Market Intelligence - 25.8.20
25/08/2020
In our part of the world the holiday season is in the final lap. In the northern parts of Europe, the holidays have already finished, while in the centre and the south the last half has begun. Without any judgement it is fair to say that the holiday season in Europe has triggered a rise in infections again – not that this is a big surprise. The good news is that the rising infection rate is not converting to rising numbers in hospitals.
In other parts of the world the situation is not yet easing, and the virus continues to have a very strong grip around the globe. The biggest concern of all remains the risk for new lockdowns. In several countries more restrictions are in place again and travel is becoming increasingly difficult.
The financial markets are shaken between optimism and concerns. Stock markets, basically driven by tech stocks, continue to perform relatively well but it is becoming obvious that investors are focusing on specific shares which makes the general performance look better than it really is. Investors will now likely become much more cautious after the holidays with a clearer view on the real state of the global economy.
More and more pundits begin to question the effects and the long-term consequences of endless liquidity which is continuing to be pumped into the markets. It might be like medicine. It is the dose that could eventually become toxic.
The oil market as well as gold lost a bit of steam. Having been pushed massively high they faced a bit of retreat in the last couple of days. The coming weeks will tell us if this is just a correction or if there be a return of the trend.
The US dollar saw a similar trend, but in the opposite direction. After weakening for almost four weeks in a row it has seen a bit of a recovery recently.
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In the western world and the northern hemisphere, the first tanners have already returned, and the remaining ones are beginning to prepare for reopening. Within the next two weeks the entire system will be back to work. In the East, producers are further advanced in their preparations for the winter half of the year.
As far as we can confirm, an interesting question raised before the holidays has already been answered: So far, no tanner has decided to quit, and it seems that almost everyone is going to take the challenge again.
We have mentioned in many of our previous issues that we might reach a point where fundamental decisions have to be taken, and they will have very important influence on how the situation is going to proceed. With the corona crisis the level of production of leather has been massively reduced. In some cases even full lockdowns for several weeks have been the case. However, this is only one part, because production is one side and sales and consumption are another. We have had enough time to investigate and to get a better feel for the situation over the past months. We think that most will agree that the situation is pretty uneven.
At the moment it is still very difficult to generalise. Under the old standards of the hide and skin market in the leather pipeline we had basically seen everything going up or everything going down, just taking into account certain time lags.
Presently it is a little different and the biggest problem remains the shoe industry. As previously mentioned, we are not really dealing just with the corona problem, but with a general and fundamental question of the material use in different consumer products. Under the lead of the recovery in China, vehicle manufacturers around the globe continue to ramp up their productions. New models see a decent recovery in demand and the order books, which were taken from February, allow the industry to increase production wherever and to whatever level possible. The obstacles remain the supply chain and a smooth production which is still based on just-in-time deliveries. Missing parts or disrupted deliveries create immediately stopped or reduced manufacturing.
However, in China the industry is almost back to normal and has been for a few months. In America, including Mexico, strong recovery is also on its way. In Europe, the automotive brands are all planning almost full capacity production until the end of the year. The penetration level of leather in the order industry hasn’t changed very much and on a global scale the consumption of leather has not been reduced yet. This means higher production of cars leads straight to higher consumption of leather again.
Another strong performer is the domestic upholstery demand in China. From people familiar with the situation we understand that the interest is quite selective, with a straight and clear focus on better quality and less corrected upholstery leathers. Corrected grains are followed by heavily pigmented and developing further into more and more soft and less finished leather types. Such a trend can be easily followed and respected by the manufacturers when it coincides with a period during which raw materials are in abundant supply and cheap at the same time. Several European suppliers confirmed that the main interest from the Chinese customer base is for heavier and better-quality female hides.
This leaves us with the markets for handbag, accessories and leather goods in general. Many of the top brands try to make the market believe that they are optimistic and not expecting a sharp decline in their sales. Well, it might not be very smart to question or criticise the statements of those who know best, but at least some remarks have to be made. We agree and can confirm a good and strong performance of what we would call tech-leathers. Tablet cases, smart phone covers, covers for e-book readers, ear-phone charging cases, etc, are seen more and more being made from leather. What used to be a very cheap sector, mainly made by all kinds of leather trim, has become something of a status symbol. In particular the top brands are choosing high quality leathers with good performance and high-tech standards. This market is growing and supports our comments made a while ago that leather has a strong position wherever a product is constantly handled.
