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Leatherbiz Market Intelligence executive summary: • •
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The delay of the US-China tariffs until August is welcome news, but is causing havoc with shipping logistics, and makes planning difficult The leather sector is being buffeted by changing information as companies try to hedge, but there is a growing feeling that governments are realising high tariffs would be good for no one Prada’s investment in Rino Mastrotto looks like a sign of confidence. Experts within the tanneries must still be allowed creative expression Adidas’ decision to ban kangaroo leather could mean skins will be left to rot. Companies should be braver when explaining leather’s qualities and not bow to perceived public opinion A shake-up of supply chains might be what is needed for groups to work less administratively and more creatively. The leather industry has previously been resilient in the face of these types of changes
MARKET INTELLIGENCE
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ver the past two weeks, events outside of the leather markets have remained more important than the business within the supply chain itself. Firstly, of course, it was once again the US government's tariffs, with decisions changing almost daily. The most significant was the temporary suspension of tariffs between China and the US. In addition to the questions of which tariffs will apply, when they will apply and which products will be affected, the parties had to check how goods already shipped might be affected. The temporary suspension of tariffs is crucial. It does not help with planning for the second half of the year, but it does play a role for goods that were either already planned for shipment or en route. The deadline now is August 14. Bear in mind that many of the US cattle hides that were either already planned or already travelling to China when the original tariffs were introduced were diverted, either because the Chinese customer was not prepared to bear the high tariffs, or the hides were planned for finished products for the US market, or simply because they were not sure whether the goods would be accepted or could not agree on what to do with the contracts. This changed again with the suspension of tariffs. A whole lot of raw and wet-blue hides could then be rebooked to their original ports of destination. Although this means high costs, it may still be the better option.
Questionable statistics The official USDA statistics on sales and shipments of American cattle hides raised big questions. In the week ending 22 May, large volumes of sales allegedly to China suddenly
appeared in the statistics. At first glance, this was seen as confirmation of strong buying interest at favourable prices, but on closer inspection, suspicions grew that these were merely new statistics for existing contracts. It is also possible that some larger new deals were added and some bigger names were mentioned that have the financial resources to speculatively secure large quantities of very cheap commodities. In this context, of course, it is not so much a question of whether there are really valid leather orders to cover but whether it is just a question of securing cover for production with raw materials. Those who are concerned will already know exactly. For everyone else, it remains speculation. In the following week, the figures then fell again significantly, even if the absolute figure was still impressive under the conditions. Here, too, there may be other reasons. New customs negotiations between the US and China are due to begin in London and the results will certainly be of great significance for the leather business. However, it should not be forgotten that the negotiations are not only important for the leather industry but also to the meat industry, as meat exports from America to China plays an important role. At the same time, negotiations are taking place between the EU and the US. In addition to customs duties, the resulting logistics are also causing problems. In addition to completely unreliable dates for shipments, the first bottlenecks for empty containers are now becoming apparent. This is dangerous and means uncertainty for the calculation of freight costs. Both exporters to the US and importers in the US are trying to hedge for the near future. This is particularly evident in the build-up of stocks in the US in order to avoid possible higher
tariffs, but at the same time to ensure that they remain able to deliver. The logistics trade media report on rapidly filling bonded warehouse space that enables duty-free storage. Here too, it is not just a question of capacity, but also of the associated costs. Importers and exporters of products that use leather as a material have been mentioned. From Europe, these are the luxury companies, and from China it covers a wide range of products, from shoes to furniture. To round off the negative influences on the demand for leather, the possible production cutbacks by car manufacturers due to a lack of raw materials from China must also be mentioned. This relates in particular to rare earths, without which vehicle production is inconceivable. Of course, this also applies to many other products, but leather still plays a major role in cars, especially in the premium segment. But even without the restrictions on the supply of base materials, the premium market for cars is in jeopardy, as European manufacturers are dependent on the two particularly important markets: the US and China. Sales were already far from satisfactory without additional restrictions. Despite all the potential disasters that the trade conflict could trigger, there is a feeling some kind of solution can be found. There is a slowly growing confidence among most business leaders that political leaders realise an economic war could do more harm than good for them, too. Nevertheless, we are dealing with big egos and the risk of anyone overplaying their hand remains very high.
Acquisitions and consolidations In the leather industry itself, the most interesting news over the past two weeks has been about further interlinking and broadening of the product range in the leather industry. We have already had the announcement that Pasubio, which operates almost exclusively in the automotive leather segment, is expanding its range and taking over leathergoods tanners. However, it is possible that this is not just an expansion of the product range, but possibly also the acquisition of specific expertise. It would not be surprising, as the market for automotive leather seems to be changing from a mass product to a more specialised niche product in the luxury segment. Last week, the Rino Mastrotto Group announced that Prada had acquired a 10% stake. This is not just a purely financial investment; two tanneries that already belonged to Prada are now being integrated into RMG, plus a cash injection. Of course, such investments and acquisitions are always celebrated by those involved as a major