Rising auto sales to complicate leather sector?

By blogger Richard Smith
Published:  21 September, 2013
Richard Smith

Underlying buoyancy in the US economy is being reflected in rising auto sales as consumer confidence returns. Buying a car is a big ticket item and new vehicle sales are on the up. Auto sector analysts are now forecasting total US car sales will reach 16.1 million units this year compared to the previous forecast of 15.8 million.

In August auto sales rose by 17% compared to the same month in 2012 and this is the fastest pace since October 2007 – the month that the Dow Jones reached its then peak of over 14,000 and about a year before the financial crisis hit the US banking system and spread its tentacles around the globe.

Auto sales are a key indicator of consumer spending, which accounts for about 70% of US economic activity. Currently the US economy is growing at a respectable 2.5%.

It has been a long hard six years for the US auto industry with GM and Chrysler having to be bailed out and restructured; “cash for clunkers” stimulus plans being implemented in many countries to boost stagnant sales back in 2009 and many analysts giving thanks to China for offering a new, even bigger market for company saving sales.

After better car sales in the US there is also positive news from Europe. According to the The Sauer Report European car sales during the first six months of the year were still 6.7% below last year but the last months (this summer) figures have been somewhat better, especially in two of the economically worst hit countries in Europe, Spain and Italy. Confidence seems to be coming back. On the other hand, there is not enough good bull hides for top quality car leather.

Despite a relative slowdown (is 7.5% GDP growth really a slowdown?) in China auto sales are expected to reach almost 21 million units this year. This is a blessing and a curse for the automotive leather sector. In the first place it is fine to have demand for more car leather seating and full order books. But on the other hand with historically high hide process and a shortage of the larger hides obtained from bulls, it can become a headache for car seat manufacturers to secure supplies and pass the higher costs on to their customers.

Upholstery and automotive seating account for a large percentage of leather demand, especially in the Chinese auto sector as new car buyers tend to be partial to leather seating more so than US and European buyers. Seat and dashboard leather manufacturers must be saving leather off cuts and using complementary synthetics where possible to keep costs down.

Higher auto sales equal more demand for quality leather and this is becoming more expensive as demand continues to outstrip supply keeping prices high and tanners margins limited. Despite healthy order books specialist automotive tanners will continue to face a complex situation. Auto sales are unlikely to fall as are hide prices. The solution is longer term for tanners. Bovine herds have to be rebuilt during the next five years in the US and Argentina creating more supply and softening meat prices, encouraging demand and, by extension, making hides relatively cheaper and easier to locate.

It is a delicate balancing act for the whole supply chain but one thing is certain – complex though it may be - demand for leather auto seating is not going to decline any time soon.

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