Macroeconomics

Problems between China and the US are growing. Quarrels about software, namely WeChat and Tik-tok, rumours about an invasion of Taiwan by the Chinese, US issues with the World Trade Organisa-tion about the tariffs imposed on some imports from China are all contributing to this. However, there is much more going on at the moment. There are also questions over China’s actions in Hong Kong and its ongoing dispute with India.

In Europe the negotiations around Brexit indicate further trouble ahead. The UK government is play-ing hard, but if a no-deal situation is the result, there could be difficulties for the UK economy.

There are tensions between Greece and Turkey over gas resources in the Mediterranean and this is making discussions about how to handle the refugee situation more difficult.

Large bushfires in the US and the first storms of the autumn are putting climate change back in the limelight; the relationship between those who see the climate change as the main cause and those who deny it is become increasingly fractured.

The elections in the US are getting closer. It is obvious that the outcome will have a great influence on the country and possibly on the world. 

Many countries are seeing a second wave of covid-19. New restrictions have been imposed locally but governments say they will do anything to prevent complete lockdown again. In Israel, though, that’s exactly what has happened.

Fortunately, the economy in general is doing better than expected. On average, the decline in gross domestic product is less than analysts have predicted. Unemployment has been rising, but so far the numbers have stabilised. People should be careful with statistics and read the positive news with great care. What has come down by 50% needs to rise by 100% to get back to the same levels before.

Global central banks continue to flood the markets with liquidity. Every central bank has in its own words declared that further money is going to be injected into the economy, in whatever volume, at zero interest rates. They are claiming this strategy to be a success. Quite a lot of the money seems to end up in the stock markets, which are almost completely at the levels we saw prior to the corona crisis. 

Oil prices have come down again with many producing countries pumping and the outlook for the global economy becoming a bit more gloomy.

The currency market continues to see a generally weaker US dollar, but the trading ranges have be-come much more narrow after sharp corrections during the summer.

Market Intelligence

The usual recovery of activity and production along the leather pipeline seen traditionally from September onwards is also taking place this year. Despite all the problems, tanners and manufacturers have finally decided to plan and act for the seasons ahead.

We dealt with this scenario during the summer period. We might go through difficult times, but eventually everyone has to take a decision regarding the future. If you want to stay in business, you have to make things run and this means you have to take a position on procurement, production and sales.

The second quarter is always tricky in the leather pipeline. After March production usually slows down for seasonal reasons and, in the northern hemisphere, production stops in the month of August for the summer holiday. People finish existing orders, wind production down and reduce their inventories to the minimum levels possible. Then, collections end, new products and materials are introduced and production ramps up again in September and October. Well, this is happening in 2020 too.

What was unclear owing to the corona situation is becoming clearer now. Whatever the pandemic may hold for us there are still almost 8 billion people living on the globe and they have needs and desires. Their demands change and so does their disposable income, but, fundamentally, life goes on.

For the leather pipeline, some problems persist and further replenishment of raw material is necessary. For a number of producers the decision is tough, because they still have reasonable quantities of semi-finished and finished products. In particular in the shoe business we understand that there are still very sizeable stocks of unsold shoes from previous seasons. Looking at retail results since the beginning of the pandemic and adding them to the relatively weak performance of leather shoes for some time be-fore, it is not too difficult to understand the situation. However, this is a separate issue and requires action from the marketing and sales departments to work out what is going to happen. In terms of production, factories have to be run or closed.

The situation is obviously different in the upholstery segment. Traditionally, it’s not forecasts of sales that determine the production of cars, but actual sales and orders placed by customers. Consequently the congestion along the pipeline in this segment has been significantly less. Improved consumer demand in this segment is confirmed now. The industry may still be suffering and the losses and problems of the last six month are weighing heavily on businesses, but the recovery in demand is absolutely in place and the companies that want to meet this demand are having to ramp up production and their raw materials purchases.

What started in China is now spilling into the other regions too. In Europe, the prospects for sales of upholstery leather is positive. As well as the increase in demand for automotive leather, we also see significantly more interest in furniture. A real and positive surprise is the willingness of manufacturers to consider leather as a material again. We have all been taken aback by the aggressive anti-leather campaigns and by the weak performance of leather in upholstery in recent years and many had begun to believe that leather had already lost its place.

