price because it was considered the only safe investment. 

Market Intelligence

The leather pipeline is almost exclusively dealing with the many consequences of the coronavirus, the most obvious of which is China’s extended cut in production. For most players in the pipeline this is the problem of the day. The further down the pipeline you move, the more people get concerned about sales and consumption.

Leather is still in most cases a “can have” and not a “must have” product. Where the material is most integral to the product itself – such as luxury items and cars – sales were hit the most. Car sales in China were hit by more than 90% in February, while the massive reduction of international travel is hitting tourist spending. So far, few leading companies in the sectors have published what they expect the impact on their business to be; rather, they’ve made only superficial comments which, of course, have not been positive. 

For car sales, most brands are hoping this will prove to be no more than a delay in purchase and registration – some are even hoping for a strong recovery to meet their 2020 budgets. This is unlikely. But as a strategy, it fits into the communications policy of such companies to wait until the third quarter before putting the cards on the table.

The automotive industry also has to deal with the serious problem of logistics. If the logistical chain is not going to be restored very quickly, there will be a lack of parts and components, which will hit production schedules as well. The main problem for many suppliers, including the tanners, remains that the automotive industry is not sharing the real facts with their supply chain. So far most of the problems related to the virus have been Chinese ones, but with the current spread in Europe and employees being sent home when cases are found within a given company, it is only a question of time until production lines in Europe and maybe even in the United States are hit.

A similar pattern can be seen in other sectors, although there may be more options to compensate.

In the luxury sector, we have to admit we are pretty surprised and impressed with how brands have dealt with the situation so far. There’s not much known about how deep the cancellation of luxury fares and the reduction of global travel is going to hit them. Very important nations for luxury travel, such as Italy and France, are seriously fearing the consequences. 

Governments are estimating numbers in the multibillion range, which are indeed startling. Various airlines have cut their international connections between northern Italy and the rest of the world, and the big spenders from China are not able to easily leave the country at the moment. It is not so much an issue of going, but rather how to come back. Other popular tourist destinations, such as Thailand, are reporting a decline of up to 50%.

Nobody actually knows at this stage how the consumer is going to react. Some analysts believe that online shopping is going to compensate for a good percentage of the losses in bricks and mortar retail; time will tell.

At the moment, however, most consumers are showing low interest in pleasure shopping. It’s fair to expect a sharp drop in sales of luxury accessories, which should also hit the consumption of premium quality leathers.

For more mainstream products we are far less pessimistic. We still have the same number of people around the globe who may postpone some of their consumption; but what they need, they have to buy. Certainly, we might lose the spring and some part of the summer season, but the purchase of a pair of shoes has to and will be done. 

The present challenge for the leather industry may be short term, but on average, the number of shoes produced and bought will not change by much. The key challenge remains to convince the consumer to choose the material leather, to educate about its dynamic, sustainable, elegant possibilities. We must remember that the mood at Lineapelle in Milan was positive and hope that the trends we saw there will extend, in time, into mass production.

We should not, however, ignore several other impacts too. We must think not only of consumption, but of raw material production as well. Food and nutrition are far less affected because they are basic necessities, but the export of beef to China is going to be hit and the climate-related circumstances in Australia seem to curtail production there as well.  

Logistics are, from our point of view, also underestimated. The raw material supply chain from the United States and Europe to China remains heavily congested. Several tanners have reopened, but as of today we have already lost 3 to 4 weeks of full upholstery leather and furniture production at the end of the winter season. It remains unclear if the delays are going to be accepted by the export clients and whether the product required can still be delivered in time. This applies to leather and to finished products.

In the shoe sector, many Chinese tanners complain that their domestic clients have already cancelled the orders for the spring and summer season. We find this premature, but for the moment many tanners are suffering from lack of clarity regarding production plans for the coming months. In the international supply chain, we don’t hear of such decisions, but retailers are afraid of delayed deliveries not reaching the consumer in time. This could not only hit turnover due to lack of product, but also create large stocks of unsold products and affect the coming seasons.

The sharp decline of car sales in China is another unknown. While it may turn out that sales are simply delayed and they will ultimately recover, there is still a strong chance of production cuts. There is still no word from the automotive brands regarding how this will affect consumption of leather, and our contacts in the tanning industry have offered nothing more than imprecise comments.

We hear with great concern that there have been some requests for contracts to be renegotiated, and in several cases there have even been cancellations. The biggest worry is that other industries are already reporting claims for ‘force majeure’ with the support of the Chinese government to cancel contracts.

On the positive side, we have heard from various suppliers that payments are going through, containers are (slowly) getting cleared from the ports, and customers are trying to return to some normality. This, however, has not yet converted into much new business. This cannot surprise anyone, because the extended shut down of factories requires first the cleaning up of the congested raw material stocks. Photos and films of hide warehouses in China show large stocks of raw material waiting for soaking.

The market reaction is presently quite different. The US suppliers try to stimulate demand and shipments by making private deals with clients who can take and pay for product. These clients are getting rewarded with very attractive offers and sales which do not reach the public. Any leather producer able to benefit from this should experience a double positive effect; they can run full and expand their margins. For the others it is rather the opposite.

In Europe the situation is still unclear. So far the tanneries are still running close to normal. No virus cases have hit production and there is little report of tanneries having to cut production because of problems with sales, shipments or reduced consumer activity. However, this only applies to those who are not shipping a large portion of their production to China or China-related supply chains.

The reduced kill is already tempting several suppliers to try to lift height prices. It is once again very strange to see how little people really look at the situation from a wider perspective. As long as the US suppliers are grabbing market share with lower prices, the price gap between EU material and US material is going to widen again. Some will remember a similar experience – and the results and consequences – from last year. In general, European tanners have a good chance to gain market share if they are competitive, which would also benefit EU rawhide suppliers. However, keeping prices high will make it more difficult to build a new opportunity for the European leather industry in the global market.

We will skip once again the split section, because we’ve found nothing interesting to report. Those that can be converted into quality suede leather still find a reasonable market, because they are price competitive. The hype for collagen and gelatine material has begun to fade due to current changes in the food market.

The skin market is a reflection of the hide market. Certain niches, which are mostly manufactured in Europe, still continue to find good demand. Commodity types, the majority of which find their homes in China, suffer from the current situation.

As long as the coronavirus situation dictates the conditions it is very difficult – maybe even impossible – to make any kind of serious predictions. The pipeline flow in the production has to return to normal and we also have to get a clue as to when social life around the globe will return to something close to normal conditions. Only then can the damage be analysed and the casualties be counted. 

Presently everything points toward less production and fewer sales around leather. The plummeting oil prices and a weaker US dollar make leather once again a more attractive option. Leather has to emphasise its benefits so that further damage to the industry can be avoided. The opportunities are still the same as two months ago, but the work and the focus have to be intensified.

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