New frontiers1 August 2019
Leather International sits down with Vera Dordick, editor-in-chief of Hidenet, to discuss key issues and events impacting the industry, including promoting leather as an attractive, progressive fashion material, and how innovation can unlock new markets.
Since Hidenet founder Don Ohsman passed away at the end of January this year, how has it been for you in terms of taking over the helm and carrying on the Hidenet name, which has been so integral to the industry for so long?
Vera Dordick: Don’s death was certainly a stunning loss. He had a wealth of knowledge and history of the hide market that he worked very hard to pass on. Once we knew his health was going to become a serious issue, he started ramping up my responsibilities so that a future transition would be seamless, which it has been. I am a doer and a planner, so over the past couple of years Don and I worked hard to create a team that facilitates Hidenet’s daily operation in all aspects, from information technology to data tracking. Of course, the loss of a mentor is never easy, even when you are prepared, but having all the pieces in place certainly kept everything on track.
Don’s greatest desire was for Hidenet to continue without him. I promised that I would commit to carrying on his legacy, shepherding Hidenet’s evolution as Don did. He created the report as a typed and mailed document, successfully transitioning it through various delivery technologies to the current digital version. We aim to do the same as we launch further innovative offerings planned for our subscribers.
As prices stabilise in the US, optimism is returning to the market. However, uncertainty is still a major concern, with weaker beef demand in the US and internationally potentially the biggest threat to cattle and beef markets for the remainder of the year. Can you explain the forces behind this in light of the growth of the middle class in China and India, where demand for US beef is increasing?
From the beef side of the equation, the market is doing well. In the US, we are in ‘barbecue season’, so slaughter figures are at their highest levels. This began around late April through early May and is anticipated to continue through much of the remainder of the year, as it did in 2018. As long as beef demand is sustained, producers will continue to see attractive profit margins, which they, of course, would like to see remain in place.
Growth in demand is seen coming from beef exports, particularly to China, as you mentioned. The growing middle class there and in some other Asian countries can drive US beef exports. Current estimates put the size of China’s middle class at 400 million people or 140 million households, less than a third of China’s total population. China’s middle class expanded as its urban population grew from 19% of its population in 1980 to 58% in 2017. A study by McKinsey & Company projects that 76% of China’s urban population will be in the middle income bracket by 2022. Its study defined middle class urban household earnings at $9,000 to $34,000 a year.
Other issues can also drive beef exports higher, such as African Swine Fever, which has led to the culling of a significant proportion of the pig population in China. As pork is less available or more expensive, consumers are moving to other proteins such as beef. While all this might sound favourable to the beef sector, political uncertainties are affecting the market. Halfway through 2019, the trade war with China was on somewhat of a hiatus but was nowhere near being resolved, and that can significantly affect exports to that enormous market. For the hide industry, however, robust US slaughter and the resulting plentiful hide supply comes at a very bad time. Globally, leather demand is at historically low levels, meaning that what demand exists is targeted mainly at the best selections.
What are the broader ramifications of decreased demand causing warehouses to bulge with supply? Has the industry yet to hit bottom?
It is not news that we have a global oversupply of hides, as has been the case for some time now. Increased beef demand is keeping slaughter levels high, so there is no reprieve from the supply side. As far as the broader ramifications of overstocked warehouses, it is having several effects on the market that go beyond just lower prices.
First, the price disparity – and level of demand – between hides of good quality and those at the low end has become more pronounced. Even within a selection, you can see a range of prices depending on the quality level. In some cases, customers prefer a specific hide from a specific plant for their leathers, so those can command a better price. At the other end of the spectrum are low grades and poor quality hides, many of which no longer have a market. For example, little official historical information is available on small packers.
However, just looking back through the average offering prices for the first six months of 2018 versus that of the first six months of 2019, the decline is roughly 40% on normal weight fleshed material. The most dramatic declines of all, however, have been witnessed in conventional small packers, which have lost over 100% of their value within the past six months as most small slaughter operations are now either paying collectors to pick up their hides or paying for their disposal. The same, of course, could be said for conventional processor-type threes and conventional renderer hides, which also cannot sell to recover costs.
Second, what little demand there currently is in the market is directed at the best hides, which in the US are the steer selections. The month of June saw sales improve and packers were able to establish positions that eased their urgency to sell. This explains the price increases logged for steer hides in the first half of July. The result is also a tighter supply of these steers, which allows sellers to keep prices from dipping.
How do you think the leather and fashion industries need to synergise better so that the athleisure and synthetic trends don’t permanently relegate leather to the fringes?
For leather to stay relevant, there definitely needs to be more communication from the leather sector to the fashion industry. In fact, this year’s Shanghai Shake-Up at ACLE will address ‘Redesigning a Future for Leather’ that focuses on tanners as well as designers. As we can see, ‘commodity’ leather is no longer relevant and the tanners that invest in the innovative development of new versions of leather with novel properties are the ones that will move beyond survival mode and really thrive in the future. At the same time, the leather sector has to do a better job educating the designers about what is available with regard to new types of leathers and how they can use these new materials to create novel products that consumers will want.
Recently, presidents Xi and Trump met at the G20 Summit in Osaka to discuss tariffs. What is your assessment of how this protracted and shifting standoff will play out?
The tariff situation has been a roller-coaster ride over the past year because of the uncertainty and constantly evolving announcements from the White House. It is impossible to say what will happen definitively, but the uncertainty does not help the hide market. We know that the Chinese leather industry does not want to see additional levies placed on hides brought into China, and thus far it seems that their government has had a sympathetic ear. However, who knows how far that sympathy will extend. Even if higher tariffs aren’t in store from the Chinese side, higher US tariffs on finished products coming back into the US can still disrupt the leather market significantly.
