Macroeconomics

Corona continues to dominate the world. While in some parts of the globe the spread is under reasonable control, in other parts it is still going wild. In Europe, Australia, New Zealand and China we can now see – apart from some smaller clusters – a very moderate situation. However, parts of the US and Central and South America are badly hit, and regions like Russia, Africa and parts of the Middle East and the Indian subcontinent are difficult to judge, because the data does not deliver a clear picture.

The status of the virus goes hand-in-hand with the sentiment of people and businesses; where the virus is under control, everyone feels better about the future. How quickly the mood can change was seen recently when a minor outbreak in Beijing created a new soft lockdown in the capital; this elicited massive concern throughout the country, but as the outbreak seemed to come under control, people quickly relaxed again.

Political tensions continue. India and China had a clash of border troops with about 20 casualties, and North Korea blew up the building used for meetings between the South and the North. In Russia, President Putin is trying to cement his leadership until 2036 with questionable methods. The UK has to manage two major fronts: extremely difficult Brexit negotiations and a deteriorat-ing relationship with China (due to issues surrounding Hong Kong). The US is pulling troops out of Germany and Mr Trump is taking further disturbing positions about NATO. The massive spread of coronavirus infections in many countries creates the risk of civil unrest at any time, and in many countries, poverty and hunger must be expected. It’s possible that one day people will get fed up about how their government is handling the situation. All of this will be further im-pacted by the number of coronavirus casualties and the next development of the epidemic.

Financial markets continue to take a more positive outlook. Stock markets remain relatively firm and investors are optimistic that investments into stocks are a good option. Tech stocks are per-forming best, as they are not negatively impacted directly from the coronavirus epidemic.

Oil has stayed around $40 for awhile now; it seems that production cuts and moderately rising demand are sufficient to sustain these price levels.

From the consumer side, we saw US retail sales rising sharply. However, the numbers look more impressive after the steep drops in recent months, and we are still not where we were be-fore. A similar situation can be observed in other developed countries, with the best performance still seen in China.

Market Intelligence

The situation along the leather pipeline remains extremely difficult. In the northern hemisphere, spring is turning into summer and in many regions temperatures are rapidly rising. Several com-panies could be taking extended holidays and product flow may be hindered. This leaves the question of whether there is sufficient salting capacity to handle all the hides which will still be slaughtered in many countries. Tourism might be reduced and the trade of beef within the EU reduced. However, everybody staying home and spending their holidays nationally will likely consume a similar amount of beef as they would if they were travelling. So, we do not expect any significant change in the kill due to reduced travel, with possibly a few small exceptions.

This means that slowly but surely raw material suppliers are beginning to worry how they can handle the input/output balance in the coming two months. The standard raw material flows in Europe, which are dominated by the automotive industry and large tanning clusters in Italy, seem to face serious interruptions. More than in years past, it looks as though tanning might come to a complete standstill from the last week of July until the third week of August. This is not yet 100% certain; there have been reports of automotive tanners internally discussing the need to shorten the vacation period to two weeks. However, this will not be a widespread approach and will only be helpful for a limited quantity of specific raw materials.

We don’t think many tanners are yet discussing with their suppliers the usual deviations of pro-duction towards contract tanneries. It might be a bit too early because everybody is making deci-sions from week to week, but time is beginning to get tight for major decisions. The standard da-ta of business development and expectations is certainly gradually improving, but we are missing a clear position taken at the manufacturing level. There is no commitment along the supply chain other than the basic bread-and-butter business. Nobody is willing (or in the position) to take any commitment for the time after the holidays and this is becoming a serious threat.

In the meantime, it is openly and seriously discussed that several types of hides are not going to be paid for, or even collected, if there is no payment for the service. The only little relief we hear about comes from the collagen and gelatine industry. Reduced production in the leather industry has hit the availability of byproducts such as trimmings and lime splits. Considering the sharp downturn in production from mid-July until the end of August, these industries have to decide whether they will take any cheap hides around and produce them for their purpose to have a safe-ty net of inventory until September. However, several raw material people believe that this is the emergency exit for all their hides. They are well advised not to put too much money on this op-tion. 

For people in Europe, this doesn’t leave too many options. Either you cut intake wherever you can and hides go for destruction, or the material has to be stored in the hope that demand will rise significantly after the summer break and consume the stocks built.

