Macroeconomics

The world is becoming more used to life with the coronavirus but the pandemic continues to dominate politics and economics. It is the uncertainty that makes the situation unstable and unclear. In many countries, cases are still rising and in the northern hemisphere businesses and governments fear the winter and the indoor season. Almost every day new theories and scientific studies circulate in the media. After almost six months it might still be fair to say that there is much we do not know. So the basics still apply: distance, hygiene and masks provide safety against covid-19 and many other diseases as well.

It remains unclear if and when a vaccination will be available but there have been small steps forward in the treatment of infected people, which has kept the numbers of intensive-care patients in check so far.

We are now in the phase of most of life in the northern hemisphere taking place indoors again. Public transport, resumed production activity and the attempt to manage the pandemic regionally instead of with complete lockdowns could make larger outbreaks possible. The discipline of some people is also fading. Consequently we are facing a swelling threat of possible impacts on the economy again.

It is basically just China where all seems to be in perfect order again. The Purchasing Managers’ Index (PMI) rose again in September and remains above the 50 level, meaning companies are more optimis-tic than pessimistic about the economy’s prospects. This applies to the service sector too. One barely hears of outbreaks of covid-19 cases in China now, factory production is still on the rise and domestic private consumption continues to be strong. It might all be too good to be true, but after 2008, it was the Chinese economy that offered the earliest and strongest recovery.

The recovery process is beginning, slowly, in other countries too. Polls confirm rising consumer and business confidence in many places. The contraction of the economy in many countries is deep and a big worry, but is perhaps less than most forecasts. All this is at a price, and nobody knows yet who is going to pay for it.

For global investors and economists the focus now shifts to the presidential elections in the US, where not only the result remains unclear, but also how Mr Trump would deal with a possible defeat. The election result could mean sharp reactions on the stock markets as well as in other markets too.

Local conflicts like the current between Azerbaijan and Armenia are a threat to  regional stability. There is plenty of instability in many of the regions around Russia. The activity around Taiwan by the two superpowers cannot be ignored. There are other conflicts that have caught our attention in the recent past and have not yet been resolved. The number of these seems to be mounting up all the time rather than diminishing.

Market Intelligence

The past two weeks have been a rollercoaster ride in many ways. In general, covid-19 is back and hit-ting many countries, particularly in Europe, although nobody is expecting a repeat of full lockdowns for now. Videoconferencing and other modern communication methods are only temporary solutions, and if serious communication and a feel for the market conditions are to be assured, trips and meetings are essential for many.

The second big challenge is the repeated threat of disrupted supply chains. Local lockdowns and transport restrictions can quickly interrupt just-in-time plans. For the leather pipeline, we have seen a continuation of the recovery. However, this is not as solid as many would like to believe. Raw material demand rose, as too did sales and prices. So far, so good. However, the situation is a bit more compli-cated and the general enthusiasm is beginning to crack. We are currently seeing an initial phase of re-plenishment in the pipeline. The excessive reduction in material procurement, which we have seen since March, had to end when the excuses for refraining from activity came to an end.

Firstly, lockdowns, disrupted supply chains and the very unclear situation over how the consumer was going to act slowed everything down. The second excuse, particularly in the northern hemisphere, were the holidays, with a production break of about four weeks. Businesses had run down their mate-rial inventories to stay afloat. 

The main driver of the situation was China. Despite all the uncertainties about export business and the trade conflict with the US, the Chinese government did absolutely everything to restore consumer con-fidence and to pump all that was needed into the domestic market to get production and consumption back to normal. The government was quite successful in its tactics and the easy access to finance also invited the leather industry to take positions on raw material. A strong performance in the upholstery market added to the general confidence and, as we have seen many times in China, if one starts, many follow.

With the production cycle in China always running a couple of weeks ahead of the rest of the world, tanners there became active buyers of excess raw material at very low prices at the beginning of Au-gust. The recovery in leather demand from automotive production and furniture then followed. The same did not apply to the side leather tanning industry. The situation here has not changed, and there has not been a big recovery in the material’s use in footwear. Without a strong recovery in leather demand from this sector nobody can really believe in a seriously sustained and healthy new cycle.

This leads us to a statement in one industry publication claiming that ‘Hide demand is outstripping supply’. We cannot share this position. We have experienced a massive contraction in retail, in combination with loud anti-leather campaigning. This created a toxic environment for the industry even be-fore the challenges related to the pandemic.

 Significant write-offs of stocks, interrupted produc-tion, lost contracts and so on have left deep holes in the results of the tanning industry and an uncer-tain future. To draw a picture of a raw material shortage, paving the way for the meat industry to push for higher prices is an inadequate answer to the present problems. There is certainly no shortage of raw material. Quite the reverse: there are still large volumes of unsold stock, even if this is invisible to most people.
A lot of strong hands had to ‘park’ raw material during the summer, most notably in a semi-processed state. Less desirable hides and origins have not yet felt any of the brightening conditions and still wait for buyers. Here, many of the tanners must shoulder some of the blame. Their willingness to switch raw materials has faded and so they complain when they don’t get what they want at the price they need. 

We are not in a phase of expanding leather use. We are not in a period in which leather is becoming more popular and we are not in a time in which brands and retailers, car manufacturers and shoe com-panies plan to expand their consumption of leather. We are in a period of replenishment of the pipeline and in a period of government influence, in particular in China, that has offered easier access to fi-nance and triggered more private consumption.

This is temporary and not a sign of a fundamental improvement. Moderately rising prices for raw ma-terials are beneficial for everyone up to a certain point. With missing demand and popularity, leather can, at this stage, only gain market share by price.

If this allows a better penetration of leather, it could lay the base for a better future. Those who wish the leather industry well should not pour oil onto the fire, but do everything to support leather consumption, to stabilise a solid demand in appreciation of the material and its specifications and to ana-lyse properly the market situation to prevent erratic price movements and long-term damage. That way, raw materials will also achieve their share and return a better average than today.

The split market in some sectors was able to take advantage of the situation. Here it was indeed the shoe industry in Asia looking for specific types of splits, but also attracted by low cost. The opposite was seen for splits ending in the collagen and gelatine business. Dropping prices for pork raw material and normalising supply from the tanning industry made it more difficult to sustain the price levels achieved before the summer when the industry was a bit scared about supply and possibly acted more out of panic than necessity.

The skin business is still lagging. However, we are no more negative now than we have been for a long time. We see on one side, despite all the anti-leather campaigns and the general difficulties in re-tail, more interest in garment nappa. With plenty of skins still around to be bought, we see little by way of an effect on prices. However, many are reporting a rise in the number of enquiries. With the massive destruction of raw material reducing supply, only the better skins remain in the system.

In the coming two weeks we think activity will slow down again. The main reason being the holidays in Asia for the Mid-Autumn Festival. In the rest of the world it seems that the tanning industry must digest the recent and, in some cases, steep increase in raw material prices. Looking at the percentage of sales that have gone into China in the past two months, one could also conclude that buyers can take a break when they do not like the prices. In Europe the situation is a little different, as tanners are no longer well known for taking larger raw material positions, preferring repetitive and regular renewal of contracts without a big buffer to lean back on. This seems to lay the base for tough conflicts in the next round of price discussions. 

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