APLF has been traditionally held at the end of March in Hong Kong for more than two decades and it has always reflected the state of the leather, materials and fashion sectors that are subject to the performance of the global economy that is measured mathematically by the IMF. 2016 was lacklustre and global growth came in at 3.1% but the outlook for this year and 2018 is somewhat rosier with the IMF predicting global GDP at 3.4% and 3.6% respectively. China’s GDP growth objective has just been set at 6.5% for 2017 – 0.2% lower than the 2016 result.
On the demand side, retail sales in the US have improved since last year and even the European Central Bank head, Mr Draghi, stated three weeks ago that things are “looking up” in Europe. Add this to the 10.9% increase in China consumer spending and the big economic picture is somewhat more encouraging since last year.
One factor to notice is the strong performance of stock markets especially in developed countries since Donald Trump won the US election in November. Investors obviously think that his policies will be good for business as share value on the Dow (DJIA) have gained by US$3 trillion in just four months.
This time last year leather was still recovering from the hangover of record high prices reached in September 2014 and demand had suffered as designers and manufacturers turned to cheaper oil-based synthetic materials to replace leather and thus protect their profit margins. The sector that maintained and even increased its demand for leather in 2016 was the booming automotive sector in which global new car sales reached an historic record of 88.1 million units sold. Thus, in terms of specific materials, large bull hides were firm the whole year whereas cow prices everywhere slid in the face of weak demand for footwear leather.
One year later leather appears to be coming back into favour with both designers and manufacturers as the crude oil price has risen by around 37% to US$55 / barrel from the US$40 / barrel ruling at the time of last year’s APLF. In fact, renowned commentators on the leather industry are for the first time in more than three years seeing some “green shoots” in terms of leather demand from footwear manufacturers. As David Peters of DLP Advisers from the US states in his latest market commentary; “We are optimistic that 2017 will be the turning point in shoe leather demand as more brands are finding ways to re-invent leather in footwear”.
Add to the increased oil price the fact that tanners are now looking to alternative countries away from traditional US, European and South American origins to buy hides, thus saving on sourcing costs, then there is every reason to be optimistic that shoe leather demand could pick up considerably in 2017.
With auto sales also forecast to continue rising globally this year and new car sales in China predicted to hit almost 30 million units from 28 million sold in 2016 (+5%), the leather industry could in fact be in for a “terrific year” as Peters enthuses in his commentary.
Future Challenges
On the other hand, in the bigger picture of globalisation and world trade, there could be several challenges facing the leather industry in 2017 after the ongoing clampdown on polluting industries and the transition taking place in China away from an industrial-exporting-economy to a consumer-and-investment-driven-one, focusing on its huge internal buyers’ market.
The report published at the beginning of March by the China Leather Industry Association (CLIA) on the performance of China’s leather industry in 2016 makes interesting reading. Overall leather sector exports declined by 11.3% to US$76.4 billion but leather shoe production rose by 0.9% to 4.6 billion pairs. Imports of hides, semi-finished and finished leather all declined and the mixed results confirm that China is still in the midst of a major transition of its economic model and the leather industry is having to retrench in the face of strict pollution control regulation being imposed on textile mills and tanneries.
Nonetheless, the pure size of China’s leather sector means that it will still be the dominant force in the world market but the main challenge it – and the global leather industry faces – is a change in US trade policy. The wheels of free trade and globalisation that had been greased by US trade policies for almost three decades are on the verge of being transformed by a potential wall of protectionism as the new US Administration starts its quest to restore manufacturing jobs to the American homeland.
Such policies could well impact the leather sector……. but in a positive way. For example, no matter how US trade policies change, Chinese tanneries will still need billions of dollars’ worth of leather imports of all types to keep the shoe production lines rolling. And even if some of this shoe production is lost to Vietnam, Cambodia and Indonesia these countries will also need to import leather.
The withdrawal of the US from the Trans-Pacific Partnership (TPP) and its stated intent to renegotiate the North American Free Trade Agreement (NAFTA) are cornerstones of President Trump’s “America First” policy. We now wait to see how trade policy might be modified with regard to China in the context or reshoring jobs to the US. Whatever happens on this front it looks more than likely that US current slaughter rates will produce around one million additional hides this year which will ensure that leather prices do not spiral out of control and nip the “green shoots” we mentioned earlier in the bud.
Countries that know they could be negatively affected by the new trade policy of the USA are already taking measures to offset this possibility and be ready for any such eventuality. Mexico, for example, will have a larger presence at APLF Leather 2017 as tanners look to Hong Kong once again as a port of entry into the China and ASEAN markets.
There are also signs that after the rapprochement between Turkey and Russia, the latter’s internal market will reopen to Turkish products, thus relieving the pressure on the leather sector that had suffered due to political impasses for two years.
There are many factors in the backdrop to the current state of the leather industry and by extension to APLF 2017. The immediate task of the leather industry will be to actively market leather and educate upcoming designers about its beauty, quality, flexibility, biodegradability, sustainability and variety. The aim is to be able to compete successfully to regain at least part of the manufacturing market share it relinquished in the past two years.
