The Leather Pipeline - 11.12.18
11/12/2018
The past two weeks have confirmed how uncertain global investors are regarding the future of the economy. Investors are using any excuse to step in and out the market, which has made most stock markets bump up and down, but with a weak tendency in general.
Politics has an important role today. General tensions continue to rise. The G20 summit in Buenos Aires did not really deliver any kind of convincing statements or conclusions to make investors believe that things can return to a more stable and positive trend again.
The G20 leaders tried everything to prove to the world that there is a high level of common interest, but the fundamental tensions could not be hidden. Mr Trump and Mr Xi were at least able to suspend a second level of tariffs for another 90 days to gain some time for further negotiations. However, the optimism that their differing positions can be brought closer to one another in that period of time is limited. The arrest in Canada of Meng Wanzhou, the chief finance officer of telecoms firm Huawei, upon a US request on December 1, which became public after the summit, will not make the relations any easier.
After the summit, general politics returned to the foreground and the strikes and riots in France and the conflict between Russia and NATO made the headlines. The French government was trying to appease the situation with a temporary suspension of tax rises while the position between NATO and Russia seems to be pretty rigid. The previous marine conflict between Russia and the Ukraine was another piece to prove that Russia is trying to reposition itself by displaying a rising military presence again.
OPEC’s oil-producing members met again to discuss further cuts in oil production as a response to a steep fall in prices. They agreed on a cut of 1.2 million barrels per day and oil prices rebounded sharply after the decision. Qatar has left OPEC, Iran is suffering from sanctions, making an agreement within the group difficult, but likely. For the rest of the world and for net importers, the decline in oil prices was welcome, because in the times of economic uncertainty falling energy prices have the same effect as a tax cut and this helps consumer spending.
The latest statement of the Federal Reserve in the US made further quick tax rises there more unlikely. Also the Fed recognises the unclear outlook for the economy, despite the strong labour market and reasonable inflation numbers. For the time being the markets continue to be undecided and the US dollar has traded sideways within a very small range recently.
The world climate conference in Poland has brought questions about the greenhouse gas effect and CO2 emissions back onto the agenda. Countries thriving on coal-mining, including the host of the conference, are not willing to lose this source of income, just as countries that have agriculture and in particular livestock as a strong base of their economies do not want to give up on beef production. There is no common global interest on how to tackle greenhouse gas. A rising population requires more food production and, whether scientists and the intellectuals of the western world like it or not, there is no common understanding or interest in how to deal with the situation.
Market Intelligence
Everything points in the direction of the year 2018 ending on a negative footnote as far as the leather pipeline is concerned, most likely the most negative ever seen in recorded history.
There is no recovery in leather demand to be seen anywhere. The outlook for the automotive industry and the consumption of leather in this field remains extremely unclear. The optimists continue to believe that this is just going to be a temporary interruption, which is going to end early in the new year. Others see a major turnaround and slowdown with things remaining negative for a while. The holiday season in Europe, followed by the one in Asia, is making analysis still more difficult.
If people need to try to agree on one statement, we would assume that they could agree that leather consumption in the coming three or six months will not be sufficient to absorb all the raw material produced. This means, in the end, that everyone is fighting now for their own future and, as is usual in any market, it is going to be about the survival of the fittest. There may be different kinds of fitness for keeping heads above water, but weaknesses will obviously not be tolerated.
For those selling raw material directly from the production of beef, the situation is certainly significantly easier because they are able to integrate the result of their efforts into their entire business calculation. For those who depend on the by-product, things are going to get serious and dangerous; returns on the product are no longer going to cover the processing costs. Without a fundamental change in market conditions we are going to see an increasing number of victims along the leather pipeline in the year 2019.
With everyone now monitoring the trends in leather-consuming markets, one has to realise that many players seem now to believe that any kind of statement against leather will be favourable for sales of their finished product.
The last example we got was Audi. It has presented a new idea called e-tron GT. One doesn’t need to be a big expert to understand that this is a product to compete with the Tesla S: an exclusive, aggressively looking electric car for the premium market. So far, so good. When you continue reading Audi’s description, you see that the model is being called ‘the first vegan Audi’ because the seats are covered with synthetic material, although it misuses the term leather in its wording. Yes, it wants to be vegan, it wants to be ‘modern’, it wants to be ‘lifestyle’, but it chooses not to use the word ‘plastic’, which is the material it has chosen to use. This description, for such a prestigious car, has various implications.
Firstly, the leather industry cannot allow a combination of ‘synthetic’ and ‘leather’ to be continuously used. Although legally there might not yet be lots of options for sanctioning this, depending on which market the product is selling in, the leather industry should at least make it clear to customers that this is absolutely not tolerable. Before tanners complain that they can’t argue with one of their main, premium customers they should think twice and consider what Audi really intends to do. It is testing the waters for the future. This is the same as Tesla did previously.
