Ron Sauer was invited by the organisers of the IILF fair in Chennai, India, to present a seminar on ‘World raw material markets and the status of the tanning industry in China, Italy and Brazil.' Here we provide extracts from the presentation which proved popular with delegates
According to Sauer there is no problem in making leather but there is a big problem in making money out of it. He believes that tanning all over the world is in crisis:
‘You may find my presentation rather negative but then again I have always liked to provoke. The leather industry is not on the winning side when it comes to making the world's consumers buy our leather products.
‘In the world's richest consumer markets there is less money available so consumers will save on non-priority products. Almost everything made out of leather can be made out of something else nowadays.
Buyers have got younger and their purchasing power is limited. We have to wake up and adapt to market reality.
‘According to a recent study the most important requirement in footwear manufacture today is the management of moisture. This has led to the development of new fibres and fabrics, coatings and finishes which provide additional benefits.
‘Currently more than half of the world's leather production goes into footwear, and wouldn't we like to keep it that way?
‘Everywhere in the world sales of leather garments are down. Today it is the worst performing article in the global leather basket. Is it because leather garments are too expensive? Not at all. They are cheap and therefore have lost all sophistication.
‘Our main sales argument is still ‘Leather is a natural product'. Big deal - this is no longer an argument which keeps people away from buying other products. I would say that today buyers don't care too much about quality.
‘What they mainly care about is price, fashion and functionality. Quality is a word which tells us the product will last a long time. Today's consumers do not care if a product lasts a long time.
‘My own wife said she didn't want a handbag that lasts five years. She wanted two new ones or more every year to follow fashion. And if it lasts only six months or a year because it is not of superb quality and is therefore not too costly, then she's happy!
‘Of course, we should not produce rubbish either. Buyers still demand reasonable quality and good functionality. It should not fall apart and should last at least a season. I call it ‘Good enough quality'. And good enough is good enough and cheap enough to sell!
‘To come to the price of the raw material it is essential to say how things have changed. Why do people buy or not buy your products? And I say it is the consumer price of the end product which determines the price of leather and eventually that of the raw material. That is the reality of the day. We have to count backwards from the shop. Not forwards from the abattoir.
The leather industry has no say in retail sales prices. That is decided by the big retail organisations. They study and analyse the economic situation from country to country and they KNOW how much that pair of shoes, that jacket, that belt, that handbag, that wallet, that sofa will sell for in their shop.
‘We know how much it costs us to produce the leather but the marketing people decide what the final retail price will be. And by doing that they have practically decided the maximum price of the leather and the raw hide or skin, although that is not their business and to put it bluntly: they could not care less.
‘It is up to the leathergoods and leather industry to make the product under their price limit and to figure out whatever it needs to produce it profitably. If the buyer's price proves impossible, he will use another material to meet the end product price set by the world market for his specific product.
- The retail price of leather products has nothing to do with its production cost
- The tanner has to accept what the market is willing to pay. If not the buyer will go to another tanner or eventually may just move away from leather.
‘Now let us look at the raw hide or skin at the abattoir. The hide comes off the animal whether somebody needs it or not. Then the abattoir sells it to the trader or tanner who offers the highest price. Again the leather industry finds itself in a weak position.
‘One way or another there always seem to be more buyers than sellers at the meat plant. And in the negotiations the abattoir is often the winner. Why is this so?
‘Because tanners and traders have to close their doors if they do not have hides to tan or trade. Even today while leather business and demand are not good, traders and tanners are still out-bidding each other.
‘Why does it have to be like this? Because they generally approach the abattoirs individually. All too often it is David against Goliath. The sellers make the rules. What buyers should realize and make known to the abattoirs is that they, too, have a weak point.
‘They produce hides whether they like it or not and the only people they can sell them to are from the leather industry. Basically abattoirs and tanners cannot operate without each other.
‘Reality shows there are one or two ways which do make the buyer stronger. One proven way is to be bigger. If hide buyers could organize themselves into something like a buying cooperative such as farmers have they create the possibility of taking big quantities or to refuse big quantities if the price is not right. This would surely give them a stronger hand.
