Macroeconomics

There has been positive news regarding vaccines for covid-19, but even in the best of all cases it will most likely be well into 2021 before a sufficient vaccination rate can be achieved in most parts of the world.

Until then, times will remain difficult. It is obvious that winter is worse than summer and that lockdowns are working.

 However, an endless run of lockdowns and releases cannot be a successful strategy, in particular if one looks at the massive economic damage created. Politicians are buying some time, but if the vaccination are not successful or the virus mutates we will certainly have to learn new lessons about the wider risks affecting life in general.

For the moment, politicians are struggling to find a strategy for Christmas. They are serving up the bad news in small bites.

 So far the impression is still that there might be a relatively normal Christmas with the family. However, more voices are being heard to say that family gatherings and parties have proved to be the main super-spreader events and that more restrictions may come into force the closer the holiday season gets. The next weeks will tell us which way we are going. For the sake of all, let’s just hope that the infection rates continue to decline.

The fragile situation in the Middle East and the possible consequences of it have come to world’s at-tention again. The pandemic has commanded a lot of attention in 2020, but global stability has not im-proved at all.

Stock markets continue to run a firmer trend. Stock investments have been the best protection and possibly even a winner amid all the uncertainty and risk of the current year. Gold prices, which had been the safe-haven investment, continue to suffer and the price of oil continues its slow recovery. It is not the balance between supply and demand so much, but the uncertainty about the stability in the Middle East that is the driving-force behind the oil-price rise over the past months. It is definitely premature to believe that the world can be climate neutral and avoid oil and gas in the energy mix.

Market Intelligence

Tanners in Europe have basically already finished their programmes for this calendar year and it is al-so clear that a break of 2.5 weeks has become the standard over Christmas and New Year and may even be extended in regions that also celebrate the Epiphany on January 6.

In Asia, the break begins at the end of January and as far as we are concerned it is not clear how many days the holidays there are going to last. Most buyers are asking suppliers to have shipments arrive not later than January 27; Chinese New Year itself is scheduled for February 12. It seems likely, that the break will last at least two weeks. Upholstery tanners in Asia continue to be very busy and may take a shorter break, while shoe tanners continue to complain about their order situation and may add a few days.

The main focus of the leather pipeline has been less on trading and ordering activity and more on lo-gistics. Day by day, reports of problems increase. Hides and skins suppliers around the globe com-plain about insufficient options for shipping space, not to speak about lead times, necessary for com-pleting all kinds of administration before product can be loaded onto the boat.

The imbalance of import and export quantities, already triggered at the beginning of the pandemic, has been amplified by the decisions taken by the shipping companies and the reduced capacities they have planned and offered since early summer. Slow steaming decisions come on top and this has created chaos in schedules and capacities ahead of the holiday seasons in Europe and Asia. Hide and skin shippers are suffering also because their product is not really appreciated by the shipping lines. If the information, which is unconfirmed by the shipping lines, is correct then many carriers prefer even to send empty containers to Asia instead of filling their vessels with hides and skins. Whatever the real situation may be, the logic of shipping with this kind of imbalance cannot be resolved in a short period and if things are going wrong then we might be dealing with transportation issues well into the first quarter of the coming year.

With most of the books already closed for the year 2020, many pundits have begun to discuss options and trends for the coming year.

As far as business over the past two weeks is concerned, it reminds us of a set of different puzzle pieces that don’t seem to fit together. The Christmas shopping season this year, which is so important for the leather pipeline, is a mix of smaller pieces and there is a lack of statistical information. In China a lot of hope was invested in online sales for Singles Day in early November. The total volume was impressive, but the share of leather-related products did not show the performance that sellers had hoped for. Many global brands were pleased by a strong rise in sales volumes, which offered some compensation for the loss of sales in shops, airports and shopping malls, but all in all the results were still lagging well behind the numbers required. Private consumption and retail in China is up in single digits versus 2019 but this is not enough to balance out losses in other major retail markets.

