The Leather Pipeline - 12.06.18
12/06/2018
The G7 Summit, the expectations around the meeting between US President Donald Trump and North Korean leader Kim Jong-un, new governments in Spain and Italy, elections in Turkey - although none of the above has had any immediate effect on the economy, the long-term disturbances may be quite large.
Regardless of one’s position towards the politics of President Trump, there is no question that his behaviour following the G7 summit can be classed as unordinary and perhaps even chaotic. He is risking within months what has been built over decades. If he doesn’t agree with what has been agreed by former US Presidents, it is acceptable for him as the present leader to be looking for renegotiations However, to simply declare anything that doesn’t fit into his individual and personal world of politics as null and void does not make this world any better, nor does it help his own nation.
The patience of his former partners seems to be slowly exhausting. If there is no longer a common base, it is not going to be easy to form alliances and the balance of power will be at serious risk. Political analysts and media have already started to study and investigate what the potential consequences could be. The current fundamental global stability, which we have seen for a long time, could finally be coming to an end.
When old alliances break, new ones will be found; if stable connections become weaker, new ones will be found; if power vacuums are created they will soon be filled with new arrangements. Whether that will be good for the world has to be questioned; selfish autocrats have never been good for political and economic stability, neither regional nor global.
In Europe people are worried about the policies of the new government in Italy. The country is already suffering from heavy debts and the general political programme of the new government does not seem to make the financial stability of the country any better. The European Central Bank (ECB) will have to decide how it is going to handle the situation, because they were about to begin to move away from their policy of tapering and easy money.
If we consider that President Trump’s policy is to start trade wars, to risk free trade and to set a policy of tariffs, we also have to assume that he has got no interest in a strong dollar. This is a pretty two-side position; on one side a weaker dollar will definitely make exports more difficult for the non-dollar countries, but at the same side imports in the US are significantly more expensive. If this is combined with higher interest rates, there could be a difficult time ahead for the US economy, at a time of inflation for US consumers as well. As long as people are not affected, they will not complain, but no matter which angle you look at it, it definitely does not look good for the global economy.
So far, we have not seen much influence on the financial markets, but big investors are beginning to talk about their concerns for the stock markets in 2019. In the past two weeks the stock markets have not moved much, drifting lower in general. The US dollar was not able to extend its gains and saw a moderate setback. Gold prices remain stable and oil prices fell a little over the past two weeks.
Market Intelligence
Things have changed a little in the leather pipeline in the past two weeks. There is no fundamental improvement, but the raw material producers have started to think about their business and budgets for the time after the summer break.
This touches the tanneries in Asia first because they have the longest shipment times and so their decisions have to be made much earlier than in Europe. Consequently, we saw inflated weekly export sales in the United States and several people in Europe were talking about more interest and enquiries coming from Asia.
However, this is only one side of the coin. Leather prices continue to be under serious price pressure, returns for splits are in the same direction, and production costs are rising all over the place. This means that tanners have absolutely no interest at the moment in buying anything if it is not cheaper than before. They hope that further declines in the raw material market will eventually compensate for the deflating leather returns and growing costs. Raw material sellers are fighting to preserve some kind of regular product flow and this has to take place with further price concessions, a situation that has been present for a long time.
The only exception remains the top-quality hides, in particular those for the automotive industry, and veal skins for the luxury market. Prices continue to be stable despite clear statements from that supply chain that compensation needs to be found somewhere for the declining split revenue and the rising production cost.
The price of cars and luxury bags and sales of these products have not shown any weakness, and so it is not the leather price that is causing the problem. There are still profits in this supply chain and the balance between supply and demand continues to be intact, so prices barely change at the moment. With the falling kill in Europe, the main supply source for this market section, and even considering the holiday break in August, there is no build-up of unsold inventory to put any kind of serious pressure on sellers to discuss lowering their asking prices.
The situation is different in the average and lower quality section, where sales can only be achieved with price reductions. This means sellers are having to surrender when they are in negotiations with their customers for next year. In the US in particular profits in the beef business are very impressive and the demand for beef remains good, so we are facing a wall of hides coming out of the abattoirs week after week. The packing industry and many pundits are predicting that the situation is going to continue for a while. The fantastic profits from meat production allow packers to be a little softer in their price negotiations. The most important thing for the US beef industry is to make sure it holds on to market share in the international leather industry. This means staying ahead in pricing to avoid any serious competition from other supply origins.
