Market Intelligence - 15.10.19
15/10/2019
There are political tensions and problems wherever you look.
At the beginning of this month the Chinese celebrated the 70th anniversary of the founding of the Chinese Communist Party. No surprise that it was used as a huge demonstration of the internal and external power of the nation. President Xi made no secret that China is claiming to be the leading power of the globe now. At the same time, protests in Hong Kong continued and intensified complaining about the rising influence of mainland China in their society.
The trade war between China and the US is leaving a deep impact as well. The biggest obstacle remains the cultural difference in the way of dealing with conflicts between the two global superpowers. People who know both parties and their attitudes know very well that it’s difficult to find the right way forward between ‘not losing face’ and ‘having made a profitable deal’. The talks continue and one can only hope that on either side of the table there are the right people to handle it for their bosses. Big egos look for their chance to sell it as their victory. On Friday night last week partial agreements were reported with the news that this will be fixed in a written agreement soon. Optimists hope for a big change now while sceptics mention that progress had been advertised many times just to be followed by the next level in the conflict.
Populism, nationalism and religion continue to develop extreme and violent positions. Terrorist attacks of individuals where once again noticed in France and in Germany, not to speak about the never-ending suicide bombing and terrorist attacks in the places in the Middle East. People are out in the streets from Africa to the Middle East, from Moscow to Hong Kong and South and Central America.
The never-ending story of Brexit is now getting closer to at least an interim end. Almost every day there are new developments and last weekend positive news about a possible last-minute deal were circulated. Turkey is invading northern Syria, Mr Trump has left his former allies, the Kurds. He has pulled out there and increased troop numbers in Saudi Arabia. Mr Erdogan has threatened the EU; if it takes any action now he may open the borders for 3.6 million refugees.
The world has become far more dangerous, but the financial markets take little notice. Why should they, because for them all is still fine. Who worries about a trade war, about the grim outlook considering the changes in global trade, about possible asset bubbles and about the rising violence around the globe? Stock markets continue to side-step these issues; it seems there will be a never-ending flow of liquidity to cure any problem in the economy. The US is celebrating its lowest unemployment in 50 years, for example, and consumer confidence in the US jumped by almost three points in October. Nobody is willing to believe that things could go badly and sometimes one is reminded of the famous Titanic voyage.
Public opinion is unpredictable. Apart from the political tensions and the risk for the economy, at least in the western world, one has to watch how strong and successful the environmental activists are becoming. They ask for action on climate change and are gaining support in wider society. However, what they ask a for has massive consequences for economies. Fewer emissions and more sustainability mean, in the short term and until technology offers new solutions, less production, less travel, less choice and variety and also less streaming and chatting on line. It will also mean less globalisation and more nationalism.
The price for most commodities remained in their narrow ranges. Precious metals bounced a little, but it was nothing worth mentioning. Oil prices fell and rebounded and the USD rose and fell. Volatility is still very low and the amplitude of price variations in 2019 is small compared to previous years. However, if all the positive news last weekend about agreements between China and the US and the EU and the UK become reality a rally of commodity prices and stock market is expected. The opposite is also possible. This applies to currencies too.
Market Intelligence
The leather pipeline still continues to try to find solutions and new directions for this business in the future. It is tough because there are so many different influences that have to be monitored. Just one of these would have been enough in the past to create a great deal of uncertainty.
Before we begin to monitor and discuss all the different options, let us start with a quick review of the Lineapelle Fair in Milan at the start of October. Most people agree that the number of visitors was visibly less than in previous years. From a negative perspective one would blame the difficult situation in regard to leather demand, but from a neutral position we have to consider the numerous holidays that kept a lot of visitors at home. Those who consider the fair in Milan to be the core event were all present. Hardly any exhibitors failed to meet up with regular and important clients there, with only a few exceptions. The first day was, unusually, the busiest one and many exhibitors received their important clients on the first day instead of the second one, as usually happens.
It needs to be stressed that the show in Italy is still the anchor for fashion and luxury. Although many raw material suppliers from all around the globe use the event to meet people and to try to gain an impression of the leather business in general, the real conversations are held between specialists and fashion trend-setters. The management of the big global brands, e-commerce platforms and retailers walk around the aisles too, but for them it is rather an event for spying and taking inspiration. They are not purchasing and it’s also not the place for them to discuss real business.
