The Leather Pipeline - 09.07.19
09/07/2019
The world of economics and politics in the past two weeks concentrated on the G20 meeting in Japan. Media and interested people were hoping for results from the various meetings that would make the world easier to understand and more predictable.
Those who are only focused on investments and the question which asset class might offer the best deal for tomorrow might have been quite satisfied. The trade war between China and the US did not escalate and has been put on hold, the EU has signed a new free-trade agreement with Mercosur, and the final G20 statement did not contain anything conflicting with investors’ ambitions. There was not too much about climate either so nobody was hurt. The Europeans tried to use the chance of personal meetings to put across the position of the EU, but they were not so successful, as they realised quickly when their planes landed back in Europe and those who had stayed at home made very clear what they thought about the private deals done in Japan. The EU commission needs to be strong in defence, foreign affairs and so on, and represented on a global scale by one elected, competent voice at the table of leaders, but it has become the usual backyard juggle for posts.
With easing tensions and the trade war on hold, investors thought it was a good idea to liquidate their security positions in gold and return to the stock markets. Also the US dollar gained somewhat and the agreement of the OPEC group of oil-producing countries to stick to production cuts became a side note, but oil prices were able to advance as well. Lower production and less risk of headwinds for the global economy let prices rise again.
Politics were a bit on the backseat. There was no big progress on Brexit and UK politics, not much from the Middle East or Venezuela and this left a chance for the leaders of the US and North Korea to film a Hollywood scene and make some headlines, with a US president setting feet on North Korean soil for the first time. This was not really of any importance or diplomatic relevance, but probably earned some extra clicks and likes.
Also a video of the US president’s daughter (presidential advisor by acclamation) not having realised that the group of bigwigs she tried to join was not in small-talk party gossip mode made it into the news.
The auto industry is showing signs of trouble again after some stability in May. Ford is cutting about 20% of its workforce in Europe, Audi faces diesel problems again and most CEOs are working on after-holiday statements to excuse why their optimistic forecasts for the second half of the year and full-year results for 2019 might not prove accurate in the end.
Market Intelligence
The month of July has started and this means we are beginning to enter the holiday season and a slowdown in activity in the leather pipeline. Considering the conditions of the trade and the upcoming holidays our regular issues will now become shorter until the end of August, unless something very interesting happens or we see a new trend that needs to be discussed. Not much of this is to be seen on the horizon at present.
For a while now not much new has happened. The global kill continues to be high due to strong demand for beef in Asia. This, and the high season for beef consumption in the US, will keep beef sales strong and packers will continue to enjoy high margins per beast. This will be a great help to them because the rapidly falling prices for hides will not make them happy, but nor is it putting their businesses at risk.
From a European perspective all this looks weird. Anti-beef campaigning is still present in the media and many people must have the impression that the end of beef consumption and production must be close. The reality however continues to be completely different. Cattle kill all over Europe is a fraction lower, but nothing is really changing for the moment. Consequently the production of the main by-product also remains relatively stable.
The term ‘vegan’ has become a marketing tool and slowly but surely in our part of the world the consumer is beginning to react. There is a clear definition what vegan means (Veganism is the practice of abstaining from the use of animal products, particularly in diet, and an associated philosophy that rejects the commodity status of animals, according to Wikipedia) but there’s no clear understanding of what you get instead when you decide to follow the market. Unfortunately, the leather industry has been dragged in many parts of the world into a battlefield on which it is not really one of the combatants.
In a way, the leather pipeline looks a little bit like the EU. There are huge problems to deal with, and a general common interest, but there is no consensus or unified strategy that everyone can support. The result is the same: everybody is unhappy. There are too many fragmented ideas and individual interests attempting to deal with small isolated, individual issues, presenting them as being of the highest priority. There is no indication that anything or anyone can change this or put things into an adequate order, implement an adequate common strategy and unify all the people and businesses that are striving to make a co-ordinated move and speak with one voice and speak loudly enough to be heard. Under such conditions, you are always an easy victim. Like in the EU there are many working hard and trying their best, but without successful coordination and a common, strong body it is hard to see how this could ever achieve any positive progress.
There is almost no inter-sector communication. The leather industry may say that it is trying to coordinate under the umbrella of Leather Naturally. The problem is a problem of the entire chain. It all starts at the farm, with the farmer, and not only in the bovine sector, which is so dominant in the discussion. Farm, beef industry, collagen and gelatine, leather and even look into the medical and pharmaceutical direction: all of them have a common interest, but they don’t act together when they really should do.
The public and the media mix things up instead of separating them. Many people in particular in Europe believe that vegan is automatically environmentally friendly. In the marketing messages, the term has become synonymous with having climate concerns, which it is not (see the definition of Veganism above). It is far away from being positive for the environment, if you think about the full consequences, but the number of marketing teams now using it as a sharp and crisp term is noticeable. It is almost as though they were the sale of indulgences. If you buy a ‘vegan’ product you compensate for your last flight, the use of your car or even for the steak you enjoyed last night and you can feel happy, excused and socially responsible again. This diabolic combination is a tough enemy and requires a very strong opponent.
The way things are developing now there is still a long, rough road ahead and much will depend on how strong the defence is. It looks presently like it is far too little and far too small.
In the meantime the general business along the leather pipeline is still progressing on the same subdued note we have seen for a long time now. Demand for leather and for raw material is still not sufficient to clear the pipeline of the hides and skins being produced by packers. In many parts of the world, many suppliers are struggling to move their stock.
However, there is also some light at the end of the tunnel. If we simply monitor US export sales, we have to acknowledge that sales have pretty much stabilised and even become regular on a weekly basis. This may still not be enough to clear the entire production of hides, but it means that an origin with a large and uniform supply base has successfully created a stable price level and is achieving sizeable sales. If the sales of the past eight weeks have really been done at the prices reported is of no importance really. Whatever they are, the prices that have been agreed are the ones at which a good number of tanneries are willing to purchase raw material and at the same time those who are buying confirm that they feel they have a future in the industry.
This does not change any of the fundamental problems we have been discussing now for almost two years. There is no indication that the demand for leather is going to rise to levels that will clear all raw material production, at least not for the next one or two seasons. This is just an opinion, but going through all the facts and the forecasts of leather buyers there is no other conclusion to reach. How close we are to the reality we will learn at the end of October when the majority of budgets and production plans for the next seasons are available.
The industry and the supply chain are split into those who might benefit from the low material price level and others who could become victims. One has to be afraid of the risk of seeing further casualties along the road in 2019.
The skins market is not delivering any real news. You have a wide range of prices with the desired raw materials, which are dense and fine wool skins and the premium raw materials for the luxury shoe, garment and luxury leathergoods segments, at one end. For the rest the situation remains pretty grim and many slaughterhouses are happy if they find anyone picking up the skins they produce.
Standard splits in wet blue continue to pile up and struggle to find enough takers. In the lime split section, in particular in Europe, the declining leather production continues to leave traps. Not enough material is available to feed the collagen and gelatine factories and this is leading to higher prices. Several people are mentioning more interest and rising demand. This can only be verified after the summer holidays when the match between rising soaks and real demand for material will be established.
Over the coming two weeks the industry will slow down even more before closing for the holidays. Most of the focus will be on politics again. Is the trade war between China and the US really easing? Is Mr Trump going to open new battlefields in the trade relations between the US and Europe or Japan? How is the conflict between the US and Iran developing? We think that these issues will have more influence on the summer trend than anything else. From the supply and demand situation it is pretty unlikely we can expect anything positive.
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