Factors affecting global leather2 October 2017
A premium final product requires top-notch raw materials, but a market in a state of flux has made for an uncertain and occasionally fractious relationship between slaughterhouses and tanneries over the past year. Andrea Guolo investigates the economic forces currently at work on the global leather industry.
The best leather products begin with good rawhide, but where does it come from? Europe’s climate, breeding techniques and animal welfare, all of which contribute to the final quality of raw materials, make it an ideal source. Quality comes at a price, though, so it is no coincidence that the biggest tensions in the past year have involved hides from that part of the world.
Hidenet.com, which carries weekly market values for hides and skins, reflects the stability over time of selections such as German bull, reference origin for automotive interiors, and even the best cows in Central Europe. It also reported on the downward trend for North American selections: in the first five months of 2017, heavy native steers went down in value by 8%, from $75.00 (FOB) to around $70; heavy Texas steers lost 15% (dipping from $73 to $63 a piece), with most of this loss occurring in May. North American packers have more stock in their warehouses and, in a market that is flat – especially for cows – are having to give discounts in order to make sales.
Don Ohsman, Hidenet’s founder and editor, believes that the intense activity at slaughterhouses that is behind this overabundance is set to continue.
“Slaughter increases in summer for the barbecue season, and, with packers making big profits, this should continue into early autumn. Normally, it slows in November/ December, due to the customary holiday increase in pork and poultry consumption, though this was not the case in 2016.”
Regional variation In Europe, losses in the second half of May were limited to cows, with some German and French selections declining by €0.05/kg, but bulls and calves maintained their values. Adult males from German slaughterhouses have been steady for more than a year, only fluctuating by €0.05; sales completed in northern Italy for southern German bulls were stable around €2.20–2.25/kg, while those from north Germany rose to €1.90/kg, thanks to a combination of huge automotive demand and low seasonal slaughter.
John Rainer Semmelhaak, managing director of German firm Sturm, does not expect to raise bids at least until late August, when the production season at the slaughterhouse will be resumed.
“Tanneries have adopted a ‘just in time’ delivery system and operate from fresh hides,” he says. “As a result, drums must be filled every day, and it is normal that there is a lack of offers in periods of slaughter, as has happened every summer since 2013. Prices are stable because more expensive hides would not lead to increased production”.
Operators talk of ‘anything but abnormal’, and the data available at institutional sites gives them just cause. The stories about the continuous drop in European supply are denied by Eurostat, which in 2014–16 shows a stable, if not buoyant, situation calculated by weight (not head) for slaughter.
France is up from 1.42 to 1.46 million tons, Germany from 1.12 to 1.13 million tons, the UK from 0.87 to 0.91 million tons and Italy from 0.71 to 0.81 million tons. USDA analysis on European cattle, calculated for heads, shows progress of 26.2 to 26.5 million processed heads in the same period. Further growth is expected until the end of 2017, when total production should reach 27.2 million heads by calculating calves (6.5 million) and adult bovine heads. The biggest problem, according to the Italian tanning industry association, UNIC, is linked to the quality of the hide.
“The problems of profitability where slaughterhouses and farmers are concerned certainly do not improve the hide-quality situation,” says Luca Boltri, head of the UNIC-Lineapelle study centre. “Much also depends on the care of breeders and flaying processes of the industrial facilities, which are struggling to find qualified workers.”
UNIC notes that, in the first quarter of 2017, total European production of bovine rawhides increased by 2% in a market driven by the Netherlands, Ireland and Poland. The most significant losses were registered in Italy (-5%), the UK, Germany and Spain.
Back in the veal world
Calfskins, which have reached prices that are now unsustainable as far as tanneries and some manufacturing customers are concerned, have been in steady supply.
After a 2% increase in 2016, the first quarter of this year has shown a slight increase, despite the decline in France, which is more than offset by the growth in activity in the Netherlands and Spain. Together, France and the Netherlands were worth about 3.5 million heads, accounting for more than 50% of Europe’s total veal production.
It is therefore evident that the economic stability of European raw material depends on demand, rather than the decline of availability. In this prospect, some are predicting a downward trend, but only for female animals.
“European cows will have to be measured primarily against US slaughter,” says Francesco Matelli, owner of the Italian agency Matelli Srl, which sold heavily in Europe in May, particularly in Italy, using aggressive pricing. “Price research by the footwear industry suggests that Europeans will struggle to maintain current levels.”
The downward pressure is also increasing for bulls. “Tanneries urgently need it, given the reduction in the contribution of the splits on the one hand, and the fall in yields observed in winter hide harvest on the other,” says Matelli, “but the excess of demand versus availability favours sellers.”
Moreover, due to its structural characteristics, hides from European bulls can hardly be substituted for other sources for use in the automotive industry. If the current situation continues into autumn, it will be almost impossible to reduce supply costs, and tanneries will have no choice but to charge more for finished leathers.
“Until August, the programmes are made,” says Semmelhaak, “then we’ll see what’s going to happen. The sense is that, in automotive, there is less confidence than there was a couple of years ago. On the production front, the bull season should start on a regular basis, while the slaughter of cows ought to decrease, with milk prices returning to normal levels.”
The forecasts must take into account what will happen outside Europe. If, given the delicate political situation in Brazil – not to mention the JBS case – forecasts related to Latin America end up being a gamble, some additional scenarios can be calculated for the US, where production will remain intense at least until September, while Australia should point to a year-on-year decline of 2016 to reach about 7.5 million units, against 9.9 million in 2015.“Half of traders and producers think the market may have bottomed on steers, and half think we are in a pause on the way down,” says Ohsman. “Firmer prices, but no big rebound, are expected in the period just before ACLE.”