Luxury handbags tend to be seen in a different light at the moment. It might be true that the wealthy of this world will continue to please themselves with these kinds of accessories. They may continue to buy every new release, but this is not where the volume or the growth has been seen in recent years. These products have become a very important part of travel shopping. Not just passing by a store in the airport but being part of that trip to France or Italy, possibly a day stopover in Hong Kong or Singapore. If you buy such a bag and you spend a lot of money for it, it needs to be shown. With the massive restriction on public gatherings, and the absent fun of social shopping, we can’t really find a justification for why this market segment should be one of the strong performers in the next season.
This might also be reflected by the problems for sales of the equivalent raw materials. In particular, high-end veal and related raw materials did not adjust in price quickly enough to attract other market segments for their sales and so quite reasonable stocks have begun to build. Many suppliers around the globe were following the general idea that the luxury market would not be hit severely by the corona crisis and so were quite relaxed and the demand for the raw material nosedived. It is of course true that top quality raw materials will never have a problem finding a buyer, but they do have to conquer new markets on price.
At the end we must deal with the situation in the shoe markets. No matter where you go or who you speak to, the information is not very good. Volume manufacturers in Asia continue to speak about order reductions of anywhere between 40% and 60% versus a year ago. It seems to be a mixture of declining demand and our crucial and long existing problem of leather use in shoe production. The last six months left very little chance to turn the ship around. Discussions about new designs, different materials, new trends had been blocked by the restricted travel and the high level of uncertainty manufacturers, brands and retailers had. There was no option for trend scouts to attend shows and events. Fashion designers and influencers need public attention and early adopters need places to show, and none of this has been part of our lives since February. Consequently, the adidas plastic sandal was possibly the hottest item this summer – known for almost 50 years, standard and relatively cheap in absolute terms, comfortable and easy to order online.
Shoes are still something with a fairly long supply chain and lead time. Losing a season and losing the time for a change costs too much time – for leather. Contacting volume manufacturers from India to Pakistan, from south-east Asia to China has not delivered any major recovery in leather shoe production and demand to our desk. There is still some hope for the next season, with winter production starting sometime in January, but it will require a lot of work to get leather back into play. The chances are still the same. The functionality and sustainability of leather remains unbeaten, but without convincing designers, manufacturers and retailers to tease the consumer it will remain difficult.
For the past two weeks, general business in the raw material markets has confirmed all of the above. The industry has decided not to surrender, and this means the raw material pipeline has to be refilled. Demand and activity in the different raw material market origins has confirmed confidence in automotive and better-quality upholstery but with a certain concern still for the rest. However, no matter what you think, without a hide or skin no tannery can be run. This has led to a decent wave of purchasing activity all over. Agreed, it was selective, but the volumes for certain origins and types were impressive. Buyers remain extremely price sensitive. A big problem remains transport and currency. The shipping industry is complaining about the reduction of transport and so their answer is to increase freight rates for those who are still to ship. Most hides and skins are still traded in US dollars, with its declining value making it difficult for certain origins and taking away returns for others due to higher shipping costs. Collection and processing cost of hides and skins have also increased leaving the revenue for the butcher and the farmer with very little room to rise despite the better sales.
The split market remains very difficult. More splits have been directed to collagen and gelatine markets. Due to reduced tannery production, more lime splits were diverted and instead of manufacturing wetblue, cheap high-volume production just being limed for that market segment has taken place. The industry is now well served and so the demand for splits appears as a problem again exactly at a time when the tanning industry returns to work.
The skins market does not show any major change yet. Most skins from the major producing origins are dumped or even destroyed. Ovine leather is competitive now and it must not be afraid of plastic. Before the corona crisis we had been very positive for garment leathers. This has had a bad beating, but the door was already slightly open and we can only hope with all the circumstances and benefits from the low prices it is pushed further open for more business in the seasons to come.
We are now at the beginning of the busy season for leather production. A number of tanners have already replenished their raw material stocks. On average, retail sales have dropped by approximately 20% to 30% in the past six months with tanning activity down by possibly 50%. A lot of raw material has either been put into stocks or has been destroyed. This means the entire market is not really in balance and we still have room for another round of refilling the pipeline just to make up for the present consumer demand. Rising corona cases almost everywhere are also causing rising concerns. However, the global community has become a little more used to handling the situation. The level of consumer sales should not be massively threatened once again. Economy is psychology and so the next 4-to-8 weeks will become very important for the leather pipeline and maybe even more for the general economy.
We see so many people in the industry now working so hard for leather. The good reasons still remain the same: value is generally the currency of the crisis and this means we are still more positive than negative for the coming season.
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