Macroeconomics

The pandemic continues to have the entire world and its grip. The focus is almost solely on the daily developments and the numbers and statistics supplied. In many countries, the flattening of the curve has been achieved while others continue to struggle. Anyway, it means little until we have either full immunisation or a vaccine.

So far, most politicians have, in cooperation with the scientists, done the best they could. Nobody can blame them for their decisions because they have had to deal with something they did not know and where no specific advice was available. In the developed world the expectation of full safety and governmental protection has been created and the only criticism might be that, even today, politicians try to maintain this impression. Many leaders around the globe are still trying to celebrate themselves as the universal masters with everything under control and being in the possession of the knowledge needed to guide people through the crisis.

It is not them and their decisions, but rather the medical systems, the people serving and working on the frontline and the discipline of people in their daily lives that have created improved results.

Discussions about an exit strategy are slowly beginning. So far, people are still willing to accept isolation and restrictions, but it is only human to want to know how this is going to end and when. This is difficult: most politicians are trying to play for time, and possibly, they need it. However, the economic and social paralysis we are facing could create even bigger problems than the terrible mortality the coronavirus claims. Any easing of the restrictions will, in the view of the politicians, cause new and rising infections.

All details have already been discussed in the media and we do not need to repeat them. China, the first place to have an outbreak, is leading the pack. The government there has decided to return to normal life again and they know very well why. China could be a very good example for the rest of the world if there were total confidence in the numbers and statistics published. At this stage, everyone would be glad if the decisions taken in China could be transferred to other countries too.

So far, everything still looks like a cycle and this means we might have seen the worst in China and other parts of Asia, that we are possibly close to the peak in Europe and still a little bit behind in the Americas. However we still don’t know what to expect from the Indian subcontinent or from Africa. With the best will in the world, living conditions there can be very different and the health systems are often not prepared for the numbers of people they may need to serve.

In the markets, gold continues to be a safe-haven investment and the price continues to hover around the $1,700 mark. Most analysts consider that the next level is going to be $2,000 per ounce, because gold is serving as a safe investment against possible falls in the financial markets.

Market Intelligence

The leather pipeline is struggling, like many other businesses. Being a material for general and standard consumer products, it is hit by the shutdown of retail. It is hit the almost complete stop of international travel, it is hit by the closed automotive factories, it is hit by the meltdown of international air travel and by the aircraft grounded and delivery of new planes being postponed. It is hit by huge stocks of finished products, it is hit by cancellations of orders and it is hit by the shutdown of the tanning industry in many countries.

It is almost impossible to figure out by how much leather production has been reduced, but it might be fair to assume that production up to the semi-finished state is down to a level of 50% to 60% and the production of finished leather possibly down to 30% or 40% of normal levels.

Those markets that are beginning to open up again are mostly in Asia, with China and South Korea in the lead. In China people say about 70% of the old normal has now been reached. At the same time, tanners are complaining about missing orders and massive cancellations. In the rest of the world, most tanneries are just keeping the drums turning wherever they are allowed, for the sake of keeping production afloat rather than seeing an active customer base asking for leather. The leather industry is not as badly hit as travel companies, restaurants or hotels, but in the end leather cannot be used to produce facemasks or serve in any other way to combat the crisis.

Everybody is waiting for good news along the supply chain. Shops must reopen, because products made from leather can only be supported in a limited way by online business. The luxury brands had been publishing results, with a surprisingly small decline in revenues in their leather sections. Some have been hit hard, but the top end of the range was a downturn of between 10% and 25% in the first quarter.

In the automotive sector, China has recovered pretty well after a massive drop in car sales in February and March. However, it might be wise to be a bit patient to see how the balance between production and sales turns out in the second quarter. In Europe, large companies have been delaying their reopening. Supply chain issues and car sales make reopening difficult. Factories producing components, which are also needed in factories around the globe, will possibly restart their production lines first. Vehicle production and assembly will certainly focus first on the models for which there are still well filled order books. This applies mainly to premium models, a good part of the SUVs and models that run either hybrid or electronic engines. We tend to believe that the first round of reopening will take place at the beginning of May and after a test phase to show how reliable supply chains are.

The biggest hit has definitely been taken by the shoe industry and shoe consumption. Hardly anyone around the globe is short of shoes. If you work from home or you have become unemployed, the purchase of a pair of shoes is way down the priority list. Timing has also been very poor. Retailers and online platforms have lost almost an entire season and we understand that many large brands and retailers have cancelled shipments and orders wherever it was still possible to do so. Shoes delivered and planned for the shelves and online sales over the course of the past six-to-eight weeks are now congested and it remains to be seen how many of them will still find buyers for the spring-summer season. In the best of all cases, they can be kept for next season and find buyers then.

Under normal conditions, we could expect a massive discount battle in a few weeks because many players will be in desperate need to raise cash to keep their businesses afloat. At this stage, we may mention adidas, which is one of the most successful brands in recent history, pleasing investors and the financial markets with strong growth and outperforming forecasts. The company has asked the German government for financial shelter and has obtained rescue loans of a significant size. If they need this kind of support, one can imagine how difficult it will be for smaller enterprises.