Christmas shopping in the western world is definitely different now. Lockdowns and limitation in the shops continue to hinder total sales of leather products and many other goods. Only a rebound in car manufacturing to almost normal levels and the bonanza in furniture sales have been able to support leather production in total volume and save the industry from a total collapse. Prices have climbed slowly and everyone along the supply chain has had to accept that the price levels seen in the second quarter of this year are history now.

This does not mean that we are back in a strong and sustained bull market because there are still many things making the price of raw material and leather vulnerable. However, when people go back they might remember that every market has to return to balance. If demand is not enough than supply is the issue.

The valuation of leather is certainly not yet clear for the future because we will have to deal with many new alternatives in the years to come. Everybody is talking about them, but nobody knows how they are going to perform and what their real cost will be. The only real and direct correlation in price, cost of production and cost of manufacturing we have is with plastic. No matter how it is presented (as foils, mesh or any other appearance) it is easy to calculate the price and competition can be laid on the table. Nothing can be said about any of the other alternatives. They are still not available in volume and they have not been put into mass production.

Big manufacturers are still happy to use oil-based materials and their interim strategy is to increase their use of recycled plastics. If you calculate the cost and the real environmental impact of these mate-rials, it doesn’t look too good and the percentage of collected and recycled plastic very disappointing. The vast majority of the plastic fibres will still end up in the ocean, in landfill or it will be burned. This applies even to the most environmentally conscious countries.

We should be aware that the competition remains the same as before and this may last for a while un-less other alternatives can really make a breakthrough in terms of results and volume.

We still have a good potential in the market unless we are not killing the possibilities by price. There was once a saying in the US about presidential campaigns: It’s the economy, stupid! For the leather pipeline it might be adequate to modify this to: It’s the price, stupid!

There is enough market out there to keep a continuous flow of raw material into the leather industry. It just requires a sensible analysis of the price levels you can impose without killing demand. The greed to test the waters too much on the upside is not just killing the business for next week but also a lot of demand for the following season. Once again everyone should be reminded of the warning experience we have seen in the sheepskin sector. Sheep and goat skins have never recovered from the use of plastic and microfibre in the garment sector. Price killed the product. There is absolutely no reason why this could not happen to bovine material too one day. The trend in automotive should be seen as a warning sign for those not willing to take the subject into consideration.

The split market is mirroring the grain business. The tide is lifting all boats and the risks of an absolute catastrophe are behind us. There is a little more demand and the product flow has improved with-out a big push for prices yet. The market for gelatine and collagen raw materials remains exceptionally sensitive. African Swine Fever and the consequences for slaughter in many countries in Europe and China have deviated and congested a lot of material flow. In China we are hearing day by day about more shortage of raw material, while in Europe the excess availability has sent raw material prices substantially downwards. There are still a lot of unknowns about how supply and demand are going to come back into balance, but the base market potential for gelatine and collagen is definitely not shrinking globally.

In the lamb and sheepskin market we cannot trace anything new. We continue to see and sense more and more garment leather in fashion. However, with the difficulties in retail it is certainly hard to pre-sent leather to the final consumer and to bring leather back into widespread use in high-street fashion. For the time being, prices for standard items remain low, below the processing and transportation cost for most of them. For special items with special functions and special performance, it is a different story as for all niches in all markets.

In the next weeks people are going to wrap up for Christmas and for the end of the year. With all the drama we have seen in 2020, the vast majority will not seek entertainment and excitement in the usual way. One has always to be ready for the unpredictable in this business, but in our view the commercial world is not really looking for any surge in what remains of this year. This makes us believe that the closer we come to the end of December the more activity will fade and everybody is going to be happy just to leave things the way they are for the moment. People are looking forward to a break from problems this year has presented.

By the end of the year we can also hope for more information about vaccines for covid-19. Confidence could grow that normality is soon going to be restored and the leather pipeline too might be able to return to a more rational and plannable future.

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