During the last APLF, the China Leather Industry Association (CLIA) admitted a drop of more than 25% in the import value of hide and skins in 2018 (-10.5% in quantity). This admission raised serious doubts among several European observers; namely, if the official decline reported by China is so high, how much worse will the real one be?
Beyond that, the fact remains that in the Chinese market, where in the post-2008 crisis period the conditions for the restart were created, there was the perception that there was no reversal of tendency that tanners, and especially raw material traders, would attend the fair. After an apparently very positive first day in terms of numbers and a desire to reboot, it turned out to be rather subdued, despite overall turnout. Also, in Hong Kong, as in Milan in February at Lineapelle, the protagonist’s part was played by synthetics.
“US sellers bravely pushed for steady-to-improved pricing,” said Vera Dordick, Hidenet’s publisher and CEO. “While they did manage to keep most selections fairly level during the fair, any hopes for higher prices were quickly dashed. We understand that Europeans, Australians and Brazilians all started the fair asking for steady price levels but quickly took prices that were cheaper than they were one month ago.”
Low leather prices are the logical consequence of this stagnation in international demand, which manifests itself in different forms. The most obvious is the enormous differential between the top of the range – identifiable in the best European calves still quoted over €7/kg, a value that represents the historical maximum for these skins, or in the Spanish sheep for double face merino, at close to €15 – and the lower grades mainly used for footwear and furniture.
Until last year, the automotive sector saved the accounts of specialised European tanneries, and in fact, prices of the European bull had surprisingly defended their value, because the need to respect the planning moved the automotive tannery to buy regularly. But today, that programming has been lacking because the car industry has lost its solidity. Thus, the southern German bull, which was sold at €2.20–2.25 per kilogram last summer, fell to €1.50 per kilogram.
The crisis began in destinations that absorb more quantities of leather – in this case garment and furniture – for cost reasons. Then it continued with footwear, for both stylistic reasons and as a matter of practicality on the part of the companies that, resorting to synthetic materials, can work with more security in the supply and with profit margins higher than those achievable with the actual leather. Finally, it was the turn of the car, partly due to the decline in production and partly because, in the most hidden parts of the interior, there is a tendency to include synthetic materials.
Only leather goods remained to offer certainties, and this is the reason why calf prices are much more expensive than cow, a differential never observed before. At the end of March, the cost per kilogram of a 25kg cowskin from northern Germany was around €0.60–0.65, compared with €6.50–6.70/kg for a largesized French calf for leather goods, a ratio of one to ten. The problem of calves is not the negotiation, but the availability of that type of skin, because the best grades are rare and the best tanneries compete with each other, even if the best part is destined for the tanneries controlled by luxury groups, which have no problem paying more than their competitors.
This does not mean that the calf is sheltered from the storm. On the contrary, the prices have become so high that in the face of a request limited to the best selections, everything else ends up weighing financially on the tannery that fails to dispose of the surplus. Thus, the critical issues related to excess stock in warehouses are becoming a problem and are no longer limited to hide specialists but also apply to skins.
The drop in the import value of hides and skins in China in 2018.
CLIA
Therefore, it seems evident that the current situation is unsustainable. For now, the negative trend is offset by the fact that leather goods continue to perform well, but as production in the automotive sector has been in crisis, the same could happen for leather goods, considering the speed with which consumption models are changing. At the base of everything, in fact, there is not an economic crisis, but a structural change in consumption. For millennials, buying a house or a car is no longer a given, and for the next generation – Gen Z – this sense of possession is becoming more of a burden than a reason for enjoyment.
Driven by innovation
Currently, for car manufacturers, the answer is innovation. BMW announced the launch of 20 new models by the end of the year and the research is mostly oriented towards eco-friendly electric cars. Manufacturers will have to convince adolescents, who in 10 years will be the new consumers, that the car is an object of desire to dedicate a year’s salary to. This will not be easy for a generation conditioned by the need to reduce their environmental impact, and increasingly distant from the concept of long-term investment. This attitude will also inevitably impact on personal consumption – why fill your wardrobe with leather goods, only to use them on rare occasions, when you can rent bags, exactly as you do with cars or flats? These smart or sharing economy logics could have a negative impact in terms of production.
The change in the propensity to consume is an aspect that is beginning to be taken into consideration in the leather market, which is contracting. And the impression in Europe – and in particular from Italy – is that the bottom has not yet been reached. Faced with a rigid offering conditioned by abundant bovine slaughter, which brings a large hide quantity to the world market, demand has been lacking and has focused on high quality, causing the low-end to collapse. And Europeans are aware of being the luckiest in this market phase, because their qualitative and environmental excellence has put them in a position to defend themselves. In fact, today, the highfashion brands that continue to grow are those related to leather and are customers of European tanneries.
However, speaking with several Italian tanners before and after APLF, no one is under the illusion that the pact for survival with their high customer range will guarantee that they remain immune in the long term, because leather, for the luxury brand, is the basis of its fortune – while at the same time representing a critical issue. The ‘stakes’ established in recent years in terms of the level of documentation on the origin, traceability and ethical elements prove it, as does the decision to avoid furs, or in some cases exotic skins, like Chanel. The desire to enter directly into the tanning business to have the entire process under control also proves it. If they could, these brands would gladly do without leather, which forces them to manage a complicated material at all levels, and all that is geared towards a more mature consumer, however unjustified that is.
From this hostility comes the desire to carry on with communication projects such as Leather Naturally in order to revive the naturalness of leather and the sustainability of its production cycle; however, from the point of view of Italian tanners, the communication strategy should instead go on the counterattack against synthetic materials, because the plastics that are deposited in the oceans certainly do not depend on their activity. But in reality, given that in Latin America hides are now buried because at current prices it is no longer convenient to process them, it would be worthwhile to highlight this environmental emergency. Burning hides or burying them instead of recovering them with the tanning process is a real cause of pollution, as well as waste.
An uncertain outlook
After APLF the sector clearly understood the difficulty of the moment. In the coming months, the alliances between the tanneries holding the impact and A-level raw materials suppliers will be strengthened, ensuring their selection, service and safety. A leading European raw material operator told us that B-level suppliers are no longer considered – after all, why should a tannery, while paying less, take in wet-blue hides that they are not able to sell?
Before Lineapelle, there were tanneries willing to sell low grades of German bull for €4 per metre, transformed into wet-white, which by its nature must be finished faster than wet-blue; after Hong Kong, as far as we know, there were also offers for €1 less. This is destabilising. The market continues to produce and then sell-off stock without commercial outlets. The consequences were seen in Australia, where in Queensland an estimated 500,000 cattle died following the February floods – once, this would have caused a surge in prices; in today’s climate, nothing happened.
There is no reason to think that, in the second part of the year, footwear will go back to asking for leather, or that demand for upholstered furniture for the home will resume, or that the automotive market will regain vigour. The European market may improve slightly in terms of raw materials, because lower prices make European hides more attractive for Chinese tanneries, which are experiencing quality problems with those that originate from the US. By paying a little more, China can secure better materials and thus ends up supporting European leather prices. But in general, this will not change anything in terms of the values of all the other origins.