The sophisticated high-end manufacturers and brands visited their tannery suppliers at Lineapelle and, from what we were told, there were mixed emotions in these meetings. Leather still plays a very important role for many. New articles, new colours and technical evolution presented once again a fantastic and beautiful spectacle. Tanners are still working hard to prove how nice and attractive the material can be. However, some general uncertainty about the material could be felt all over. Every second discussion was about the future. Will the small minority that is currently enjoying so much public attention finally be successful in forcing brands and retailers to walk away from a natural material? Will these companies believe that non-leather materials are a safer option in the competition for the consumer’s money? Will ‘vegan’ as a sticker on the product shift the purchase of a shoe, bag, sofa away from the real leather? We failed to find the full confidence in all the discussions we had.
On a side note we recognise once again the rising number of exhibitors of non-leather material in Milan. This raises the question why the fair is still called LineaPELLE. The organisers should clarify what their intentions are or it might be better to hold two events, one called Lineapelle and the other called Lineaplastica. This would at least make the positions and intentions clear.
Certainly nobody can expect leather producers to predict their own extinction and so everyone is complaining about ignorance, everyone has all the correct arguments why leather should and must have a future, everyone knows that destroying natural resource is the worst crime, but nobody has really presented a convincing strategy on how to reach the public and to guide consumer decisions towards the most sustainable and best material. Consumers should know already, but don’t. Actually this is not just a problem for leather, but for many other natural resources too. We all complain about the trend and the situation, but we haven’t found so far the right tool to make our point and to find our place in the market.
Many have blamed the trade war between the US and China for the sharp decline in demand. This may be true, but only to a limited extent. We still have the same number of consumers around the world and consumer confidence in public spending is not really declining. Manufacturers, exporters and retailers may be concerned about delaying decisions, but so far we have no serious consumption problem. We are stuck with the material issue. As long as leather is not considered attractive, we will continue to fight with the same issues. It is not the environmental campaigning and it’s not the burning Amazon rainforest that is the fundamental problem.
We must not make the mistake either of believing that European trends and media opinion apply to the rest of the world. Not so many people around the globe consider leather as evil and most do not believe that animals are slaughtered for the production of leather. Animal rights campaigners usually have far less success at consumer level then they have at corporate level. However, all this doesn’t help as long we don’t manage to convince the industry to use more leather as a material. There is no indication of a change on the horizon and we can only hope that a resolution of the trade war between the US and China will at least lift some of the concerns of Chinese consumer and for more leather to be consumed in that market again.
On a positive note, in other regions the sharp decline in raw material and leather prices seems to have created more interest. In particular in the Middle East and parts of the Far East we still find a strong consumer base, which is willing to consider leather as good value for money at the moment. Since in these parts of the world meat and beef consumption is regarded as desirable, the purchase of leather raises no questions either. We are able to find increasing interest from that part of the world, which is also a demonstration of the shift of production from China. There are many other places now where manufacturing is significantly cheaper and the combination of rising international interest with a rising domestic and regional consumer base makes several tanneries and shoe manufacturers increasingly positive about their business outlook.
This is a quick look at the main trends for the future:
• Global beef production and consumption is still expanding for now. So more raw material is available
• Alternative products, either plant-based or lab meat, are hitting the market. If they can become price competitive they will increase their market share
• Some time in the next decade beef production is likely to decline and the price will fall.
• For some time leather demand is unlikely to match raw material supply
• Alternative uses of hides, such as for gelatine and collagen, offer an alternative and this is matching the trend of food and nutrition production
• Leather is most likely going to become a more exclusive material, with shrinking volumes
• More investment in manufacturing techniques and technological progress will close the production cost gap between plastic and leather, which might slow the reduction of leather consumption down somewhat.
The split market is undergoing a restructuring. The value and consumption of wet blue splits is facing the same issue and problems as hides in general. However, alternative uses seem to offer a better deal now and prevent rising stocks of material that isn’t being used any more in the leather production pipeline. This is not an easy and quick change, because it requires new production facilities, product development and marketing.
The issue of falling demand for leather hit the sheepskin segment much earlier than the bovine segment. This may offer an example of what is likely to happen. The number of skins used in the leather industry has been sharply declining with only a selective use and consumption for leather now. The rest is stuck; in some cases the skins are fellmongered to recover the wool and what can’t be used is either going into landfill or being destroyed. In this way a certain balance has been achieved with no value or cost from some skins and an adequate return for others.
The next two weeks will most likely be dominated by politics. For the short term the trend of the leather pipeline will depend on the outcome of the negotiations between China and the US as well as the solution between the UK and the EU. This will have a strong impact on raw material and financial markets. This could be good or bad and we would say it is pretty unpredictable. In the long term nothing, politics will not make much difference. We have to watch and see where consumer product manufacturers will lead us.
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