The only wildcard in this equation is demand from China. For most of the trade it remains un-clear how much of the raw material the Chinese tanners bought over the past three months is ac-tually covered by finished leather orders. It is obvious the Chinese industry took a chance on low raw material prices, like they did during the financial crisis of 2008 and after. While after the fi-nancial crisis we saw a quick recovery of consumer demand and the classical V curve of the global economy, that seems unlikely this time; many now expect an L curve. 

It is not only the general economy that is defining the trend in the market. We still see that the fundamental problem of leather is not so much the impact of the pandemic, but the question of whether leather is becoming more attractive for the consumer again. Sustainability, quality, value for money, slow fashion – there are a number of reasons to boost leather demand. Studying the media, it seems plastic waste and uneconomical recycling procedures are becoming a rising prob-lem for waste management. Leather is the natural and logical answer to many of these problems, but it remains unclear whether the message for leather is reaching the minds of consumers. 

It is a toxic relationship at the moment. Manufacturers prefer plastic for cost and production rea-sons, which means they are not voluntarily and quickly returning to leather. The lead time in pro-duction is another big obstacle for leather, as long as consumer products are manufactured in low-labour-costs countries that need a preparation period of 6 to 9 months before the finished product can hit the market. Public opinion and media discussion is one thing, but the other is how consumers are truly reacting. How easily will they change their habits from fast fashion to slow fashion and consider using the superior-quality and durable product instead of the fancy use-and-dump one?

It would be a paradox if the industry and retailers who are so desperately looking to recover from the crisis and to boost turnovers and revenues would now suddenly change to making and selling less. This can only work if prices for products rise as well. In the luxury industry, several top brands are trying this already. Several high street brands have advised that they are going to raise selling prices. They justify this by citing rising raw material cost (great laughter), but at the end it is simply the response to their fear that selling fewer products could mean reduced turnover and less profit. Consequently, they are testing the price sensibility of their wealthy clients and it’s go-ing to be very interesting to see if the rich people continue to not be bothered by price. For mass producers, it is a much more difficult task and we have not met any management in the past 10 years which considered price increases as a serious option for their business. Reducing material prices and saving on production cost is a different story and very popular still.

The big problem for every person and business is that the summer is not a good time for trend research. The northern hemisphere is on holiday and most of the decisions and trends are still set in this part of our world. We cannot trace much anticipation anywhere; the wait-and-see attitude of big retailers and industries is paralysing the decision takers in the next step down the produc-tion pipeline. The holidays are the best excuse and everyone is trying to enter the holiday period with the lowest stock possible. This presses back to the first owner of the raw material, which is either the beef producer or the processor. For them there is no escape and the only option they have is to destroy the material if they don’t want to keep it for better times.

We lost about 20% of consumption during the corona peak period and recovery is only slowly taking place. It is the timing problem that is hurting so much. We need decisions, but nobody is either willing or in the position to take them. Whatever the decision is, it can be converted into action. For better or for worse, there are solutions available, may they be favourable or not. No decision is definitely the worst option.

In the skin market we continue to see a reflection of the above. In Europe the production of new season lamb skins is in full swing. Here, sellers are also struggling to obtain sales and prices that make it sensible to process and handle the material. The butcher must make a calculation between destruction costs and the potential revenue and processing investment. We understand that there have been some limited sales to China at low prices, but still better than to destroy the skins. Tur-key, said to still be completely on the sidelines, is hitting the market as well. Usually the Turkish tanners are hectic when the new season lamb skin slaughter begins, but this year they are com-plaining about having no orders following the shutdown due to the corona epidemic. However, they believe they will get huge quantities of raw material offered after the EID festival. From our point of view it is the same fundamental mistake they make. You may buy some stocks at prices below processing and shipping cost, but this can never be a sustainable level for the future. It is also unclear what they can offer at the end to their clients abroad when the winter season starts, and this is coming soon. 

The next weeks will be very important to understand how in Europe the summer season will be handled and passed. The same applies to the US, where the terrible spike of the pandemic will eventually play a role in the beef market, but even more in the consumer market. 

In general, we still see good opportunities for leather. Fast fashion is problematic for many rea-sons. For the winter season people will likely be staying home more, which is good for leather upholstery. Leather clothing is back in fashion, and raw material prices are at historical lows. It only requires initiative and ambition not to hide, but to show up and deliver attractive options to the consumer.

The industry is certainly creative in terms of product development, but not in bringing their prod-uct to market – and the organisations are not better. This business is not science and rationalism. It is emotion.

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