All this good news, however, could lead to problems in the future. So far we have not been able to clarify if the return of leather is just the result of lower prices. If it is, there will be trouble if raw material prices rise too quickly and too sharply. The interest could fade as quickly as it has come. The reaction of consumers is also still unknown because we are at the beginning of the retail cycle and it will be the end of the year before we know the full response. The quarter ahead is traditionally the strong season.

The pandemic has triggered several new trends. Nobody knows if they are sustainable trends or just short lived. People who can are avoiding the cities. The hype of living downtown, close to restaurants, shops, cinemas and theatres is cooling. Just in New York City, statistics say that almost 400,000 people have left already and moved out to the suburbs. There are similar stories in other places around the globe. The second trend is that people are avoiding public transport. In some regions bicycles are be-ing promoted, but car sales in city regions are rising too with consequences that we don’t want to discuss in this edition. For the moment, it means that vehicle production is rising with the only questions being about the type of vehicle and the material for the interior.

This began in China, where more raw material demand for the production of upholstery leathers first came to light. The Chinese tanning industry was active in August and replenishing raw material stocks at very attractive price levels. European tanners returning from their holidays had to acknowledge that they couldn’t dictate the prices any more; the number of suppliers so desperate for sales that they would accept almost any bid had declined. Serious negotiations about hide prices became normal again and raw material prices began to climb, little by little, from the end of August onwards.

Prominent players in the market were comfortable with a moderate rise in prices. Suppliers and tanners agreed on this because, despite the changes we have described here, nobody was yet totally confident about a fundamental turnaround in the market. The replenishment phase in combination with an im-provement in demand for upholstery leather is certainly not enough to confirm a real turnaround in the market. The majority of production is still side leather and in this segment a solid recovery cannot yet be reported. This is now dividing the community of hide sellers. Some support the idea of a solid, healthy, step-by-step development, but others, in particular some in the beef industry, seem more inter-ested in a sharp rise in price levels.

The reasons are clear. Although some of the stocks have been cleaned up, there is still abundant supply of wet blue hides around the globe, material that went into storage when the tanning industry was idle. Only a sharp rise in the price of raw materials would make these hides attractive to buyers and the price attractive to sellers. It’s all a dangerous gamble and it might be too much to expect an entire glob-al community to engage in long-term thinking. An individual sales manager may well think that more money now is worth taking, no matter what tomorrow promises. It is this that creates the boom-and-bust trend that is the standard in this trade. 

The fundamentals haven’t changed. Leather is not yet truly back. We need a real return of the material and this cannot be achieved without an increase in demand for side leather. A moderate management of the situation would certainly be a more healthy way to encourage leather demand, possibly on a sus-tained basis again. Exploding prices could quickly destroy the flowers that are budding now.

The split market continues in stalemate. The boom from the gelatine and collagen industry seen in ear-ly summer has faded and the market is in search of a new path. In some sections, like cheap suede leathers, splits can still perform, and also some other niches will move with the general trends. How-ever, a solid base can only be achieved in combination with the general rise of leather demand in foot-wear.

The skins market is not showing any sign of change. There are plenty of skins and underperforming demand. We still see in many magazines a lot of leather garments. However, it is not the catwalks or the magazines that create business, it is people purchasing products. Textiles and apparel are in the doldrums as a consequence of the corona crisis. Fashion is not topping consumers’ shopping lists. There are plenty of good reasons why people should shift to leather jackets again. Price is one. But leather jackets are something that have to be touched and tried on. For this season we see a bit of better demand, but for a real breakthrough it is too late. 

Over the next two weeks the leather pipeline will have to digest the initial rise of raw material prices since the summer break. A lot will depend on the leather prices and their calculations. Asian tanners might have an easier time now, because they have been absorbing the biggest percentage of the cheap hides that became available when prices collapsed owing to the pandemic. In China in particular do-mestic demand has been improving for a while. Reports claim that export orders are increasing too, which means that Chinese tanners are sitting on the competitive advantage of having cheaper average raw material costs.

European tanners will have to focus on the premium sector and on their ability to supply much faster. Historically, raw material prices are still low and if the tanning industry plays its cards well, the present rebound should not make further progress prohibitive. However, an aggressive and sharp continuation of price rises would cause serious damage to business and sales for the season that has just started relatively positively. 

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