Leather Pipeline - 10.12.19
10/12/2019
Politics continue to make the headlines and there are plenty of subjects feeding the news every day. In the US Mr Trump is facing impeachment. Protests and elections continue to dominate the news desks as well. Recent elections in Hong Kong went in favour of those who have been protesting for months, riots in Colombia, Iran and Iraq were another demonstration of social unrest and France had to deal with a general strike last week. The world is full of increased instability for various reasons.
NATO leaders met in London for a summit and, to many people’s relief, it did not give the impression that the organisation is “brain-dead” or beset by disagreement and weakness.
The trade disputes around the globe continue and the situation between the US and China has not been resolved. An agreement has not been signed and another round of tariffs seems likely to come into force on December 15. The next targets for the US are Brazil and Argentina, which have been blamed for manipulating their currencies. Tensions are also beginning to grow between France and the US too. OPEC members met to try to stabilise the oil market by cutting production.
The climate summit in Madrid is a very popular subject too, but despite a lot of warnings the global community continues to fail to meet climate change targets.
From the financial markets in particular the very strong numbers from the labour market in the US were important. Lower unemployment and higher average wages were pleasing the stock markets. Also China reported better-than-expected data from the production sector for the month of November. The European economy continues to stutter in the wake of falling factory orders in Germany.
The prices for oil and for precious metals continued to trade in very narrow ranges. Day traders might recognise larger variations, but on a long-term graph price changes are negligible.
Stock markets showed a little bit of weakness at the beginning of the period, but most of that was erased after the release of the strong labour market data and most major stock markets around the globe rebounded.
Market Intelligence
While politics continue to be quite exciting in the final lap of 2019, the leather pipeline has already begun to wrap up and wind down. The early holiday season in China (Chinese New Year is on January 25), and its closeness in the calendar to Christmas and the western new year will lead to a longer period of reduced production and activity.
The busy winter season is in full swing and the businesses along the supply have a relatively clear picture about their orders and the necessary action they have to take. A lot of the excitement related to the trade war between the US and China has faded as well. When the whole story began many were absolutely unclear about what it would mean for their businesses and many seemed to believe that the known business world would come to an end. There might be some inconvenience, but business always continues. The negative effects on the leather pipeline have come from many different angles and this trade war and tariffs constitute just one of them.
The tariffs are not specifically hitting leather as much as they are hitting consumer products in general. Consumers in the US continue to shop and it doesn’t seem that they are particularly worried about the tariffs. In the case of leather the tariffs are weighing on the final product cost and this works back into the materials used and, at the end of the long pipeline, to the farmer.
Price pressure on commodity leather continues to be massive. However, we are receiving more and more confirmed information that a good deal of the large stocks that had been sitting in warehouses in particular in China, have been or are in the process of being cleared.
Looking at the prices for leather and in some cases also for lower-grade wet blue, it is clear that we are not talking about commercial success. The price is dictated by competing products and if tanners want customers to buy leather instead of plastic, they have to compete on price. This is leading to prices that barely cover cost. The biggest problem for those who own stocks of raw hides, semi-finished material or finished leather is that the attack is coming now from both sides. On one hand it is the clients who base purchasing values on the alternatives available to them. On the other hand we have the continuing large production of new raw material, in particular in the Americas. For producers of hides it has become a simple comparison between the cost of disposal and the returns they can make on a sale. As long as the return from the sale is still better than the cost of disposal, it is a big headache for those who hold stocks from the times when hides and skins had more financial value. One day, all the overhanging material will be cleaned up and as long as the large packers in the Americas still enjoy favourable margins from beef, they will continue to have options to dispose of their by-product.
In the quality and luxury products segment, in contrast, the added value hasn’t changed at all. The finished product price of a luxury handbag or an exclusive designer chair is still as high as it was some years ago. The buyers of this kind of raw material have taken the opportunity to widen their margins and they would be pretty stupid not to do so.
The big change is definitely coming from the automotive industry. The system of pricing and the general structural problems in this industry have put a lot of pressure on material costs. Every large car company is running cost-saving programmes and is trying to squeeze every drop out of their suppliers too. This is creating a double effect with the necessary price adjustments according to the price index trends and the general budget targets the purchasing officers have been given by general management. This is keeping raw material and leather prices under very tight control for now and for the rest of the season. What happens next is going to be dictated by the success of leather for the coming seasons.
While many continue to be negative and totally depressed about the future of leather, we continue also to see bright spots. Just to mention one, we are aware of a strong recovery in fashion of double-face jackets. Strolling around the city, one can see more and more young people wearing the double-face jackets of their fathers and mothers. In a way, the 90s are back and many youngsters are putting old jackets they have found at home to good use. Winter has come in the northern hemisphere and as long as it is not pouring with rain a double-face jacket can easily compete with all the microfibre alternatives when it comes to comfort.
We have been seeing for quite some time increasing demand from the major production centres for double-face raw material. In particular from Turkey and China one can feel an increased demand for lightweight double-face skins and tanners are trying to secure raw material at a cheap price. It’s not all going into garments; some is going into shoe lining too. The past two winter seasons were dominated by artificial fibre linings and a lot of people have realised how uncomfortable these can be. Even with low price levels, natural material might be more expensive but for the regions of the world where the weather is really cold and function matters, it can offer a good alternative.
What is true for this kind of winter fashion is also true for general garment fashion. The classic, boy-band leather jacket is definitely also back. However, here we are still fighting with the problem of imitation products. A lot of plastic is being used, but also here we understand from retailers that many consumers who are still aware of the original understand the difference and are willing to go for the real stuff. Will there be enough jackets left to go on offer for the spring season. We will see. We still hear a lot about positive trends in the raw material markets for nappa production.
The split market is not serving us with a lot of news. The only impression we have collected in the past two weeks was about gelatine raw material in China. We expected that the increased production of leather in November would also quickly lead to a rising offer of lime splits for gelatine products. This seems indeed to be the case because there is very little heard about any kind of shortage and rising prices any more. Splits for leather production continued to be in the same vicious circle as before. Specialties for vegetable tanning and high-end products using suede continue to do reasonably well. Coated PU splits continue to struggle.
Our last Leather Pipeline for 2019 is going to be published right before Christmas week. With everything we have described and reported above, one cannot expect any big surprises. We hope that the rumours about the successful clearance of unsold stock are correct and that we can obtain more confirmation of this in the coming weeks or months. Let’s hope that the increased activity in local consumer consumption in China will absorb still more product, and do so quickly. After the Chinese New Year break consumer activity usually starts to fade quickly.
The shopping season that began on Black Friday and Cyber Monday has been quite positive so far. All the large online platforms have reported double-digit rises in sales. Products using leather may not have had their fair share, but at least the global consumer, despite all the turbulence, is continuing to shop and to take full advantage of low interest rates.
For the rest of this year we don’t expect any change in direction, for good or for ill. It would be a surprise if there were any significant change in direction in either way.
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