A strong hide producer and obstinate tanner17 June 2002
Latin-America has a herd of some 325 million cattle and produces approximately 1,530 tons of hides and skins every year. This figure is just over 35% of the world's production. Of the world's ten largest hide and skin producing countries, four are located in this continent: Brazil, Argentina, Mexico and Colombia, turning the region into a fundamental player in the global market. No consideration of the problems faced by Latin America's economy adequately describes the situation of its leather industry. A clear example of this is Argentina's tanning industry which, despite the various financial crises experienced by the country, has built a vigorous, technologically advanced sector producing crust and finished leather complying with the strictest international standards. The region has both kept and increased its production of cattle, hides and tanned goods. All over the region, many companies have grown and evolved technologically, had their plants and processes certified and won a place of their own in international business. Basically, the region has a large hide production and is benefiting from a trend by which hides are and will be increasingly processed next to the point of slaughter. Many economies have established an exchange rate which is linked to the US$ dollar - the reference currency in the region. This kind of policy can lead to a loss in competitiveness due to higher local costs in US dollars. In the current circumstances of exponential growth of the industry in south-east Asia, the synthetic exchange rates allows massive imports of low price shoes and leathergoods and destroys local industry. Brazil is the only country in Latin America which has not fallen into this trap. The Brazilian government has protected its industry and its sources of employment through a strong devaluation of its currency in 1999. Moreover, Brazil has the ideology to defend everything that is 'national'. This has made it possible for the country to grow its footwear industry into the second largest in the world with a domestic market which consumes two-thirds of the country's total shoe production. Most of Latin America has two identities: its Hispanic roots and the political and economic influence of the USA. This has led the region to having strongly similar features across borders - especially in the past few years. That is why, in this article, we have chosen to analyse just four main local producers in the continent. Argentina After keeping an artificially overvalued currency for more than ten years, at the beginning of the current year Argentina finally managed to devalue the peso. This generated a 'before and after' point in time for the country in general and for the tanning, shoe and leathergoods sectors in particular. The exchange issue resulted in high internal costs in US dollars affecting power supply prices, public services, taxes, interest rates etc. However, the price of hides and some locally produced goods and services increased in price and virtually put themselves at the same level as the devaluation. Today, in order to calculate their final costs, companies must take into consideration the incidence of a new export duty. Even so, tanneries have improved their profitability, which in the past few years had been edging down towards inadmissible levels. Today, the tanning industry, which during the hard years saw many instances of corporate merging, is a strong sector with the ability to compete internationally. In the nineties, companies went through a modernisation phase and became certified for ISO 9001, 9002, 14,000 and QS 9000, as reliable international suppliers of leather and ready-cut and finished upholstery products/components. Today, they occupy a prominent place in the production of top quality upholstery leathers, both for the furniture and the automotive industries as well as supplying the best international footwear brands. At present, 85% of Argentina's leather exports are provided by a dozen or so companies and groups: Sadesa, Curtarsa, Yoma, Curtiembre Fonseca, Curtiembre Arlei, Antonio Esposito, Becas, La Hispano-Argentina, Curtiembre Urciuoli, Gibaut, Cidec, Cueset and. La Teresa, who export almost all of their production. Out of the $750 million exported in 2001, finished leather accounted for 40%, crust for 51%, wet-blue 8% with leather soles accounting for the remaining 1%. Also, ready-cut and ready-sewn upholstery covers were exported with a turnover of $180 million. At the moment, Argentina has a herd of 50 million cattle of European breeds and cull levels of 25% which result in the availability of some 12 to 13 million hides per year. The fast recovery of the cattle breeding sector after last year's outbreak of FMD in the country means that slaughter numbers should increase and greater hide availability is foreseen from this year on. Brazil The largest country in the region and seventh global economy, Brazil has a herd of around 170 million cattle, mostly of Indian origin breeds. The country's herd grows continuously and slaughter numbers increase by 2% annually. At present, slaughter numbers are 