‘The problem is that hide buyers are not good at organizing themselves. Often they don't trust each other and in some cases have even cheated each other. When leather demand is weak, as is the case today, the hides keep coming and pile up in the abattoirs. They disturb their meat business.
‘The meat business is not brilliant at the moment which means money that comes in from the by-products such as hides is ever more important. The hides must go and the money must keep coming in. Storage is a further problem.
‘In such cases we may see big powerful tanners or more often, tanning groups (there are no more big powerful traders) move in to buy huge quantities of hides at attractive prices. Often a condition is that they take the hides away immediately. These are also the deals we never hear about because they are kept very quiet by both partners for obvious reasons.
‘However, it is proof that big means powerful and that big can exploit the weak point of abattoirs. Another possibility could be the vertical integration of a meat and tanning business. Not very common but it exists.
‘Where a meat company also owns a tanning industry and maybe even a leathergoods manufacturing industry, it uses its own hides and leather and does not have to buy them at all. It is rare that all the hides produced are exactly what the tannery needs, but it helps. And what cannot be used can be sold elsewhere.
‘I want to leave this subject with these conclusions:
The leather industry is hammered from two sides: the buyers of the finished products and the producers of the raw material they need. The industry's influence on price setting is minimal on both sides. Leather products are not priorities on family shopping lists. Leather producers are, therefore, in a fragile position.
We must not underestimate the continuous attacks by new products to divert buyers away from leather.
Supply, demand and prices of raw material
Are there enough hides and skins in the world to make all the leather we want to make? Often we hear there are no offers of hides or skins. That should scare you if you are a tanner. But of course it is not true. The world produces enough hides and skins to meet demand. To my knowledge the tanning industry has never been idle because there was no raw material. There are always hides and skins if you want to pay the price.
Of course, supply depends on the developments in cattle, sheep, goat and pig production which again depends on world meat markets. From that point of view one expects increased production in Asia and only small advances or even reductions in the US and Europe.
Emerging markets are advancing fast. More people can afford to eat meat and the developing countries will produce more hides and skins. But an increase of purchasing power in emerging markets and an increasing meat/hide production there does not mean that consumers in the emerging markets are going to spend their extra money on leathergoods.
I added Spain to the list to show how little these figures mean for the leather industry. The Spanish economy is one of, if not the strongest in Europe. Its leather industry however is close to disaster. Its importance has been reducing year after year.
The lesson in this: Do not base your leather industry plans and company strategy on general economic statistics.
Here are the United Nations Comtrade figures for the year 2006, Code 4101 raw hide and skins imports and exports in major leather importing countries.
Top importers Trade value in US$
Rep. of Korea 363,759,405
Other Asia 231,727,804
Hong Kong 192,830,649
Total imports 4,307,495,463
Now if we put all Asian imports together we come to $1,992,290,401. Almost half of global imports. The only other important country is Italy.
Top exporters Trade value in US$
But where is Brazil for instance? It does not export a significant number of raw hides so it is not in the listing although it is the second or some say first producer of cattle hides in the world. Brazil exports wet-blue and crust, and these figures should be added to give a more complete overview of leather industry exports and imports.
Now let us take the biggest hide producer, the USA's export figure in the world total and see where the raw hides went.
Total exports 1,558,131,634 US$
Of which to
Rep. of Korea 293,562,151
Other Asia 139,626,760
Hong Kong 101,433,555
Again this does not include wet-blue and crust which would totally change the figures but the USA is mainly a raw exporter and we can presume that its statistics are among the most correct in the world. These figures show that of US raw-hides exports, about 85% worth US$1,320,618,828, end up in Asia and the sub-continent. Italy, the only other country of importance, takes not even 3% of American raw-hide exports.
Globalisation has a positive and negative influence on the supply of hides. The positive one is the easier trade flow of raw material which suits tanners everywhere. In spite of the fact that there are still many restrictions at national level such as import and export quotas and bans, subsidies and taxes, more raw material can be internationally traded than before. Eventually, under continuous international political pressure the present restrictions will further diminish and may disappear all together.
