MARKET INTELLIGENCE—28.01.20
28/01/2020
The world of finance and economics has had quite a bit to offer in the past two weeks. The period started with the phase one deal between the United States and China, which is supposed to ease tension between the two economic superpowers for the moment. However, with the two players at the table one never knows what is going to happen next. In the first instance, businesses that depend on the trade between the two considered it be a big relief because tariffs may be less of an obstacle for the moment.
The impeachment trial continues to progress in the United States, but nobody expects a quick decision.
Further on in the period, the International Monetary Fund reduced its forecast for the global economy for the current year to 3.3%. However, this does not take into consideration the possible effects of the coronavirus situation in China. The Chinese economy grew by 6.1% last year and the outlook is for not much better in 2020. A reflection of the slower trend in the economy could also be seen by the drop of 8% in car sales last year. The German economy showed some softness on car sales as well and the statistics showed a meagre 0.6% growth last year.
Later on, the focus shifted from statistics to other topics. The first one was the big Global Economic Forum meeting in Davos, Switzerland, where global leaders from corporations and politics get-together to discuss social and economics topics of global interest. Everything was dominated by environmental discussions. In the end it was something like the Clash of the Titans with Mr Trump on one side praising himself and his administration and on the other side the face of the global environmental protesters, Greta Thunberg, blaming global leaders once again for not doing anything about global warming. As much as one may entertain one or the other position, neither side had much to offer with regard to what to do or how to act. We still see plenty of arguments, opinions and scientific facts that people choose to accept if it suits them, but really no master plan about what can realistically be done about the situation. Let’s hope that the discussion becomes more professional and objective in the near future to achieve something positive and realistic.
Finally the outbreak of the coronavirus in Wuhan, China, has become a focus of global interest. The virus is spreading quickly and has reached other countries. The Chinese government is acting quickly, but the parallels with the outbreak of the SARS virus in 2002-2003 are making the headlines. Some people are positive, saying that the virus will be handled and controlled better this time, but others say it is spreading so quickly that nobody can really forecast the trend or development. For China the timing couldn’t be worse. People want to travel and meet the families, but five cities are totally quarantined and travel is more restricted every day. Not really a good start to the Year of the Rat, for which we send our best wishes to our readers in China.
Commodities saw a bit of movement, under the lead of oil prices. They fell significantly in view of concerns about demand and the subdued outlook for the global economy, in particular relating to the possibly negative impact of the coronavirus on the Chinese economy. All concerns about supply, because of the conflict between the United States and Iran as well as the supply restrictions potentially from Libya, have faded.
Currencies and other commodities face variation, but all in all they are still limited and the volatility of the markets remains surprisingly low. The markets continue to be flooded with cheap money which seems to be an effective antibiotic for the markets.
Market Intelligence
The start into 2020 has been a bit bumpy because the holidays in the West and the East have fallen close together this year. We had only two full working weeks between Christmas and the Chinese New Year break.
This offered just a short period for normal business transactions. In general, the start into the New Year was relatively positive for the leather pipeline. What we mentioned already in our first report for this year has continued. Markets and prices are in better balance and sector after sector has faced gradually improving raw material prices. There is nothing big and nothing general yet, but it may be the beginning of a new cycle.
Most of it is so far is supply driven. In particular in Europe, the expectations for slaughter are reasonably negative. This is to a certain extent seasonal, but the anti-beef campaigns are also beginning to have an effect. Not that everyone is already changing their eating habits, but the food industry and the supermarkets are testing potential changes to their offer list and products. There is great interest in the food industry in a move to more factory-made food; it’s easier to plan, easier to make, easier to control. At the same time you can label it with a ‘vegan’ sticker, which, for some in society today, is the only sticker that matters for food consumption.
In several countries, supermarkets joined in and proclaimed January as ‘Veganuary’. This a test-run to see how consumers respond and to see if better margins and more money can be made focusing on this trend.
Some supermarket chains have already decided that they are going to reduce or ban meat from feedlot productions. How far this can really be executed and how it’s going to be handled remain to be seen. How much consumers really care what is on their pizzas, in their sausages or burgers remains unknown. In any case it is a very difficult time for farmers throughout Europe. They are extremely frustrated by the fact that they are being pressed against the wall.
So far they are still feeding us, they comply with the regulations and work extremely hard. As a consequence we have seen a big number of protests and demonstrations by farmers. Mainstream public opinion at the moment is not really on their side. The biggest problem continues to be that they have no real idea what is expected of them. Supermarket chains and consumers expect cheaper prices, despite all the sweet talk that better quality merits higher prices. The competition in the food market remains intense. Rather than support, farmers face more restrictions, more legal limitations and more need for investment, but no clear sign that this is going to be paid back.
The other big problem continues to be our growing urban society, which is used to having a never-ending offer of whatever they like and no understanding of how the food chain works or how one thing depends on another. No meat, no beef, but still looking for an excellent choice of quality cheese for the end of a dinner party.
