Macroeconomics

Campaigning in the US for the presidential election continues in full swing. Polls do not mean much in presidential elections, but most of them see Mr Biden in front with the swing-states favouring him as well.
In global affairs, the military conflict between Azerbaijan and Armenia continues. In Thailand we see demonstrations against the present government and in Europe we have the final lap of the Brexit negotiations returning to the limelight. However, the biggest impact on the markets and on people is still the pandemic.

There are rising cases all around the globe, with the exception of China, and sharply increasing infec-tions in Europe are beginning to influence the financial markets as well as people’s daily lives. There are more restrictions all over Europe, recommendation to return to working from home and regional and local restrictions that are making people feel they are moving back towards lockdown. People simply took it too easy during summer and it is fortunate that in most areas there are no shortages in hospital capacity.

The biggest problem could be new disruptions to supply chains and further negative impacts on na-tional economies. The burden in terms of debts is already extremely heavy and an extended second wave would certainly seriously harm the global economy once again.

The value of forecasts can be questioned, but large organisations are painting a pretty grim outlook for individual economies. In general a contraction of the global economy by up to 5% is expected. For some countries and regions it could be significantly worse. The only exception remains China, at least until now. In China, there has even been growth.

 Elsewhere, governments are trying to halt the trend by using massive stimulus measures. Economists continue to debate the long term effects of a massive injection of liquidity into the markets as well as massively rising budget debts, which have to be bal-anced one day.

All of this leaves the world in an uncertain state and the outlook is dim. One option is to wait for a vaccination or for a cure so that something like the old normal can return. Realistically we can expect that some time in 2021.

The financial markets remained relatively unmoved. Just at the end of the period a few days of correc-tions occurred, but so far there has been no steep fall in the stock markets. Equally, the currency market and commodities have made no big moves so far. The next big date is certainly going to be the US presidential election at the beginning of November, although it seems that the financial markets have already made their arrangements for either outcome.

Market Intelligence

A few days ago, everything seemed to be reasonably clear. The pandemic, although not under control, was not really seen as a big threat to global business, but in just a few days that sentiment has completely changed.

At this stage it has still not really impacted the leather pipeline. China is the main driver, not only for leather, but for many products, with China’s huge domestic consumption potential. At this point, we cannot think of anyone in China with a reasonably successful business who has complained about things since mid-summer.

The biggest gainers have been the automotive manufacturers but also the furniture and upholstery in-dustry. Brands and manufacturers of handbags and leather accessories are beginning to change their mood and have begun to report more lively interest and sales of their products.

The shoe sector continues to struggle, but we tend to believe that this is only to a lesser extent related to the pandemic. It remains a fact that leather as a material is on the retreat in the shoe sector. The steep fall in raw material prices and the consequent adjustment of finished leather prices has not really had a positive effect on the material’s use in the shoe sector.

 It continues to be far too inviting for the manu-facturers to focus on non-leather materials so as to save on production complexity and production cost.

Interesting in this respect, however, is that natural fibres are beginning to hit the stores in the sneaker section. All kinds of non-plastic fibres can be seen in various brands, becoming sizeable players in this market too. As long as the sneaker fashion continues and the consumer is willing to spend money to buy the same look, independent of the brand or the manufacturer, the industrial production of this kind of shoe is easy and the fundamental changes in the technology can be considered to be minimal. 

This, though, is not just a threat, but also an opportunity. The world might still be strongly divided be-tween western culture with its environmental concerns and the large consuming countries in the Far East and possibly also the Americas, but as we can see,  price is still a very strong driving factor in material selection.

One should have expected that leather jackets would never see any return or recovery. Big names in fashion design have declared leather as undesirable. Their media impact has been strong, particularly with young women, clearly a key group of consumers and often some of the strongest supporters of anti-beef campaigns. The hope of a recovery in demand for leather garments seemed limited.

However, quite the reverse is in evidence when taking a closer look at TV shows and public events, where the presence of leather jackets on fashionably dressed artists or presenters is remarkable. While this has not yet reached the department stores and high street fashion, there is a good chance that could happen soon, in part thanks to the reasonably low prices for lamb and sheepskins. In any case the price is not prohibitive and if our theory is correct, that price matters, then we should eagerly await what the next season brings.

In Europe, the focus of the business has been almost entirely concentrated on the automotive sector where the main requirement for raw material looked to be heavy male hides. Traditionally, these hides go as fresh or chilled into the tanning industry, in most cases as just-in-time deliveries. The lower kill for this category of material throughout the summer and into September saw the volume of demand just about covered by slaughter. Prices that had been at historical lows during the summer had already started to recover in September and reached levels that were a reasonable reflection of the present situation. However, suppliers, following the lead of the big slaughterhouses in continental Europe, always like to test the limits. Asking prices for October were massively raised, in some cases by up to 30%, and many of the abattoirs were checking around from tanner to processor to see who was desperate enough to accept.

The main argument for the increase was a shortage of supply. It is no secret that during the low season and the lockdowns many hides were semi-processed and are, to a large extent, still waiting for buyers. At this stage it must be mentioned that the automotive tanners were fully aware that the market price throughout the summer was low and not a reflection of the real value of the raw material. However, with the prices we reached by mid-September, the idea of the hide suppliers that prices should go back to the levels prior to the corona crisis does not really reflect the potential risks for business in the com-ing months. Overall, one can say that after the summer holidays we have seen a decent recovery of business in the leather pipeline. 

Side leather continues to struggle, and the luxury sector is not performing the way the people were hoping or predicting. However, the willingness of the Chinese leather industry to refill their stocks, coupled with a solid recovery of consumption, has been good news and certainly helped the global supply chain to regain some confidence. Other markets started to gain confidence too but could be pushed back hard by the present trend of the pandemic, not only due to lost consumption, but by the serious risk of interrupted supply chains and production.

The split market has not delivered any real news. From China we understand that some sectors of gelatine materials are performing relatively well and not all lime split prices are under pressure. In Europe, the market has not found a real balance yet. Considering splits for leather, the very cheap and extra special material is still finding a home. The average product continues to suffer from the cheap availability of grain material and there is little in the way of change for this in the foreseeable future.

The skins market is a bit of a mixed bag. There is generally a better market for nappa garment leather and work gloves of a certain quality range are performing relatively well. Production and supply of skins continues to be curtailed by the economic viability of processing them. We continue to see a lack of courage from the large producers and while many suppliers report some sizable interest, business is limited.

We would love to see a stabilised business at a minimum price that makes the preservation of the raw material worthwhile and some long-term business could be expected. Even with prices of skins at an-ywhere from $2 to $4 per piece, leather can still be offered at very competitive levels and it would be highly desirable if tanners and manufacturers would acknowledge the bottom line on specialty skins for the high-end sector as well as specialties, such as wool-on, that are still finding a home at adequate price levels.

It is difficult to reach a reasonable forecast for the coming weeks. Fundamentally one should be positive. The high consumption events are all still ahead of us.

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