Macroeconomics

For two more weeks people in the northern hemisphere will continue to try out a new style of vacation. With the end of the holidays everyone will have to return to normal life and this means that the breaks caused by lockdown and the holidays will be over for a long time and everyone will have to deal with the new realities.

There is a sharp decline in the global economy and the full consequences have still to hit us. The vast majority of people will be hit by the slump, by job cuts, reduced pay and all other related consequences. So far, a lot of people have been buffered by government compensations or by savings. Governments had also subsidised companies, but in the end this is going to stop and the different actions from different national government will also leave open the question of how much it has really helped in the long term. If the business cannot be adapted or has no market any more all these programmes will have done is buy a little time.

While at the start of the pandemic the experts and analysts believed there would be a ‘V’ trend in the economy, it is becoming clear that this prediction is going the same way as the ones about the virus coming under control quickly, that it would disappear in the summer and a vaccination would be available soon. It is an ongoing process.

Gold is still considered to be a safe haven for investment and cryptocurrencies have become attractive again too, with many investors worried now about what is going to happen to standard money with the endless flow of liquidity into the markets at the moment. We should also continue to keep an eye on the currencies of emerging markets, in particular, for the leather industry, that of Turkey. Monitoring the currency markets, the weak performance of the US dollar has also become a big concern. Its decline versus the euro has increased by almost 10% in the past months and its depreciation versus other currencies is far more pronounced; the Mexican peso, the South African rand and the Brazilian real are good examples.

The oil market continues to trade on a stable basis of around $40 per barrel. Despite the constant progress of green energy alternatives, fossil energies are still needed and with a restart to the economy beginning now, oil could become pricier again. 

Market Intelligence

At a time when most productions are closed in the western world it is a good chance to sit back and think about the ‘status quo’. It is also a good opportunity to go through the files and to study what the best options for the future might be.

The covid-19 virus has run the world into one of the deepest crises in history. We talk about the economy in times of peace. Even in the big depression of 1929 or during the financial crisis of 2008 the cuts and the contractions were not as deep as they are now. Statistics, though, can never describe the influence on the individual or on selected groups. Numbers for a national economy or the global economy do not reflect the situation of smaller or individual segments. Comparing the numbers with the great depression in 1929, they are much bigger today, but the effect is different and the direct support offered by governments and corporations in the developed countries is far bigger today. 

The biggest problem of all is that the world wasn’t prepared for anything like this and had no plan B in the drawer. We don’t want to get into a discussion about ideologies. Many critics of the free markets and capitalism are celebrating and consider covid-19 as their match-winner It certainly opens up the possibility of discussing the endless mantra of cheaper production and the concept of an excessive supply in combination with overcapacity. This concept has been also the number-one enemy of leather in the shoe industry and a strong factor in other leather-consuming segments too.

If you want to change this concept, to reduce production and consumption and lessen the use of resources, it’s not enough just to ask for reductions; you have to offer an alternative income for those who depend on the system. Many books have been written about this in recent years, but people who have to survive on a small income will earn nothing from those books and cannot wait until the intellectual debates reach a conclusion to know what they must do next.

Leather is trapped in a squeeze between the intensive environmental debate in the developed countries, the cost of manufacturing and the realities of life in the countries where animals are still an essential part of family nutrition. Everybody talks about the magic year of 2030 when the oil giants and car companies want to be CO2 neutral; they are being imitated by many others, at least in their marketing messages.

For leather it is essential that two important messages are communicated clearly and effectively enough to receive widespread public acceptance.

This is the first of those messages. No matter what, it is not acceptable to waste a natural resource as long as it is available. This is the second: if the environmental footprint is properly measured (and this means not accepting the inaccurate calculations of organisations that have a vested interest in putting leather down), the situation will look different to many members of the public. This would mean starting to calculate the environmental footprint of the hide at the slaughterhouse and measure it all the way through to the potential lifecycle that products made from leather can have. This has to be the focus; and as part of this the true environmental reality of leather production has to be openly discussed too.

More than 90% of global leather production is run on standards that are cleaner and less damaging for the environment than smoking, commuting by car or taking a flight for a week’s holiday. You could add many other examples to that list.
If we don’t start down this new road soon, the damage to leather production and consumption will be difficult to reverse and the trend of raw material being destroyed will continue. The negative current in which leather has been trapped for a long time will destroy more businesses.

