Market Intelligence - 14.7.20
14/07/2020
The coronavirus pandemic continues to make headlines and it is not pleasant to see how much it is now spreading in several parts of the world. Central and South America have been hit hard, but the US is also reporting high new infection rates. Infections in central and northern Europe are now at reasonably low levels, but new spikes in the south east of the continent demonstrate how quickly things can turn. Africa is another epicentre and one must never forget that the real numbers will be significantly different from the ones published. Donald Trump is blaming the high infection rate in the US on widespread testing which he thinks gives the wrong impression. We will leave it to our readers to draw their own conclusions.
Despite the rising global rates of infections, people and governments are trying to return to a sense of normality. In Europe, further easings are published almost every day, tourism is slowly recovering within the confines of regulations and people can travel almost freely again. The health systems are much better prepared than they were six months ago, but still it is very difficult to forecast what the next phases in this pandemic will be.
In the northern hemisphere, people are quite happy to escape on holidays. Even when they are not able to travel in the same way and to the same destinations, they are taking a break and possibly discovering nice spots closer to home.
The financial markets are also already in something like a holiday mode. Almost all markets were trading in very narrow ranges, from commodities to stocks as well as currencies. The price of gold continues to rise. It is considered a safe investment, which might indicate investors prefer to stay on the safe side. Tech stocks, no matter what kind of business, are the darlings. With physical distance and reduced contact, digitalisation and artificial intelligence are seen to be the big players of the future. For many it will be true, for some others, questions will be raised.
The oil price continues to sidestep, but most analysts are not predicting a bright future for this energy source.
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Although it is only beginning of July and for most, the holiday period is still in front of them, it might be time to discuss the future of the leather pipeline after the summer. With all the trouble we have seen this year, many are obviously very happy to escape for a break. In many countries, travel is restricted. The main tourist destinations in Europe are struggling to attract visitors. Air travel remains uninviting. There are plenty of restrictions, which will reduce the normal numbers of tourists this year.
For many businesses, the time has come to plan for the future and take the necessary decisions.
If we are all honest, it is not really the pandemic that has created trouble, the leather business had its problems long before. Corona might just be one of the final nails in the coffin. Anyone not willing to accept this will need to be ambitious to find the escape route.
New ideas are needed. Leather as a material has lost market share since 2016 and this trend has been amplified in recent months. It is also not true when people say the start of this year had been better. A little better than the worst is not really better.
The shoe industry continues to substitute leather with plastic. The automotive industry plans to go the same way. It doesn’t happen quickly, but when the decisions are made it is very difficult to reverse them. It was only the strong performance of the global economy that made the slide of leather consumption a little less pronounced. The seasonal rise in demand, which we saw last winter, was not really a turnaround for the sector. The consumption of leather was on the retreat, with the only exception of the luxury segment. However, this accounts for only a small part of the entire business.
Very little has changed. We have not been able to reach the consumer with the message that leather is an extremely favourable option. When it is well made and respects environmental rules and working conditions, it adds a lot of value and is the more sustainable option in many products.
These facts are true and not just propaganda. However, we have not proved it to the global consumer. We have been under attack from all directions. For fast fashion, leather was too expensive and too complicated to manufacturer. For many brands, the margins and profits were better with plastic. The vegan and anti-beef campaigns successfully shifted leather to a central target. Let’s face it: the industry not been willing to enter the fight. We have left the battlefield to the competition.
The marketing of leather is almost limited to mention that it is “leather”. There once was a time when this was enough, but that time is long over. We cannot find any convincing campaign where the manufacturer, brand or retailer has promoted the benefits of the material. We found a lot of marketing speech about beauty and tradition, we also found a lot of the classic explanations in regard to the environmental issues of tanning, but we did not find anybody clearly explaining why plastic or any other alternative product can never match leather as a material.
We know it will be difficult to change the minds of brands, retailers and finished product manufacturers; for them, leather looks more like a risk than a good option. This means that we have to focus directly on end consumers and convince them that leather is a better option than the alternatives. If we really think that leather is the better option, we have to be ready to fight. We must provide convincing proof and be ready to challenge the consumer if we are to regain ground.
Artificial leather materials are freely using the term leather but not respecting where its reputation came from. It did not come from low performance and bad quality. It came from centuries where it offered exceptional protection and comfort - like wool does. In contrary to leather, the wool industry has regained some territory by successfully convincing people with the exceptional performance of the natural fibre.
There is so much money spent on improving the environmental footprint of leather production. Tanneries are constantly modernising. In many cases the water entering the factory is less clean than the water leaving the wastewater plants.
The argument for artificial alternatives is it’s the agriculture industry producing dairy products, and beef cannot be accepted. If the production of beef and the consumption of dairy products falls, less leather will be produced. However, recycling a hide or skin and turning it into a valuable material is still a lot better than producing plastic, contaminating the environment. It is unacceptable that people are made to believe that consumer products containing some percentage of recycled plastic are more environmentally friendly than leather produced according to global standards.
Nothing of the above is new, but time is running out. If we want to prevent the industry from shrinking then we have to convince the public that the number of hides and skins available is exactly the number that should be converted into leather.
There has been activity over the past few years. Organisations have been created, labels have been invented and there is no lack of goodwill. The industry has to ask itself if this has been successful and if we can be satisfied with the results. The answer is no. In everyday life it’s hard to find anyone who has ever heard of these efforts. We still have to engage in face-to-face battles over the dinner table and use personal knowledge and enthusiasm to explain and change people’s minds. We haven’t met many people who have ever really thought about the positive aspects of leather.
As far as business is concerned the holiday period is now upon us. With the exception of Asia, people are wrapping up and closing down. The important tanning clusters in Europe such as Italy, Spain and Turkey are reporting the same story: a lack of orders, no planning from customers, uncertainty, and production far below normal levels. The pessimist could predict a catastrophe. The optimist will hope for a strong recovery after the holidays. But even a recovery will not change the underlying issues – it would just help to gain a bit of time. We still believe that there is a good chance for short term orders after August.
In Asia and in particular in China the business is still driven by price. Tanners are building the lowest priced raw material stock. This made a lot of factories successful. It was enough to be cheaper than the competitor, because there was money to be made for everyone. The question was just how much. The better buyer had the better profit.
It doesn’t work that way any more. Overcapacity has created a price battle which is barely covering the cost and cheaper raw material is not going to solve the problem. A better strategy is added value, a better product and a client who can see that paying an adequate price allows him to get an adequate price for his finished product.
There might be a little bright spot in upholstery. People are staying at home more and when the bad weather returns they might even be willing to spend more time on their sofa. In Europe there are reports about electronics and furniture being brought to the recycling yards. We don’t care much about electronics, but every sofa replenished is an option for leather one.
In the split section we can only report about stable interest from collagen and gelatine. The food business is stable. More pets have been bought and offers potential for food ingredients.
Nappa garments might be in fashion, but we cannot report any substantial increase in demand for skins. Ovine material is being destroyed, particularly in Europe. Skins for double face, natural beauties for decoration or superior nappa quality still find sufficient homes. For the rest, the situation is ugly.
With the season as it is now, we can’t really expect any big change in the weeks to come. The final raw material decisions will be taken, and tanners will try to get more information from their clients. Decisions about how new leathers can be presented to customers without the trade shows need to be taken. Trade information and the informal communication will be missing with less travel and few people will meet in Shanghai or Milan. One thing is for sure: strong customer/supplier relations, personal confidence and quality will become valuable assets.
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