Leather Pipeline: 12.11.19
12/11/2019
Politics continues to make the headlines. Finally, the UK did not leave the European Union on October 31 despite the promises of Boris Johnson. In the US, checks continue on the chance of impeaching Donald Trump. He is fighting back aggressively with the same tactics that proved successful for him during his time in office so far.
In many other countries, demonstrations and riots continue. The main centres are in Central and South America, but also the Middle East should not be forgotten and some countries in Africa too. Also the Indian sub-continent must be mentioned. The worry is that this will continue to spread. Options for solutions should be discussed.
In the financial world, the US Federal Reserve has cut interest rates by 0.25% again, which is considered a vaccination against the possible problems ahead. This has raised once again the general debate about the interest policy of the main national banks around the globe. The number of experts and pundits who see a low-interest rate policy as a big threat continues to rise. The leaders of the national banks continue to protect their strategies. The main concern of the critics is something that hardly anyone can deny. Cheap interest rates are giving stock and property markets, which are the traditional investments of the wealthy, a boost. And they are taking money away from ordinary savers who do not have the knowledge and the money to run a sophisticated investment strategy.
Low interest rates have once again boosted corporate and national debt. In addition, here the experts and scientists are divided in their opinion. Some see it as a very big danger, bigger in size than before the big crash in 2008, while others believe that this is the only strategy to keep the global economy on track. Time will tell who is right, but one thing is historically quite certain: the present relatively quiet and stable markets will definitely not last for ever.
Europe is causing the biggest concerns. The European Commission is cutting its forecast for the coming years and does not see inflation returning to the desired 2% corridor. All further amunition for the new head of the European Central Bank, Christine Lagarde, is to keep the money flow into the markets intact.
Stock markets have mostly been able to erase their summer losses. Many indices are close to or even surpassing past records. The expectations of a decline in global growth in 2020 are so far not reflected in the markets, which has to be directly related to the endless liquidity injected. Money has still no price or even a negative one and what has no price has no real value.
Oil prices may be down a little but the levels we have seen for quite a long time now are still valid. The US dollar continues to trade in very narrow ranges. Actually, we have not checked all the historical graphs, but we cannot remember many years when the volatility and the amplitude was so small. Precious metals have had to face a certain setback. Gold fell well below the $1,500 level and this has disappointed some risk-averse investors.
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The leather pipeline continues to run to the normal seasonal pattern. The big changes are definitely behind us but there is still not enough demand for leather to clear all the raw material being produced now. There are many estimates of how many hides are no longer reaching tanneries to be made into leather. Some people talk about a few million a year, while others go as far to say it is more than 50 million hides. The second number would actually mean that something like 15% to 20% of the global hide production is no longer being used for leather production and a precious resource is just being dumped and destroyed. For skins, the numbers are not available but we are aware of many sheep and goatskins that are either not being collected and processed or are just being collected and sent to landfill. A three-digit millions figure would not be a surprise. At the same time, the number of activists that are attacking fast fashion continues to rise as well. Many of them also support a vegan lifestyle, so they have no interest in solving the paradox of natural, renewable resources such as hides and skins being destroyed rather than used to make clothes and shoes.
However, the markets have begun to return to something of a balance. With the destruction of low-grade hides and skins, for which the cost of collection and processing would exceed the return, the supply base continues to shrink. At the same time, leather demand is not evenly spread. Leather types that are more natural, better in quality and the target of higher-value finished product brands are still able to find a home. Also regional, the anti-leather trend is different. Some people might not believe it but there are still a lot of people in many parts of the world, in particular in eastern Europe and China, who still consider leather shoes to be superior to their plastic counterparts.
This trend is evident in the prices we see around the globe. The sharp decline has come to a halt in the medium and higher-end raw material-producing regions. Prices in the US have stabilised, premium hides in Europe are seeing stable prices too and this list can be extended for items in several other parts of the world. The situation is reflected in a price spread, which in percentage terms we have never seen before. We have a range from zero (for the hides that are just being destroyed) to even $70 or $80 for a hide. Perhaps, for the first time in history, most of the large hide producers have become smart. Usually, such a market environment would have been taken as an invitation to raise asking prices. This might have happened here and there, but in the end, both sellers and buyers have looked at the situation very seriously. On average, we think it is fair to say that except for a few corrections or exaggerations, most prices can be called almost completely stable, and this has been the case for a number of weeks now.
With the rising demand for beef, in particular in Asia (partly triggered by African Swine Fever) the supply side will, despite all the activists, not shrink in the short term. Even the UK has signed the first export deals for beef to China after many years in which UK beef had been banned in that country. All over the world, suppliers of all kinds of meat and beef are trying to get their share. We have to assume that Chinese imports will rise again in 2020. There is no sign that African Swine Fever is going to be under control any time soon and this means imports will continue to be strong. In a way, this may have influenced the recent de-escalation in the trade war between the US and China. In particular, pork imports will be a matter of concern for Chinese politicians in the trade negotiations.
We learn from several sources that almost every tanner around the globe continues to do as much cherry-picking as possible. Even though there is no shortage of supply, tanners are quite limited in their suppliers today in many ways. They ask for better quality, the material controls are becoming much tighter and in their selection of grades. Smaller suppliers, who have less uniform productions, are not in a position to deal with larger and stronger production units and are suffering more and more from the cash-and-carry mentality of customers. They are asked for special selections, they are asked to accept claim standards that are far in excess of the trading standards and finally, yet importantly, they even have clients who come in person and want to pick from the shelves in the raw material warehouse.
This is something that many people are not used to; it leaves them with uncertainty about their margins and businesses. Many of them have already suffered serious losses in the past 12 months when they had in the end to sell skins below $1 per piece and even high prices below $10 were not uncommon. It has to be clear to everyone that these unprecedented low prices could not cover costs. Consequently, the large industrial suppliers have felt the least pain. The larger consumers of raw material feel still more comfortable purchasing larger volumes of uniform, standard industrial supply. True, the large leather producers who are holding orders for finished leather do not suffer from a margin problem today. Hide prices are low and leather orders in volume are insufficient. That is exactly why the hide prices are low. At the same time, we have leather prices for most of the current leather orders that have not fallen to the same extent, so tanners with a decent order book may complain about many problems, but not about operational margins.
As far as general business along the leather pipeline is concerned, activity continues to strengthen in line with the season. The sharp decline in vehicle sales has come to a stop and some brands have even been able to report a rise in sales for October. For automotive leather, it does not necessarily mean the same trend because the distribution of cars sold is not fully engaged in leather consumption. Some brands who are reporting higher sales have even turned around on leather. However, the very pessimistic view on automotive leather consumption that many of us had a couple of months ago is fading somewhat.
To stay on the positive side, we would also like to mention that far more garment leather is on offer today. Sorry, not the leather but the garments. If we compare with the previous years, we see much more leather jackets of all kinds. A certain retro fashion of the 1990s or earlier might be part of the reason. Talking to a couple of people in the purchasing department of mail-order stores they have indeed confirmed that there is a feel that it’s the time for real leather again. A lot of companies however did not dare to place volume orders because, at least in Europe, they were afraid that this would not combine very well with all the ‘vegan’ labels they are sticking on so many products today. This has resulted in very limited orders for real leather products. In a normal environment, the orders would certainly have been much bigger.
In any case, this leaves the hope that if the leather jackets and other garments made from real leather find a positive response and the clearance is satisfying, the shops may be more encouraged in the future to raise the percentage of leather products again.
We should really team up with those who are criticising fast fashion on the condition that we are able to convince them that a long-lasting quality leather product is still a very good purchase.
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