In the meantime the European beef industry is begining to worry. African Swine Fever and the extra demand for pork from China and the Far East in general covered up the problems last year. Meat companies all seem to be experimenting with vegan products. None of them dares miss the train. The younger generation are changing what they consume. What is today just a small number can turn into a big trend. In our discussions with several beef companies, they are forecasting declines in beef consumption by between 3% and 5% per year, which will mean significant numbers if we look five years or so ahead from now. What is a problem for the beef industry is a problem for farmers too. Should they replenish their herds? What should the mix be between dairy cattle and beef cattle? Investments on a farm have to be planned.
So far this seems to be a very European subject. In general the big packer organisations still expect a rise in beef consumption and global slaughter for years to come. For the leather supply chain, this means that commodity raw material should not face any kind of supply restrictions. Quite the reverse: we could even expect still more hides coming into market from these origins.
For the quality material from Europe the situation could quickly become significantly different. The supply of higher-quality hides will fade and, now, leather demand is showing the exact opposite trend. If we just look at the past two months or so, prices for raw materials like calfskin and top-quality heavy males were the ones that were the first to turn around. In the case of calfskins, prices are still significantly lower than they were a year ago, but already a decent 5% to 10% up from the low points they reached.
We look at the global table of prices and the number of grades, origins and raw material types that have already recovered from the market collapse continues to increase from week to week. We have been slowly adjusting our market opinion since the end of the summer holidays last year, but we have to mention as well that we still require a breakthrough for leather as a material for mass consumption and here we are in front of major obstacles.
On the one hand we have anti-meat and beef campaigns, we have animal rights activisits becoming more aggressive against leather, often using lies to condemn leather as a material and to work against it in consumer product manufacturing. Luckily, this has so far not been particularly successful. In contrast to the food situation, there seems to be no widespread public support for this.
Quite the reverse. We continue to see designers using leather as a material again. Since last September one can read in fashion magazines and in business media about a new trend away from casual, plastic, sneaker fashion back to more traditional outfits. Well, we have learned that designers may trigger trends, but not everything they do enters the fast fashion chains, the department stores or the internet retail platforms. It is a beginning, anyway.
Once again we have to mention that all these concerns w in Europe might not reflect the consumer opinion in other parts of the world. This means in particular the consumer markets in the Far East and in North America, Russia and the Middle East are far less driven by environmental concerns and media opinion. They follow fashion and image far more readily. A change in fashion in favour of leather could be of greater influence on the leather market than any potential decline in Europe. The question is how the brands are going to handle it; they prefer product that work globally rather than having to react to different regional consumer trends.
We think it will still need another six months to really understand what the consequences are going to be. For the moment we have to say that we recognise more leather in garments and in general fashion and we are also seeing more leather in shoes in general.
After the first four weeks of the year we would say that the pipeline needs a refill again. Tanneries and furniture factories seem to have run stocks far too low and with things beginning to normalise they have needed to buy and get raw material shipped. That has helped to solve a lot of the congestion in raw material, in particular for cow hides and other hides most commonly used in this sector. However, a small warning. Leather is still competitive in price with the alternatives but the season for upholstery production slows down at the start of spring. Those who are now just riding the trend and believe that they will be able to continue to do so for the rest of the year should get the history books out.
The split market has seen some recovery for standard uniform articles. For cheap shoes and suede production the very low prices eventually became attractive enough. Replenishment of the pipeline is under way in this sector too, although we have to mention once again that we do not believe that a real breakthrough for rising leather consumption in general can be guaranteed.
Despite all the good news from the garment sector and designers, the sheepskin market continues to suffer. Selective, high-quality skins are still performing well. However, the commodity skins continue to suffer and fail to find sufficient demand. Prices for lambskins from the UK or New Zealand, for example, continue to remain well below processing cost. Wool prices for what can be obtained from nappa skins continue to be under serious pressure and the main buyers for such materials, customers in the Middle East, continue to believe that their raw material procurement will be free for ever. We know how sensitive this market is and how quickly things can change.
We fail to understand that the reduced availability of pig skins, the cheapest raw material prices in history, and a finished leather price that can easily compete with plastic have not yet triggered any real increase in sheepskin demand. This is a market from which we would have expected more reaction already; we are now eagerly awaiting the next weeks, in which, generally, a lot will be decided with regard to production and materials for the next winter season.
The coming weeks might be quiet but these decisions will begin to form. In Europe meat companies are becoming more aggressive again. They have noticed that the situation has improved a little, that the clearance of raw material has become better and they are back to being able to scare selected buyers again. Since packers have no mercy and no long-term vision they will do anything to squeeze more money out of the hides business. This might be not a very smart idea, because when higher prices kill leather demand their enthusiasm will prove to have been short-lived. If they were a bit more sensitive they might be able to generate more benefit in the long run.
Asia will be very quiet due to the holidays. Everyone who is in contact with China these days is conscious of the fear people have for health and for business. A lot of the optimism we saw in the recent past has begun to fade. If the coronavirus continues to spread and the reaction of the government is to restrict public life, the typical reaction of the industry is to disappear from the markets and to wait.
At this moment it is difficult to predict what is going to happen. If the spread of the virus can be stopped quickly, we are relatively positive for business after the Lunar New Year holiday. If the virus spreads, public life in China is going to be affected and enthusiasm could quickly disappear; we could quickly go back to the wait-and-see attitude we meet so often in that part of the world.
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