USHSLA and LIA recently filed joint comments opposing tariffs, saying that robust, unrestricted trade is critical to the industry, which exports more than 95% percent of its total domestic production to key markets every year. This is a strong rebuke of tariffs, but what is the argument for them?
Of course, targeted tariffs can be a useful tool, among others, in managing trade imbalances or preserving a particular industry. Indeed, there are issues in the US-China trade relationship, but sweeping tariffs that cover much of the trade between two countries may not yield the desired results. Other countries, such as some in Africa, are using targeted tariffs in the hide industry to build up the domestic sector. In these cases, raw materials are being exported to the detriment of local industry. That is not the case in the US, where we don’t have the number of tanneries necessary to process all the hides we produce.
The automotive sector has always been a bedrock of stability in leather production, but that foundation is starting to show signs of fatigue. Can you explain what factors are contributing to this and what measures are being taken to offset further losses?
It is certainly true that the automotive sector has been the main driver of the leather industry, and it is showing signs of slowing down. The reasons for this are wide-ranging and not all within the realm of leather.
The first reason is that car sales are declining. CNN has reported that global car production was down by 6% in the first half of 2019. China, which has the largest market, saw a decrease that was more than double that at 13%. On top of that, China’s car market shrank for the first time in 2018 – something that had not happened in more than two decades. In the US, new vehicle sales dropped in the first half and are expected to keep declining for the rest of the year, thanks to rising car prices and higher interest rates. This year could see the lowest sales since 2014.
At the same time, manufacturers continue to increase the use of synthetic materials that are often confusing to consumers – sometimes the salespeople don’t even know the difference. Take Alcantra as an example; it is often called Alcantara suede, but it is a synthetic suede replacement that requires more care than leather. Some carmakers are looking to other materials in the name of sustainability, believing that they are more environmentally friendly than leather. Also, in July, The Wall Street Journal did a story on why cloth car seats are making a big comeback saying that, “luxury players from Bentley and Porsche to Land Rover are questioning hide, racing instead to upholster cars with advanced, sustainable materials soft to the touch”. It also cites Land Rover head of design Gerry McGovern, a collector of mid-century modern furniture, having quipped that it’s odd cars with leather interiors still constitute a space, where “otherwise enlightened” people still do want leather, believing it denotes wealth, luxury and comfort. This kind of statement seems that a backlash is developing against leather in vehicles.
Finally, the car models that still do include leather are using less of it – even premium brands. The parts of the car such as the surface of seating are done in leather, while backs and other areas are upholstered in a synthetic substitute. Originally, this was done because leather prices were high, but now with such low hide prices, the cost argument is far less valid.
What are your thoughts in the run-up to the World Leather Congress in New York in terms of further galvanising the leather industry with a strategy that is more inclusive and graspable to those in fashion and design, who might not know about the beneficial, sustainable and progressive qualities of leather?
The focus of the World Leather Congress is very different for this edition. Under the theme of ‘Leather in Everyday Life’, the session aims to educate and engage designers, media and other people in the fashion and design industry, rather than ‘preaching to the choir’.
Addressing those in the industry, the congress is making the most of its location in New York City by focusing on the designers and media located there. This is critical because leather truly needs to be more aggressive in telling its story, from quality to longevity and sustainability. Informing these key audiences is an important part of promoting the use of leather in fashion and footwear.
What are your expectations for ACLE this year following comments from last year’s show that it is strengthening its domestic capabilities across the supply chain at the expense of international influence?
ACLE is, and always has been, a fair focused on the China market, while Hong Kong has had an international focus. That said, international exhibitors have historically attended ACLE because of the importance of the China market. As a US packer said to me recently, China is and always will be the driver for the leather market, even if just for its sheer size. China imports more hides than any other country and, generally, at least 40% of those monthly imports are from the US. Moreover, the leather industry there is facing its own challenges, and must evolve and develop its own market, especially under the threat of US tariffs that could put a serious damper on exports.
In recent years, some attendees have expressed concern about the number of companies in the Chinese domestic halls promoting synthetic materials that they call leather. Like the US and other countries, China does not have laws on leather labelling and some of these companies have leather in their name, so a remedy to the situation is challenging. I do know that APLF and CLIA have been discussing this and working towards a solution.
Is footwear a liability for leather at the moment? Is upcycling and marketing the sustainability message of leather the answer to regaining market share?
For leather to continue selling and thriving, it most definitely needs to market itself more effectively. Thanks to years of negative press that mostly went unanswered, leather’s status as a by-product and its sustainable features are largely unrecognised.
Earlier, I mentioned that the Shanghai Shake-Up this year will address why designers aren’t using leather and one of the main points that some of our panellists aim to make is that leather competes only with other types of leather. The field of options for footwear now includes materials that would not have previously been considered competitors – new vegan materials, textiles and others. Leather has to market itself to footwear designers because the newest generation may never have worked with leather thanks to the prevalence of athleisure in recent years. Also, as tanners innovate new types of leather materials, those too have to be marketed to familiarise all designers with their advantages.
Where do you see the key innovations in leather taking place right now?
It is hard to say because the most creative companies don’t advertise their innovations before they are launched. Regardless, the tanneries that will be most successful in the future are those that invest in R&D to create new materials from lower grades of leather, giving them entirely new markets. In addition, products that can integrate technological functions into the leather – something that is already being pioneered with synthetics for automobiles – offer promise and new markets.