Leather Pipeline - 17.9.19
17/09/2019
We are rapidly approaching the end of the third quarter, which means there are only a few weeks before we close the curtain on 2019. Everything indicates rocky seas and the global community must deal with a lot of issues that will impact the global economy.
For the time being, growth is slowing. There was negative news from Hong Kong, China, India, Australia, Singapore and the EU. Manufacturing is shrinking in the US, China and even Germany.
People are blaming the trade tensions between China and the US as the number one factor, but that might not be all. Consumer spending is slowing. Political factors and technological changes are having an effect too. Questions over the future of mobility is a factor in some countries and political challenges in others.
The protests in Hong Kong are having a negative influence on tourism and consequently on shopping and sales. Shops and restaurants have closed and it’s hitting the retail district hard. Italy has finally got a new government and the local elections in Russia raised concerns over whether they had been held in a proper and fair manner.
Stock markets continue to hold and bounce according to the news about the US-China trade dispute and the national banks’ statements. The financial community has asked what the national banks can still do with interest rates, given that in many parts of the world they are already in negative territory. Will more liquidity have any positive effect on consumer spending? Pretty unlikely, as far as we are concerned.
The global institutions such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) are trying to push governments to spend more. Certainly, many countries could invest in infrastructure, which is a good idea when interest rates are low. However, the loans must be paid and the main problem is how much is used efficiently.
The US dollar, the price of gold and oil continue to trade in very narrow ranges. While gold corrected a bit on the downside, oil pushed a little higher, but generally the outlook for oil consumption is not particularly positive.
Market Intelligence
Two weeks ago, the All China Leather Exhibition took place in Shanghai. Much of the discussion centred around whether leather can regain market share from plastic or whether it is irreversible. There were many opinions, but it is fair to say that the number of optimists is declining. Looking at the exhibitors’ list, the number of non-leather units continues to rise and some people suggested non-leather accounted for more than a third of the exhibition space. Organisers must look after their business, but it should be questioned how the show can still be called a leather exhibition.
The fact is that the leather industry and their related satellites from raw material to finished products is not strong enough or big enough to fill a show of that size in Shanghai. So, there are two options: either to downsize and to focus on leather or to accept that leather is becoming a sideline of a general material show. The industry might be well advised to clarify which direction they want to go. It is not just something that applies to the show in Shanghai; many people are stating the same about the Lineapelle fair in Milan.
In addition, ACLE is becoming less international and more of a local Chinese event. Sure, there are still a lot of international exhibitors, but their number continues to decline and talking to several of the large exhibitors, many are discussing whether they will be exhibiting again next year. In particular, pavilion E1, which used to be dominated by international exhibitors and tanneries, had sharp reductions and several country pavilions were absent this year. A lot of free space was covered by Leather Naturally, organisers’ offices and meeting places and not by exhibitors.
As far as business was concerned, the focus was once again on better quality and more natural looking leathers. Suppliers covering the better end of the raw material range were all pretty happy. In particular, the Chinese tanners have become far more quality conscious, possibly because the lack of commodity business has meant they have to look for specialties too.
If the general problems were not enough, the trade was hit by news that an increasing number of brands were choosing to avoid leather made from Brazilian raw material. That was revoked at a later stage by saying that it would need a guarantee the raw material did not originate from the rainforest areas. Traceability is becoming increasingly important although all the promises and certifications will not solve the main issues. If one wants to protect the rainforest it is not the hide but the beef production that needs to be discussed. We are aware that this can’t be sold to the public at this stage. There is nothing that can be done against those who are using climate concern as a marketing tool.
However, all the discussions around traceability might create an alibi for brands and retailers, but they do not hit the target. Outside the rainforest, the bureaucracy and cost for the traceability systems hits the small farm and butcher and not the industrial mass producers. Before people ask for something, they should think about the consequences. So far nobody can explain how you are going to clarify to the consumer the difference between traceable leather in bovine or ovine or any other material.
In the meantime, we see rising volumes of cattle hides either destroyed or desperately looking for alternative uses, such as in the gelatine and collagen business. The surplus of raw material supply continues and no real return of leather in mass production is expected.
A lot of time in Shanghai was spent discussing possible solutions and alternatives. From my point of view, the leather industry remains stuck without any convincing strategies to change direction. Plastic has a bad image and is facing public headwinds. However, brands are turning the problem into an advantage by talking about the use of recycled products. Everyone with even a little bit of knowledge knows that this is not covering even a micro percentage of the materials originally used, not to speak of the energy consumption and total Co2 footprint. In simple words: we create the evil and are praised for the good intention to get rid of it.
The leather industry must learn from it. We are not getting much support from anywhere, even with the good intentions to explain the use of leather. Simple economics dominate and none of the mass manufacturers is significantly impressed by the efforts. We must understand that there is no leather or plastic but a combination of leather and plastic. You can read a lot about recycled plastic, but nothing or very little about leather in the international media.
In the meantime, the seasonal uptick in the leather business is taking place. This is far from being strong enough to clear all raw material production, but after the summer doldrums, tanning is gradually expanding again. Since we are still early and the real plans for the winter season have not been cemented, we are hoping for more. Car sales in the premium section were better in August. Forecasts are predicting a decent number for September, which is an indicator that the industry might have a chance for a little recovery in the second half of the year. This is what automotive tanners are saying. At the same time tanners are concerned as to whether this can be sustained, and the problems with low selections remain unresolved.
Bag leather is stable. The leather fair in Offenbach, Germany, which closed on September 9 saw good interest and a stable number of visitors.
Upholstery is suffering from the uncertainties in the real estate markets. In China, property prices are flattening. Low interest rates are still a good support for building, but one can see bubbles that could burst. Investors have become more cautious and this impacts furniture sales.
Trade tensions between China and the US remain a burden. Productions continue to shift from China, but this is not a solution. Chinese manufacturers are still dependent on the US market. Talking to some of the big names in Shanghai, the majority confirmed that in most cases buyers and exporters have agreed to share the tariffs, which is bad for both parties. Chinese exports fell more than expected in August and we will see if this can be compensated when the trading partners agree to settle the problem.
In the raw material market, some were thinking the modest uptick in business was a justification for price increases. Well, it’s not a surprise that this failed and higher asking prices were immediately answered by less demand. As much as the industry would love to see prices stabilising because of better demand, we must be realistic that it hasn’t increased sufficiently to push prices higher. All would be well advised to hold prices steady for a while.
The split market remains divided. On one side, splits for leather production are still a major headache and the bigger producers suffer from excess stock. The situation is the same in the hide market. The gelatine and collagen business is different. The pork market is beginning to show consequences and the pork gelatine plants must have a plan B against rising prices for pig raw material or even a cut in supply. There is plenty of raw material not only in splits, but also in full hides.
In the skins market, demand for rugs is slowing. Good quality linings and double face are defending their market share and nappa garment and grain linings continue to suffer. One can see quite a few designers putting leather skirts, pants and dresses on the catwalk – with success – whether this can translate from high-end to general retail is questionable, but we should not be without hope.
For the coming weeks, we think there is a good chance for more recovery in production. There has been so much bad news for months now, the summer was the excuse for everything and the pipeline had been depleted due to a wait-and-see attitude. We don’t believe in any big change yet, because it is simply too early, but the industry has either to take serious decisions on production or they have to push the accelerator a little to gain pace for the next six months. There are a lot of trade fairs ahead and so in a month’s time we will know more and hopefully the positive news will increase.
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