Brazilians were the main players in terms of sales of raw materials at August’s All China Leather Exhibition, in Shanghai. They sold, perhaps, beyond the forecasts, but what about prices? Rather than a sale, their offers can be considered similar to the end-of-season offers in stores, when there is only the new collection in the window. Offered at $0.75 per square foot, the wet-blue TR1 were sold at $0.70, but according to some rumours there were offers at $0.65. Looking at the price history, it’s quite incredible, considering the Brazilian TR1, which is the benchmark for mass-market leather production, has lost about 50% of its value within a year: at the 2017 fair, the first grades of Brazilian wet-blue were sold at roughly $1.20 and at times have fetched up to $1.40.
Analysing the values of US raw hides, we have the same response: 2018 was a year of tragic falling in price. Heavy native steers were traded at the end of August for about $55 apiece against $77–78 at the beginning of 2017. Looking around the economic selections, the evidence of the decline increases; the US-branded cows are close to $10 apiece, values similar to those reached during the worst moment of the 2008–09 crisis, compared to $41.5 apiece in March 2017. In 18 months, those selections have lost 80% of their value.
The European market
Europe is not sheltered and, in fact, the first reaction of the tanneries to the news coming from Shanghai was a block of purchases. This is partly due to the fact that Europeans still have to define programmes for some destinations. Footwear continues to be the biggest weak point in the European tannery, partly due to expectations of a further decline in values. Also in this case, Brazil could be one of the reasons for the compressed international assessment of leather – especially the most economical ones – because the government’s decision to remove the 9% tariff on raw and wet-blue hide exports – 26 and 18 years after their adoption, respectively – will have a possible discount effect for the buyer. And if by ‘buyer’ we mean the Asian tanneries, for the European seller it will be nearly impossible to defend its positions with its raw materials in the face of a downward trend in international competition, whether that be South American or Australian. And here we come to the particular situation of Europeans.
The supply of rawhides in Europe is quite rigid, especially when compared with the US, where slaughter has grown significantly in the past two years. And almost all of the first and second grades are destined for the European tannery, which, in order to meet the market demand, has strengthened its need to select the purchases by discarding the lower grades or the smaller sizes; this rule is applied not only to the cow, but also to the calf, resulting in a hyper-valutation of larger sizes and a fall in prices for smaller sizes.
Veal or no veal
For example, the Dutch veal; a 16.5kg piece suitable for leather goods can cost €1 per kilogram more than the 14.5kg, which was once considered more precious and workable – especially for leather upper destined for fine female footwear. But the difference is even more evident in the case of the cows. Consider German origins: at the end of August, a standard 25kg Northern German cow was sold at a maximum of €0.80 per kilogram, against €1.45–1.50 per kilogram a year earlier, while the 40 or more kilogram Southern German cow, which can also be used for automotive, has limited damage, losing about €0.30 a year and now, for good-quality batches, can be sold at about €1.70 per kilogram. Anyway, the European seller has only partially defended themselves against the general crisis, and if we consider the problem connected to grades in addition to weight, there is no difference between European and US hide: the price is made by buyers. So the cows of Italian origin exported to Asia, which then are the ones that the Italian tannery today does not accept because they have no market, are quoted at $21–23 apiece.
The consequences of this rawhide debacle do not fall only on slaughterhouses, which had the illusion of being able to offset the incomes of the hides to the minor income deriving from the meat market. The hide traders also pay the bill, and if they do not sell out, they will find themselves with warehouses full of materials that are more expensive than the current value. This is true for rawhides and also for wet-blue specialists operating in Europe, which did excellent business when leather goods and automotive industries supported the market because the tannery needed to select, and then entrusted them to buy only the selections that they need; so the risk has been discharged upstream, and today, the wet-blue selectors have mountains of stock that Asian tanneries can no longer absorb from them.
The consequences, finally, also fall on the drop-splits trade, which suffered a double negative effect: the replacement with alternative materials in the sneaker business and the devaluation of full-grain leather. If the price of the finest finished leathers is lower, splits must be lower too, because otherwise it is better to buy the full grain.
The calves are all right
Bulls and calves are partially excluded, for several reasons. Considering veal, European demand remains driven by the big luxury companies that often have the opposite problem to everyone else – one of finding the necessary quantities for their huge leather goods production, and the constant opening of new leather factories by the French and Italian brands in the past year will not have escaped the market observers.
Prices have fallen by a few cents (euro) per kilogram in recent months, and those few cents depend on the negative effect of lower grades, which the tanneries manage to dispose of with difficulty because, obviously, the big luxury brands deal only with the top of the range. As for the bull, the price was kept in spite of some difficulties highlighted by the tannery and related above all to the demand for extra EU car companies, for which EU leather costs too much. As a result, global players have increased demand in areas where prices are lower – such as the US, Mexico, Brazil and South Africa – and have reduced orders from their European suppliers. The possible exacerbations of trade wars between the US and the EU could contribute to a worsening of the situation.
A recovery has to be hoped for. It already happened in 2009 when, in March, the market hit the bottom and those values pushed the tanneries (beginning with the Chinese ones, facilitated by government incentives, immediately followed by the Italians) to make large stocks starting from April, raising the demand with the price lever and concluding excellent deals, especially in the furniture business. Now, the situation is more difficult, politically and at a competitive level, because outside the luxury sector, leather has many aggressive alternatives. In footwear and clothing, the performance trend prevails, because there is a movement of opinion that is hostile to this material. Also, China is no longer the nation it was in 2009; even considering the relocation of the Chinese tannery – mainly between Vietnam and Bangladesh – we can estimate an overall decrease of 30% for activities in the Asian territory, and 30% less, concentrated on economics, is the basis of the current difficulties.