Anyone who doubts this should watch the price trends of almost all commodities since the beginning of the corona crisis. Hides and skins are one of the few commodities that have not yet been able yet to reverse the negative reaction of the market in March. Just another proof that our problems are not really covid-19 but more the fundamental question of what the future of leather is.

Taking a quick look at the leather pipeline in the past two weeks, we have to say that despite all our apocalyptic statements, some light at the end of the tunnel has been visible. We know that many people will not agree with us, because there are plenty of raw material segments that are still completely stuck. However, there are certainly bright spots, deriving from the production of automotive leather and furniture upholstery. Raw material suppliers report very selective, but rising interest from China. Also in Europe the production of automotive leather might still look very depressed, but in reality we know several leather producers that are not even taking a full holiday this summer. This does not mean that they are working at 100% capacity, because they have to follow the production rules related to covid-19, but the fear that they would be forced to close their factories for an extended period of time due to a lack of orders has gone. Most other factories in Europe are taking their vacation time until the second half of this month, but this is not unusual. The big question is over how they restart after the holidays and how many are going to reopen at all.

The situation in shoe leather production remains a big headache. Reports from our sources in Pakistan, Bangladesh and several other Asian producing countries have been very disappointing. Several sources report business as ‘zero’ with international orders to be seen. This means that for many of those, the coming season is already almost lost. What we fail to understand is how this fits into the realities of retail. Nobody knows the exact numbers of contraction in retail business, but anything from 20% to 40% might be a realistic assumption on a global basis. Either there are so many surplus shoes in the pipeline from production prior to the lockdown or retailers and brands are just exaggerating and waiting for as long as they possibly can before ordering leather again. We have theories, but really no proof. It is certainly going to be very tough in this segment for the coming production season, because if the pipeline is not adequately filled in time any new orders will be difficult to meet.

As long as the quality can be met by local raw material, quick responses and action can be taken. The Eid al-Adha Festival has left plenty of raw material in Muslim countries. With almost no value, these hides and skins are quoted to be available at prices anywhere between $1 and $3 per piece for bovine material.

We think it will possibly take until the end of August to get a better picture, because the raw material and tanning community will not wait for the trade shows in Shanghai or in Italy. While the event in Shanghai is cancelled anyway it is unlikely that the reorganised Lineapelle will attract the entire global community to meet and to discuss the situation. Traditionally these two events have been milestones for the leather pipeline to collect information and to get a feel from face-to-face meetings about the market trend for the winter season. In 2020 new ways have to be found.

In the split market we continue to hear a lot of different voices. While in the leather section we can’t see that anything is changing for the better, the situation for collagen and gelatine remains a bit mysterious. The massively curtailed tannery productions continue to force the industry to look for sources, to discuss stability of supply and to study potential alternatives. With the covid-19 virus being the one and only disease the public talks about, the influence of African Swine Fever (ASF) have been almost nought recently. There are new cases of ASF all over Europe and the few countries still free from it are seeing this virus come closer to them every day. The supply of pork is going to be threatened by this.

The skins market continues to be problematic too. Also here the Eid al-Adha festival has left deep footprints. The raw material cannot be absorbed. At this stage we have also to discuss the situation in Turkey. Turkish leather consumption has been badly hit by the sharp drop in tourism this season. In addition, the general economic crisis in that country is now starting to hit the leather industry as well and the massive devaluation of the Turkish lira is making life for many tanneries exceptionally difficult because they have to import chemicals and raw material. In particular those who are paying to important these essential products but are selling locally can barely handle the situation. Bankruptcies will hit the entire supply chain in that country. Those operators that have export business could benefit over the coming months. They will thrive on sharply reduced production costs and their foreign currency returns; this will easily compensate for their imports. However, in total it is more negative than positive and another problem for the entire leather business around the globe.

For the coming weeks the focus of interest will remain on activity in Asia. The rising tensions between China and the US have now gone to a new level. It is certainly too early to understand what influence this could have on business and the economy. It could mean we will face further road-blocks in the months ahead. There are already people who believe that the recent uptick in selected European raw materials is directly related to this as tanners shift some of the raw material procurement away from the US to have better balance in their raw material supply. We are not sure if the leather industry in China is really planning this carefully, but the possibility cannot be excluded.

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