The question is how to deal with it. We have a very clear position. Either it’s leather, or it is not leather, with nothing in between. Leather suppliers should make this very clear because if the vehicle companies can sell cars with the same profit without leather, they will do so. We have to identify clients who really want leather and ask these clients to speak up for leather. Leather has to distinguish itself; the fact remains that what automotive manufacturers require today from their leather suppliers is not really what customers expect to get when they buy leather. This has to change anyway; it’s not just about image, but about real value and pleasure. This might not really please the big industrial producers of automotive leather, but we dare to predict that if leather is not presented as a natural, breathing, comfortable product coming with a particular smell, it is only a matter of time before there non-leather materials take its place in more models, including premium ones.
Many people have seen a recent press release from the French luxury fashion brand Chanel, in which it says it will no longer use exotic leather in its products. This quickly turned into ‘No croco for Coco’.
The use of fur and exotic skins for fashion products is definitely debatable. The main problem is that the vast majority of the skins come from animals that are raised only for the sake of using the skin. This is the biggest difference between mainstream leather and fur. Perhaps Chanel was trying to make a positive impression on mainstream media, but it did not bring the story to a positive end. This could become problematic. The company makes a full range of luxury products using superior-quality leather. It is even expanding that section. Does the normal consumer now really distinguish between what Chanel is going to stop doing and what it is going to promote and continue? We are not so concerned about the brand itself, because it would have stopped long ago if its customers in particular in Russia and Asia were bothered about the materials. We have to wait to see if this will lead to a push against leather too. This decision to avoid exotic skins would have been a great chance to use the attention to distinguish and to explain what leather really is and where it actually derives from. This opportunity has now been missed.
This leads us once again to the big question: why don’t the organisations involved in these exercises explain to the public some very simple facts. Stop eating beef and other meat and you will stop leather being produced. Conversely, stopping the use of leather will not stop the commercial production of meat. Nor will it stop the small-scale farming that is feeding and supplying small families in many parts around the globe. The production and consumption of meat and beef is already a complex and difficult field, but when it comes to all the related products such as milk and its derivates it gets far more complicated. We can only quote what one of our sources said the other day: “The anti-beef campaign has not been successful. Beef and meat production and consumption are growing globally. In their frustration the interested groups are targeting leather and pulling away any respect they claim to have for the animal, which is offering all it has, by arguing against using everything and wasting nothing. Not one animal fewer will be produced just because the skin is not processed.”
We continue in the end to turn in circles and if we are not able to break this there is no choice other than to destroy natural resources. Also we are basically writing for the same community with the same opinions and consequently this will have little effect as well. It is frustrating that no one so far has been willing or able to explain these complex dependencies in public.
However, it is also true that the decline in leather consumption is not related to an anti-leather feeling among consumers. It is a decision of the manufacturers to go for cheaper material and easier production, accepting that the lifecycle and the quality of the finished products will deteriorate. Cheaper, easier with a better margin is the driver; nothing else. Once again we have nothing to defend, because this is not the problem. Leather products have to satisfy the buyer more than the alternative, and leather must offer the manufacturer a better margin than the alternative. The ‘vegan’ banner is also just a PR term. The manufacturers and retailers don’t see at the moment any potential for increasing sales using ‘leather’, so they are trying something else. It may work, or it may not work, but at least it has the advantage of being ‘new’ and part of a wider concept of health and environmental consciousness. Whether it is really good or not doesn’t matter, it’s enough that it’s not bad and you can gain social credit from it.
In the meantime, the vicious cycle in the raw material markets continues. Despite all attempts the weak trend in raw material prices continues and the main fear of every seller is that contracts booked may not be respected. One way or another the product flow continues, but it is more than unlikely that all the hides that have been produced will be absorbed into the tanning business. We are now heading into the low season for slaughter in Europe as well as into the winter season in the US. The hope is that some decline in supply, in combination with the possible settlement of the trade war and ease of political tension, could have the effect of increasing confidence again. For the moment however things are moving in only one direction.
We could skip the paragraph about splits because there is really nothing new to report. Standard splits for certain productions continue to be cleared with a wide range of prices quoted. Specialties move always. The reduction of lime splitting as a consequence of the reduction in general production begins to be reflected in the offer of lime splits and trimmings. Nothing serious, but it shows how things can change if the parameters change.
Skin business is just the same as it used to be. Some specialties do well, some producers too, and there is still demand for double-face jackets, sheepskin rugs for decoration and medical use, as well as top end leather made from goats and high-quality lambs. But it is not enough to clean up all the skins produced. Prices for many standard items are pretty close to zero for the abattoir and many processors no longer want to collect the skins because they have no expectation of being able to sell them to cover the cost and make a margin.
The next two weeks will be dominated by the European closure for the Christmas season. Beamhouses will be closed by December 20, reopening in most cases after January 6. Asian and Chinese buyers are delaying purchases because any shipment between now and the end of the year would arrive in the middle of the Chinese New Year holiday (new year is February 5). It also doesn’t seem that the tanners in Asia at this stage are very eager to replenish raw material supplies yet. In our analysis they will have to return to market by the end of December or beginning of January and they might try to time things well and check what kind of bargains they can obtain when the Europeans are all gone. Their opinion continues to be that whatever they bought last time must be cheaper today. Since this has worked for quite a long time it is becoming routine.
We have to assume that the pressure on prices will persist, but without changing the fundamentals we could be ready for more activity when we get closer to the New Year or even the early weeks of 2019.
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