Globalisation also has a negative consequence. In the past one could buy hides and skins from a specific country, or region. One wanted that specific region because of the specific characteristics of its hides or skins. This ‘customised' buying of raw material is disappearing and this quite often results in expensive disappointments for tanners.
In the European Union traders can import hides from wherever they want and sell them under the nationality of the country which finally exports the hides to a buyer somewhere else. Few can see the difference between the hides from the various countries at first sight. I wonder when we shall trade something as simple as European hides under a EU certificate of origin.
This may help the trade flow of hides in volume but it does not help the tanners in purchasing the specific hides or skins of a specific country or region with the specific characteristics they are looking for.
However, there are tanners who noticed that the qualities they were receiving were not the same as before and thus they were no longer prepared to pay the same premiums as before. If the qualities in Europe dilute so, say the tanners, will the prices.
What about raw prices and demand?
Strange things are happening concerning this subject of price and demand.
Hide prices in December 2006 and December 2007 in various countries compared in US dollars at the actual exchange rate in those months are both down. On top of that the dollar is down. Buyers are winning twice. What about sales and demand now? Surely everybody must jump on this unique opportunity which for tanners outside the dollar zone offers hides as real bargains! But do they? The answer is NO.
There is hardly any demand today and very little business. At least not at these prices!!! So maybe demand does not depend on the price of the raw material alone. Maybe there are just fewer orders from the retailers.
Let us look at my own indexes from 2003 to the end of 2007. There is one for hides, one for goats and one for sheep. The hides and skins I use in my indexes represent 52 different types of the world's most internationally traded types. Each one of them has its own weight (importance) in the calculation. Clearly if a Heavy Texas Steer in the US changes price it is has a much bigger influence on the world trade than a price change in Finland or Nepal or Kenya.
Taking all the different types into consideration, we see the same story. Hides worldwide are a lot cheaper now than last year but nobody jumps on them.
We have to go back to the economic realities of the day and the fact that in these hard times on the world's main consumer markets there is less money available or less interest to go to the shop and buy leather! And even if that makes hides cheap there are few buyers these days. The new low hide prices have not filtered through to the existing end products in the shops. These are still manufactured out of hides which cost much more a few months ago. But possibly many leather products will have to go on ‘sale' if one wants to get rid of them.
We do not find any logic in these figures. The conclusions we draw are:
1) There is no logic in raw price movements
2) What we hear in the media these days that all commodity prices are on the increase and already at record highs, this does not apply to raw hides and skins.
We also dare say this proves that hides and skins are NOT a commodity as often stated.
One controls the supply side of commodities (oil, grain, copper, soya, cocoa, coffee, etc.) by growing it or not; by digging it up or not, etc. We do not control the supply of hides and skins. They come anyway anytime whether we want them or not. We in the leather business do not decide on the volume, on the quality or on the day they appear on the market. We cannot have more when we need more. We cannot have less when we don't want them. The only factor we influence is the price.
Raw prices do not follow general economic figures as published by the media (GBP, etc.) or commodity prices, and they are no longer influenced by wars or natural disasters.
But raw prices are influenced by consumer behaviour and by fashion as well as unexpected animal diseases which may cause panic about raw material availability (BSE, FMD etc). Raw prices can be influenced for short periods and regionally by strikes or transport problems.
Price changes have become more limited than in the past.
The reason is the fact that the two hammers that I talked about earlier have hammered out all margins in the middle, in the leather industry. Price ranges have become smaller. It seems that today everybody works for the minimum (unless you invented some new super fashion article).
Mostly margins are as small as they can possibly get. Just to stay alive. And not all succeed in even doing that. There is plenty of leather produced at a loss.
For speculators who were so many in the past there is hardly anything left to earn.
Today their strongest tools are the currencies. Speculating on the rate of the dollar, or the euro if you wish, is for many the critical factor in whether or not business can be concluded. Not the prices of hides or leather.
Of course, there is no worry about the existence of the industry. As long as there are animals, leather will be produced. Which means until the end of time. The challenge is to make money out of leather and leather products.