The other main supply origins have most likely learned their lesson and have understood that under the current market conditions it is extremely difficult to remain competitive with a strong supply base from the US. We have a similar situation in South America, but here it is prices that are deciding if any kind of regular product flow shall be sustained because the average quality of hides is lower than those from the US.
Demand from Asia
This leads us to an interesting development. As we all know, demand for leather has been shifting more and more towards better and more specialised types. We have learned from a number of sources in the past few weeks that Asian clients are also complaining about the selections they are getting from their volume suppliers.
Several suppliers from Europe are reporting rising interest, in particular from China, for better quality hides and for selected wet blue of average and higher selections. The big question is if any Chinese tanners are in a position to compete on price with European quality tanners for finished leathers. If Chinese tanners cannot obtain a serious price rise for the leather and meet the quality target of their customers, it will not be a very successful strategy. Even worse, it will make competition for quality raw material even tougher, which would mean more trouble for the European quality tanners trying to obtain their preferred raw materials at an adequate price.
However, this does not solve the problem of what to do with the lower selections. It doesn’t matter where they are getting stuck – in the tannery, in the hands of a wet blue trader or at raw material level. Until we find a way to boost leather demand for the bottom end of the market, the problem will not be completely solved.
The summer should give us more indication of what we can expect for the next season. If we only see more demand for higher quality, it will be good news for those operating in this sector, but it will be of no help to the rest of the market. It might simply push the trend of tanners trying to buy only the most selected materials they can get in raw or semi-finished states.
For the rest the situation will not get any better unless there are new fashion trends favouring leather or a new balance of prices between natural and artificial materials triggers a shift in material use. This seems pretty unlikely, at least in the shoe business, where the manufacturing components play such an important role.
Industry issues
Another issue dominating the conversation in the last two weeks is how the industry is going to deal with the questions surrounding animal welfare and sustainability. The beef industry needs to deal with the environmental issues and to find a defence strategy against artificial protein production and anti-beef campaigns.
On a global scale, the consumer has not yet reacted, and meat production continues to rise. However, solutions have to be found to satisfy the demand for animal protein caused by rising wealth and a growing global population. The beef industry is very busy trying to produce and publish new ideas and trends. Everyone is monitoring the situation in order to understand what the major trends will be in five years’ time.
There are also the usual discussions about animal welfare. The lack of a global standard and the presence of different cultures mean it is very difficult to come to a common view of what the term means. Global brands in the automotive, shoe and luxury industries are all dealing with the subject. The beef industry is represented by its largest players.
If one simply listens to the speeches and presentations being given, everything sounds good, but absolutely nothing will satisfy those who are aggressively campaigning against beef and leather. You can set whatever standard you like, but it will never erase the fact that killing an animal for the production of meat and beef will be seen as cruelty by those who are against it. We already have very high standards in many parts of the world, and there is also legislation and controls which are working well. A small percentage are not upholding these standards, but very few complaints can be made.
As far as the leather industry is concerned, the ambition to solve the potential problems created by campaign organisations should be reviewed. We can create as many labels and certifications as we want; the fact remains that an animal has to die to offer meat and beef and this will remain the largest target for anti-beef campaigners.
If meat consumption is going to substantially decline, there will also be fewer hides and skins, which will mean the problems for the leather industry and its opponents will solve itself. The money and effort being invested at the moment seems to be in vain. The arguments have already been presented and the consumer will ultimately decide. The strongest argument we have is that producing leather in an environmentally-friendly way is the best use for a hide or skin at the moment.
Splits and skins
The split market continues to face serious problems. There is significant oversupply, not just of standard and commodity splits for leather production, but also of lime splits. Gelatine and collagen production is starting to feel the strain of these volumes.
The skin market in Europe is over the seasonal peak. The usual enthusiasm of the industry at the beginning of the new season has faded and the ambitions of many suppliers with regard to prices has been blocked. Consequently, prices are coming down again and are beginning to settle.
There are interesting reports from various origins that interest in wool sheep has picked up. It is unclear whether this is due to firmer wool prices, speculation due to the cheap prices, or genuine improved interest in nappa leather.
Question time
The next six to weeks will be decisive in terms of determining what we can expect for the rest of the year. There are many questions to answer: Will we see a trade war? Will there be turmoil on the financial markets? Are pipelines empty and need active replenishment before the new season starts? Is the problem of plastic waste a possible trigger for leather demand? Will the trend to look for better leather selections in China create the next problem for the lower end? Will the automotive industry have to deal with new market conditions as a result of the new emission standards? Are higher oil prices going to leave footprints for leather prices and for leather chemicals? And many more.
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