The Leather Pipeline - 23.07.19
23/07/2019
The past two weeks were again a reflection of the various challenges the global economy has to deal with. It is hard to set a priority list of things to discuss.
Perhaps we should start with the political ones. The European Commission has a new president; it will now be led by a woman. The election was another demonstration of how fragmented the EU still is and how it is still struggling with a common position. Staying in Europe, the name of the likely new UK prime minister sent the pound sterling tumbling against other global currencies.
In the US, President Trump is already campaigning for re-election and has attacked his opponents with a migrant background. He used the same event to attack a few of his enemies in the global economy. At the same time, a note sent by the British ambassador to the US painted the White House administration in a negative light. It mirrored what many from the outside already believed.
A large arms deal between the US and Taiwan and the first Russian missiles delivered to NATO member Turkey were further indications that countries continue to invest in their military strength, hopefully for the good.
There was not much good news from the world of economics. The growth of the Chinese economy slowed in the second quarter to just above 6%. In the US, the Federal Reserve indicated its concern about a slowing global economy and offered the possibility of reducing interest rates again within a month.
The European Central Bank has sent the same signals, preparing to flood the markets with cheap money. Who needs this money except a few member states remains unclear, so it is nothing more than an indirect tax for private households, which are still saving for the future. It will create speculation again and has created something that scientists did not have in their studies; the falling value of money without any inflation.
Companies around the globe sent out profit warnings just as their top management leaves for their holidays.
The global automotive business continues to shrink, with profit warnings also from this sector. This is in combination with falling sales in June.
Rising tensions in the Persian Gulf did not support oil prices to the extent one would expect. The price of a barrel of oil went up a little over the past few weeks, but it remains in the mid-60s or mid-50s, depending on the quality you are monitoring.
Falling interest rates and speculation that the value of the US dollar is too high hasn’t really touched the greenback so far. The trading range against the Euro continues to be between 1.12 and 1.13.
Rising uncertainty about the general global situation is also reflected by the rise in value of cryptocurrencies and by the price of gold, which went to the level of $1,440. The announcement that Facebook is considering launching another cryptocurrency can be considered either just a business model or a reflection of the best time to build more counterweight against traditional national currencies dominated by the US dollar.
National banks and finance ministers are concerned and have indicated that they simply will not allow more cryptocurrencies under the umbrella of one of the largest and most uncontrolled technology giants.
Market Intelligence
It continues to be a big challenge to analyse the leather pipeline. The driving force of content is news or any kind of changes that could influence the flow along the supply chain from raw material to finished product.
We have seen plenty of changes, some of which have been adequately analysed in the past. We have been able to mention our concerns and to draw the attention of our readers to the big challenges that arose a long time ago. We received plenty of criticism. The biggest problem is that in all our discussions over the past three or so years we never received any serious proof that underlined the position that the leather pipeline was not in danger.
The leather industry is certainly not one of the biggest in the world. People look at tech giants, finance, automotive and the chemical industry, but the media and public do not focus on our industry at all. The only notice taken is from anti-beef campaigns and from fashion designers trying to draw attention and find a marketing niche for their products.
At this stage, we should have a look at the recent investment by the LVMH group in the Stella McCartney brand. That the luxury conglomerate is taking a stake in a design label would not usually be worth more than a footnote. Investing in Stella McCartney, which has been an active campaigner against leather and fur and a great supporter of PETA, leaves a strange taste.
LVMH is the owner of a number of prominent and successful luxury leather brands. It has invested in tanneries and in manufacturing facilities for leather products. It has done really good things for the top segment in the leather field.
So why invest in Stella McCartney? Strategically, it is a very smart move. Its eponymous founder is one of the most prominent critics of natural materials, all under the umbels of animal welfare. One has to assume that this investment is a purely political move in order to build a strong position when it comes to discussions about natural materials and sustainability. It is a good addition to the portfolio of the group in these circumstances; better to have it in-house than to fight it from outside. The private life of Stella McCartney can remain her own.
What has happened is a pretty good example of how leather is currently dealt with as a material. Sustainability has become a particularly important term in marketing speech. It is hard to find a product description, production process, company profile or anything related to consumer sales where the word ‘sustainability’ does not appear. Marketing managers have become smart; it now appears to be the word that counts rather than what it means.
We still lack a clear definition of what sustainability is. The sudden explosion in the use of the term is highly questionable. Brands like adidas are praised for producing more shoes from recycled plastics. This might be a nice marketing move to protect the use of oil-based materials, but we should take a serious look at the total energy consumption and carbon footprint. The biggest influence, however, is still the lifecycle of the product. The biggest sustainability effect comes from the longer use of products, which is in direct conflict with the growth strategies of the global consumer product community.
The question remains of how all this fits with the leather pipeline. We have to acknowledge that there is no help and support from the clients of tanneries, the brands or the retailers. The leather industry has to take control of its own future or the shrinking process will continue.
Automotive concerns
The next major consumption problem in the leather industry will come from the automotive industry. The facts and figures speak their own clear language. The vehicle market is weak, with just a few exceptions. Car sales and production are down by single-digit figures. Many of the big car companies are sending profit warning. CEOs are blaming the diesel scandal or the trade war and, if that is not enough, Brexit.
However, the decline in leather consumption in the leather industry is far bigger than the decline in production. There are plenty of unconvincing promises that it will recover, but the facts suggest otherwise. The penetration of leather in the car interior is declining and less leather is being used per vehicle The car industry is starting to stop promoting leather interiors in volume models; this means leather is beginning to become a more luxury-oriented interior material. The advantages of non-leather alternatives in production are too inviting and the average car customer is no longer focused on leather. They are more interested in electronic gadgets.
The price of leather will become far more interesting due to the decline of raw material prices. However, it is unlikely that this will create a big rebound. If it leads to a stabilisation and stops the descent of leather consumption, the industry can be happy.
Summer season
At this stage, with the beginning of the summer season, we can only stress that we must focus on the numerous advantages leather has. From a European perspective it looks like beef and leather are walking hand in hand into the sunset, but this is far from the case on a global scale. Russia, Asia, Africa and the Americas are big consumers of meat and beef and they are still happy to use leather as a material.
In Europe, we can still count on the customer who appreciates leather and that there are still many around. This can be seen by the large number of small operators who have stable demand and strong ties with long-time clients. Let’s stop lamenting and start thinking about how we can go around the ones that are not serving.
The split market has offered several positive pieces of news. For many months we have been hearing about several large orders for good quality wet blue splits at adequate prices. We have been able to get confirmation of this from several sources. The buyers are sizeable and well known, so they either have orders in sight or have had the courage to take positions, which in the end shows a positive mood.
European split production and the demand from gelatine and collagen buyers take a break until September. Most prices were renegotiated at stable or slightly higher levels to get over the holidays and to have a clearer picture for the rest of the year.
The skins market is stuck in the same pattern. Quality skins still move and there is more optimism as we can report for Europe that Chinese buyers are absorbing well preserved stocks at rock bottom prices. They know that these are the lowest prices they can get. We don’t see leather orders backing these deals. We tend to believe that the wool is used to cover the cost of operations and to keep the plants running.
We have nothing in the drawer for the coming weeks. Tanneries in Europe are closing down and production in China is put into low gear. Slow business and the summer heat let tanners run productions at the lowest possible levels. Under these circumstances we can only expect some speculative activity.
We wait for ACLE in Shanghai at the end of August and after that all the meetings, fairs and decisions for the coming consumer season. In the meantime, we can only hope that the tensions in the Persian Gulf and all around the world will not create more problems, uncertainties and conflicts.
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