Winners and losers yet to be defined

Richard Smith, APLF Ltd
Published:  26 February, 2015
Richard Smith

The Editor of Hidenet, Don Ohsman, notes that “the volume of leather orders being placed this time of year for Autumn shipment is subpar. So if someone bought a million square feet per months last year, they are only ordering eight hundred thousand or seven hundred thousand this year as leather is being supplanted by synthetics because of price”. 

In a nutshell high prices appear to have begun to price leather out of some manufacturing sectors and with synthetics getting nearer and nearer to the material they have sought to imitate for many years, it looks as if the leather market may have “shot itself in the foot”.

Since the hide market collapse of 2008 when prices fell from around US$70 to US$30 in the aftermath and panic triggered by the global banking crisis, leather prices have recovered and been on a steady upward trend from early 2009 in a five-year bull market with prices peaking in September 2014.

Since that time there has been a steady retrenchment of raw material prices but these still remain at very high levels and not too far off historic highs. The underpinning of the price is due a combination of factors:

  • Much smaller bovine herds in the USA (lowest since 1951) and the extremely slow rebuilding of the Argentine herd that declined by about 23% in terms of animal numbers between 2008 and 2010 due to drought.
  • Restrictions on the export of raw materials, crust and wet blue by a host of countries across the globe to protect their national tanning industries. These include Argentina, Brazil, Colombia, other Andean countries, India, Pakistan, Bangladesh, Ethiopia, Indonesia, Russia, Ukraine, Morocco, Nigeria and Tanzania. 
  • Fewer hides mean higher prices especially in the face of buoyant demand from the automotive and leather goods sectors. The former is in a solid recovery mode both in Europe, the USA with China leading the way with 23 million new vehicles purchased in 2014.

Manufacturers are reluctant to accept higher leather prices from tanneries and specialist upholstery makers forcing profit margins to be razor thin for many tanneries around the world. But with raw material and leather prices maintaining high levels for such a long period, this has encouraged manufacturers to substitute leather with synthetics to a certain extent and this is what could be behind the very slow market conditions as we head into Chinese New Year which runs from February 19 – 22.

With China being absent from the market for at least two weeks prices could slide a little but the port slowdown on the US West Coast delaying shipments to Asia for up to six weeks is another underpinning factor that is keeping prices relatively firm.

What about the oil price?

Raw material supplies and chemicals for the tanning process – from wet-end to finishing – represent a good percentage of tanning costs. Some relief has been experienced by tanners after the highs of raw material prices were seen last September and one would have thought that addition easing of pressure would have been experienced with the fall in the crude oil price from US$100/barrel in September to US$50/barrel at the beginning of February.

The key question is whether the main chemical suppliers to the global tanning industry have already, or are considering lowering the prices of their chemicals as many of them have as their raw stock, oil. This would be of significant help for tanneries under pressure running at small profit margins or losses and could also help moderate any future price rises for finished leather and thus discourage manufacturers from “following the synthetic route” in order to maintain their profits.

After all, petroleum based synthetics should also fall in price if oil is half the cost it was six months ago and if leather does not enjoy a similar trend, it will become increasingly uncompetitive and could gradually be relegated to a luxury status.

With leather being supplanted by synthetics because of price, lower oil prices will increase the price differential between leather and synthetics in favour of the latter. In order to maintain a “level playing field” the prices of chemical products for tanneries should also be reduced to keep leather competitive. If not, synthetics will take a larger share of the manufacturing sector and the losers will be the tanneries and then the chemical suppliers if they do not lower the prices of their products.

Is the scene set for a battle between tanners and their chemical suppliers? We could have a clearer answer to this question during the world’s leading leather fair, APLF MM&T due to be held from March 30th to April 1st in Hong Kong.

Currency considerations

When there are sharp currency moves there are winners and losers. The fall in the euro from €1.39 in mid March last year to around €1.14 in January after the Greek election results is good news for exporters of all types in Europe – especially for Italian leather and footwear. What is not good news is if raw materials and chemical products have to be purchased in the world’s reserve currency – the US dollar – by European companies.

Let’s remember that the international oil market is priced in US dollars so any fall there should be reflected further downstream in the price of chemical products. Hence any easing in the price in chemicals will help tanneries to improve their margins and to mount a defence against the growing threat of synthetics appearing in more and more finished products. 

Leather will not go out of fashion but its share in the manufacture of finished products could decline if it continues to price itself out of the market opening gaps up for synthetics to supplant it.

This is a challenge facing the whole supply chain of the leather sector and its selling price has to be mitigated so that it remains competitive when facing a huge threat from synthetics.

The complex web or costs ranging from the pampas of Argentina to the oil fields of Kuwait to the currency exchanges in London and New York has to be disentangled so as to ensure that leather maintains its status in the marketplace and is not replaced by petroleum based synthetics masquerading as “fashion”.

Further steps

It is at this juncture that leather needs to be marketed professionally as the durable, eco-friendly, beautiful material that it is. Designers and the public at large have to be educated about leather. Where it comes from; modern humane methods of slaughter and sustainable leather making to protect the environment.

In other words leather has to be presented as being “green” to help in defence of its market share. Synthetics, as petroleum based creations, cannot be “green” as they are simply not biodegradable and this “weakness” needs to be juxtaposed to leather’s environmental benefits and thus defend the leather making industry from the multiple attacks it has suffered from NGO´s that peddle mendacious and misleading “facts” in an equally ignorant mass media that also needs educating about leather.

This is where Leather Naturally! can step into the breach and fulfil the role for which it was established! 

Richard Smith

rcsmith1@gmail.com

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