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Leatherbiz Market Intelligence executive summary: • • •
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On May 23, new threats came from Washington DC that tariffs on imports from the EU would be 50% from the beginning of June There is no doubt that many leather products will be affected by this In particular, this news is likely to cause some unrest among French luxury goods manufacturers, fashion companies in Italy, furniture manufacturers throughout Europe and, of course, the automotive industry There is now hardly any doubt that the supply of raw materials continues to exceed the demand for leather.
MARKET INTELLIGENCE
T
he leather pipeline continues to be almost entirely influenced by events on the political stage. At the moment, it is not possible to assume the basic parameters of supply and demand, or any changes in the commodity markets or on the side of consumer goods. We are at the beginning of the summer period in the northern hemisphere and this is traditionally the phase in which leather production declines. Only production in Asia can reach a normal level at this time because there is no pronounced holiday season in the summer months there. In addition, globally active consumer goods manufacturers also have to submit their plans for the next six or nine months. While decisions in the last two years were more characterised by the war in Ukraine and other military tensions, we now have to deal with general chaos from the decisions that have come since the start of the US president’s new term of office. In particular, international relations and economic developments have been shaped by the constant erratic decisions that the president has made since sweeping tariff announcements at the start of April. High tariffs have never really triggered positive developments for those affected. Unfortunately, the conviction has only taken root in people’s minds that threats and intimidation are an effective means of enforcing interests. In the end, the law of the strongest usually applies. Perhaps the US will prevail in the end. Unfortunately, though, everyone will have to suffer damage first. So far, the financial markets have taken the disputes very calmly and the sharp slumps after major tariff announcements on April 2 were almost completely balanced out by last week. Whether something like this can then be repeated at will is rather doubtful, and we are still convinced that psychology and general consumer confidence correlate much more strongly finished products made from leather
than could be the case with other products. On May 23, new threats came from Washington DC that tariffs on imports from the EU would be 50% from the beginning of June. There is no doubt that many leather products will be affected by this. In particular, this news is likely to cause some unrest among French luxury goods manufacturers, and many fashion companies in Italy, furniture manufacturers throughout Europe and, of course, the automotive industry in Europe will have to reckon with a major impact on business too. Of course, there are many who point out that the great threats have never been turned into facts until now. However, one only has to remember the time in April when very high tariffs between the US and China were in place. It is not just a question of whether to believe these threats, but of the decisions that necessarily result from them. It is important to point out the major upheavals in the logistics sector. First of all, customs duties are valid for goods that reach the borders after the date of validity. What is already on the way is usually very difficult to stop, but as we have already seen in the case of China, new deliveries can be renegotiated, postponed or even cancelled. What this will mean for the leather industry in Europe at the moment cannot be estimated at this point in time, but of course time is running out quickly; June 1 is already next week and it is unlikely that there will be any new agreement and solution by then. We should also think about whether countertariffs may be imminent. Until now, the EU has almost always focused on finished products and major US brands in trade disputes. However, if measures were to be extended to other products, such as agricultural goods, similar to the situation with China, US cattle hides will also be affected. In recent weeks, the major US slaughterhouses have been looking for alternative markets to China and, of course, have found some buyers in Europe, among other places. Tariffs would probably lead to
buyers in Europe either cancelling their purchases or negotiating a compensation in prices. Let us not forget that the buyers of hides in Europe were not triggered by increased demand, but only by the attractive prices that US suppliers had to offer in order to achieve sales in Europe. As a result, everyone should also think about what consequences this will have for the markets in Europe. If the tariffs do not come, then a larger quantity of inexpensive US hides will arrive in Europe in the next few months, but if the tariffs do come, prices will have to right themselves again. This can both support (rather unlikely) or even put further pressure on the market for hides and skins in Europe. The constant and rapid changes definitely have one consequence: great uncertainty at a time that could hardly be worse. Let us look at the general market situation again, even without the latest news from Washington DC. There is now hardly any doubt that the supply of raw materials continues to exceed the demand for leather. This will continue to mean that the collection and processing of raw materials for the leather industry is less and less attractive and economically viable. This is a general statement and of course does not apply to the entire spectrum of available raw materials. The quality pyramid has not been overridden, and the special properties of certain raw materials also remain dominant in the market. Therefore, everyone should continue to analyse very carefully whether a particular product can be substituted either on the supply or demand side and, if so, with which alternatives and at what price. In addition, there is the influence of the alternative uses of cattle hides. Here, the market for collagen continues to be in the foreground. Less production of leather means less raw material (splits and trimmings) for the collagen industry. There is a solution for this and in the end it is all just a purely commercial issue of prices and revenues. However, the core questions that arise again and again remain the same. These questions centre on how much missing raw material needs to be replaced, further growth opportunities in the collagen and gelatine markets, and about geographical conditions, including the location of raw material and production costs. Simply put, the right raw material needs to be available at the right price in the right place. Nothing has changed in the demand for leather in recent weeks. We are in the quieter phase of the annual production cycle and there is no indication that consumer confidence has increased significantly anywhere.