16% of the world's total cull and it is expected that they will reach 22% in 2010. Today, Brazilian hide availability is 33 million per year. Some 12 million are exported in various processing stages. The rest is consumed by the country's powerful footwear industry and to a lesser extent by the leathergoods industry. In 2001, the turnover deriving from Brazilian hide and leather exports grew to a total US$881 million. Just as other countries in the region, Brazil protects its industry by taxing exports of raw materials and materials with little added value as is the case of wet-blue hides whose exports have been taxed at 9% since 2000. According to Arnaldo José Frizzo, CICB vice-president for new technologies and managing director of the Braspelco Group, in the next few years, wet-blue exports will be considerably reduced while exports of manufactured goods should grow. Exports of finished leather rose significantly in the first quarter of 2002. Frizzo believes this to be 'a natural, almost inevitable step and asserts that any commercial mechanism which does not add value to raw materials will be seen as an unacceptable practice in the near future.' Therefore, more and more often raw materials should be converted into higher added value goods in their countries of origin. Augusto Sampaio de Souza Coelho, president of CICB and director of Curtume Moderno, says that 'cattle breeding is still growing in Brazil and hide supply will grow considerably as beef consumption grows as a direct consequence of the improved financial situation of the population which is expected to take place in the next few years. Domestic consumption of footwear should also increase.' Brazil is becoming an ever more important upholstery leather supplier to the furniture and motor industry, especially in the area of more affordable goods. 'The Brazilian leather sector', explains Coelho, 'is getting technologically prepared to be able to guarantee its share of that market.' Coelho believes that the next two years are crucial to the strengthening process of the Brazilian leather sector because of the negotiations towards the formation of ALCA and the discussions about bilateral agreements between Mercosur and the EU. In the negotiations with the EU, Brazilian delegates will keep insisting that the 'EU must lift the 6.5% duty imposed on crust and finished leather imports from Brazil.' Mexico Mexico produces 4% of the world's total hides but processes almost twice as much. At present, there are some 1,000 tanneries in the country supplying 2,600 footwear manufacturers, 600 leathergoods producers and 300 leather garment manufacturers. Half of those companies and 55% of the workers employed by the sector are concentrated in the state of Guanajuato. Mexico processes 20,000 hides a day and 75% of the tanneries are also located in Guanajuato, mainly in the city of León. In this region there are 300 garment manufacturers and approximately 1,500 shoe factories plus 300 raw material suppliers. On the whole, the leather sector employs 43,000 people and 97.5% of the businesses in the region are small-scale companies. Mexico imports unprocessed hides. Over 60% of leather imports come from the USA and 15% from Argentina and Italy. Currently, 70% of the leather produced in Mexico is used by the local shoe industry and just five tanneries produce upholstery leather for the motor industry. According to David Haro Carrillo, president of the Chamber of the Tanning Industry of the State of Guanajuato (CICUR), the overvaluation of the local currency and the low hide availability have led the industry to a serious crisis. 'Now we cannot export anything anymore and this situation is mainly due to the overvaluation of the peso', explains Haro, 'because the current type of exchange mechanism is not favourable to us. Raw material shortage has made leather rocket and has applied the brakes on domestic shoe consumption.' He also blames indiscriminate imports, the massive entry of Asian legal imports and contraband products, which have caused leather orders to shrink since 2000. Over 10,000 jobs have been lost in the leather, shoe, leathergoods and allied trades since the first half of 2001 and some companies currently work just three days a week. Despite all the tanners' efforts, in the past ten years, the deficit of the Mexican tanning industry has increased. This situation got worse after the 1995 crisis (Tequila effect). Imports rose by 400% while exports barely reached 30%. Mexico's domestic market is big but has a low per capita income. This is why leather producers mainly look outside the country. After September 11, leather exports to the USA dropped significantly. Colombia A strong leather manufacturing tradition has turned Colombia into a prestigious producer and exporter of leather and excellent leathergoods. In recent years, the same artificial exchange policy applied in other countries - a currency strongly overvalued against the US dollar - has made Colombia lose its export markets after supplying the USA and Northern Europe with quality leathergoods for many years. The country went through serious changes in 2001 when, for fear of BSE, