Macroeconomics

After months during which there was only one headline day after day, covid-19, something happened in the past two weeks that took over the lead in the media. The death of a citizen, George Floyd, at the hands of police officers triggered a massive wave of protests, not only in the US, but across the world. People are angry, and as much as public protest is part of all our democracies, it seems clear that the mass protests could lead to new risks related to the covid-19. Many of the people who took part were not respecting safe-distancing and the virus could spread again.

In the meantime the focus of the pandemic has shifted further into the southern hemisphere of the globe and the Indian subcontinent. The virus in South and Central America and in many parts of Africa is accelerating. Also in India the numbers are growing. The government is easing lockdown there, but there’s a justified fear that this could be the basis for a new and rapid expansion of virus infections. It shows once again the dramatic paradox between the risk and danger deriving from the virus versus poverty and the need to feed people and offering them a chance to earn an income.

In Europe further easing is planned. Travel restrictions are being lifted, schools reopened and the governments are trying to return to normality as much as they can. The number of cases remains promisingly low, but there’s the general scare that we have to expect a second wave one day. Also in the US, concerns about the second wave are rising and news from Beijing that new cases there have triggered a new lockdown in parts of the city are not positive.

The tensions in politics continue. China and Australia, China and the US, China and India, Hong Kong, the US and Germany, Russian activities in Syria just to name a few. One should not forget that the Brexit negotiations are also going on and could create another massive burden for the UK and European economies. All of this is happening at pretty much the wrong time.

The financial and commodity markets continue to act within their own bubbles. Stock markets have already returned to a very high levels, which in a way is hard to justify. How nervous and sensitive investors are was demonstrated last week when stock markets all of a sudden took a massive nose-dive followed immediately by a partial recovery on Friday. With all the government help and subsidies, there are enormous amounts of money being poured into the market. This liquidity is not always used for the purposes intended. Consumer spending and investments are not just based on financial resources.

Economy is also about psychology and without confidence neither private consumers nor companies are willing to invest. In particular companies that are running today at capacity levels far below 100% will not be massively attracted by new investments to either improve productivity or to expand production capacity. Consumers will also watch expenses very carefully, because beside short-term help, most are thinking about the future and how safe their income is going to be. If you’re scared that after the government actions unemployment will increase you keep your money tight.
Slowly, statistics are beginning to demonstrate the massive consequences of the pandemic and the necessary lockdowns. The global economy is expected to shrink in 2020 by something like 5%, with some countries’ economies falling by as much as 20%. Consequently we would need a massive recovery of the global economy in the second half to avoid even more negative numbers.

The oil market continues to be dominated by the decisions of the oil-producing countries. Further production limitations support the current price of oil and the level continues to trade around the mid-$30s to $40 per barrel.
The dollar has been weakening because the Federal Reserve has stated that it will keep interest rates low for a long time and the spread of interest rates between the US dollar and alternative currencies is narrowing. This makes investment in US dollar less attractive.

We are also now heading into a presidential election campaign in the US. Summer holidays in Europe and the wait-and-see attitude in regard to the outcome of the American elections will certainly keep investment and business activities at reduced levels. 

Market Intelligence

One industry commentator said last week that things are worse now than they were when everyone was working from home and most of the world was in lockdown. In March, outside China, the pandemic was threatening societies, people were scared and governments took the decision to lock their societies down as much as possible. Most of the companies and people along the leather supply chain were still in the production and business routine of the busy season in our sector. The main concerns were how to meet the new rules, reorganise production, procure sufficient personal protective equipment and keep production flowing. Fundamentally, in particular outside China, there was a gut feeling that this would be something that came and went. It was only a question of when, not if, things would go back to normal again. 

As the situation developed, businesses, politicians and governments realised that only a vaccine or the disappearance of the virus could restore the old normality. The number-one problem now was that there was no preparation for these deeper changes nor any clear vision of what the changes would look like.

It is now the time for trend researchers and people with visions. It’s unlikely that anyone could predict what the world will look like in five or ten years, but at least the majority will agree that it’s not going to look the same as before. Yes, there will still be people, they will have similar needs to those people have today, the sun will rise, the sun will set, but the organisation of life, business and production will have to see some deviations.

In the leather pipeline we are confronted presently with three major problems. A lack of sufficient consumption, disruption to the supply chain and the low season for the industry owing to the summer holidays in the northern hemisphere. The low season will disappear and the holiday season will be over, but we will still have to deal with sale and consumption of leather and find solutions  that show how the supply chain can either be restored or adequately altered to the new conditions.

Sales and the consumption of leather were already a problem in the pre-corona time. The pandemic has only amplified the trend. Automation, uniformity, price and speed (fast fashion) have become a toxic cocktail challenging the use of leather as a material. All these parameters are the natural enemies of leather. For a while it was covered up by the endless rising  demand for products in China and, until a few years ago, a certain reputation that leather had as an exclusive and superior material. Sometime, around five years ago, the wind began to change. The appeal of reduced production costs from using alternative materials made leather continuously less attractive to mass producers. Shopping off-line and online became a habit and, for many, a form of entertainment rather than a necessity. There have been many studies made in which they came to the conclusion that up to 20% of the apparel people bought has never been ever used.

Criticism from environmental and other campaign groups was thought of as something for the marketing department and considered to be a side issue. 

This system was quickly disrupted by the covid-19 pandemic. Products could not be made any more or shipped around the world. Worst of all, products were not being bought any more. A week of disruption became a month and now we are already looking back at disruption lasting almost one-quarter of the year.

Seasonal products were already delivered but attracted no buyers. Future season products could not be designed, planned or produced and they will not reach the markets in time. This is not a problem for consumer products that nobody needs, but it could become interesting if products that people really do need and want are unavailable later in the year.
What does this mean for the leather pipeline? Prior to the pandemic the production of raw material was bigger than the consumption of leather. This imbalance may not have been distributed evenly, but the general statement is definitely correct. The consequences were diluted by overcapacity along the supply chain and so it was not completely visible. Now we may see congestion owing to the production cuts over the past months, plus the effects of the falling production of the low season and hindered options to secure new products for the coming seasons. This has now created the environment that we are experiencing at the moment. Everybody is waiting for customers to make decisions and place orders but the vast majority of brands and retailers are dealing with the problem of built-up inventory rather than discussing with suppliers what they want to have in the future.

The standstill has created pain that we might have expected at the peak of the pandemic, not now that the general feel in many countries is that we are getting back to something approaching normal life. 

This leads us to the question of what is going to happen next. The initial question centres on the level to which private consumption of leather products will recover and when. The second one is to ask if the pandemic might force the international supply and distribution chain to change. The more global the industry, the more complicated the supply network and the longer the lead times, and these are the factors that are forcing companies to reconsider their set-up. It is no longer acceptable that incidents (in this case the pandemic) can come out of nowhere and suddenly disrupt the entire global system. This means that, wherever possible, production has to become more regional and move closer to the market again. Businesses will have to be able to continue regional activity no matter what is happening somewhere else.

As much as the world may be connected, it is not just a pandemic that can suddenly stop your business. Rising nationalism, political decisions, tariffs and so on can quickly put your entire business at risk. This is something we have completely ignored for the past 20 years when the impression was, that despite politics, business would never be threatened and supply chain systems would always work. Projects like the new Silk Road and the total commitment of governments to growth have made companies lazy with regard to risk. The world is different today and certainly not easier or safer.

There’s a lot more to say about all this; perhaps we will come back to it in a future edition of this report.
Business in the leather pipeline at the start of the summer season is looking pretty bleak. Everyone is complaining about a lack of orders and waiting for clients to make decisions. If it’s not sales it is the supply of components. Just have a look at the automotive industry. A lot of production that was in the order books before the coronavirus has not run because of uncertainty over the supply of necessary components. Car companies are still promising improvements, but have a look at what they were forecasting and promising before and compare it to what they have been able to do. If their hopes now become true, it will be an important development.

In the other sectors, time is running out. We understand that the raw and semi-finished market is becoming congested once again. Supplies are simply too large for what tanneries require at the moment. Tanning capacity use is, at best, at 50% around the globe. It might be little higher here or there, but it’s definitely also a lot lower in other places. Many were hoping that the summer holidays would be shortened because business would pick up and an increase in production would go some way towards balancing out the losses of the second quarter. Unfortunately, we now hear more of people discussing an extension to the holidays. Time is running out and we don’t know what could happen to turn the ship around before September. Another question then arises about how many businesses will be able to make it until then. It is not only the lack of business activity in the here and now; it is also the lack of a clear plan for the future.

We will skip the sections for splits and ovine skins this time. There is nothing to report that would qualify as valuable information.

For the coming two weeks we can only lean back, watch and wait. From our perspective, China and Asia as a whole is the key factor. Why? First, because normal life and consumption is already operating again at a much higher level there than in the rest of the world. Without a second wave and without further lockdowns, the level of consumption in China may not be exciting, but it is definitely recovering and higher than in the rest of the world. Secondly, the Chinese industry is in many cases dependent on raw material imports and have a much longer lead time. If Chinese tanners don’t buy in the next four-to-six weeks and get the raw material on the boat it will not arrive in time. Shipping in August means arrival at the end of September and, from October onwards, the high season of production will be in full swing. 

This means that Asian producers will need to be the first ones to act. The international supply chain is not yet ready for major change. That will take years. In the meantime, any company that wants to have items produced so that they can offer them for sale will have to make decisions with manufacturing partners pretty soon. The easing of travel restrictions to China might also give many companies the chance to travel now and meet up with manufacturers. This could be what we have been waiting for to get things moving again. No, decisions, no business.

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