The situation in the shoe industry raises a question we were already dealing with. Is the extended supply chain really something that should be the set-up in the future? Most likely not. Cheap manufacturing, uniform fashion, manipulation of consumer demand and attempts at perfect production planning and careful cost control have dictated and created mass consumption. Fast fashion and flooding the western market with oversupply was the path to growth. Companies became obsessed with budgets and the optimised cost of manufacturing. One doesn’t need to be a political critic of capitalism to understand that there is a defect in this logic. There is a cost to inflexible production: long delivery times and the excessive risk of unsold products. The calculated margins they were able to obtain for low-quality, mass-produced products could cover missing revenues. 

A crisis like the present is now displaying the full risk in such a strategy. Products gets stuck, long delivery times with large stocks in the pipeline kill flexibility and options. The scale effects have reduced cost and widened margins, but at the price of increased risk. This has become common management sense and practice since the time of the famous José Ignacio López, once head of the purchasing departments at, first, General Motors and, later, Volkswagen. He renegotiated contracts and pushed costs lower and lower. His strategy was taught in management schools, practised in business and worked well for many years. However, there is still the fundamental law in the economy: there is no higher profit without higher risk. Even when you don’t see the risk.

We are still at the beginning of the consequences of the present crisis and it is going to be very interesting to see if this could be the start of a new cycle or a return to what we had before. For the shoe industry, for example, we have to wait and see if big factories and global mass production under the auspices of the global brands will just resume or if the situation will offer a chance for smaller units that are closer to the consumer markets. Apart from entrepreneurial skills, investment opportunities and allocation of capital, a lot depends also on politics and decisions at management board level. The changes and new options in distribution, marketing and logistics offer newcomers to the market access to the consumer that has been closed to all but the global players for a long time. Disruption can be a chance for a new start and for many products made from leather the present situation offers at least as much chance of a new path to success as the danger of going under.

Business in the past weeks was a reflection of the situation, with the only exception being speculative gambling from China. In most tanning centres around the globe, tanners have just been navigating on sight and purchasing and planning from week to week. The Italian tanning industry remains closed until the beginning of May, which has taken a lot of demand and consumption away from the market. Plenty of containers continue to be stuck in ports and this general congestion needs to be cleaned first.

Even with factories beginning to reopen, we still have to deal with the same issues as before, such as China, where productions may have reopened but nobody knows how finance and orders will go in the coming months. In northern Europe the majority of tanners are still producing, but possibly just at a rate of 50% to 60%. There was a lot of activity and hope around the collagen industry, which was looking until some weeks ago for options to replenish missing supply from the reduction of lime splits. Many people were working on this, but our understanding today is that a lot of that excitement has vanished. Some of the automotive tanners are trying to keep producing and to secure cheap raw material so as not to miss out. Quality operators in upholstery and shoes are trying to do pretty much the same.

There has been a lot of buying of raw material in China over the past few weeks. Mainly the US has reported big numbers of hides being sold to China. Also in Europe we understand that a lot of bargain hunters have been sniffing around and wherever agreement on prices could be achieved decent sales were accomplished. In the US market many people are raising questions over how many of the hides shown in the statistics might be being traded for a second or third time with sellers forgetting to cancel the original orders. We saw the same speculation in 2008 and 2009.

Anyone who believes in the future of leather production knows very well that cheap raw material continues to be the basis for success. Without cheap raw material, even a strong recovery in finished leather orders would not even help you. With the kill now dropping in many parts of the world, the easing of lockdowns in the next four-to-six weeks will be decisive in determining which way the market will go into the summer. If life continues to normalise, several industries have already announced a cut in the summer holidays hoping to make up for some of the volume and production losses caused by the shut-downs. However, this depends on sales, consumption and incomes supporting this.

The split market has been unclear in the past weeks. Gelatine and collagen producers have felt the shortage of supply and do not know how to react. They are looking for products that either cannot be supplied at the price required owing to rising transportation charges or blockages on imports. 

We have had little information about the skin market. In Europe the new season for lambs is about to start soon, but the main takers, such as Turkey, are either shut down or uncertain about future orders. Despite all the problems, we remain rather positive about leather garments, in particular for double-face garments, for next winter. In addition we still see a lot of interest for nappa leather for jackets. 

We are now curious to learn what the next two weeks are going to be like. The coronavirus is going to remain a big challenge. With every day and week passing the medical systems in our societies are becoming more used to dealing with it. Global life is not going to be the same, and travel and tourism are going to be the sectors most severely hit, but in general the same number of people are still living in the world and as time progresses the more normal life is going to be again. We will continue to change our way of life, to use masks, to take precautions over physical and social distancing, but we will also learn that there are risks that we cannot manage completely.

So we will live in a different way; there is going to be a new normal and people will handle it, factories will produce again, people will shop in the economy and adjust. Those who anticipate the changes well will have as many opportunities as ever before. This applies to the leather pipeline too. 

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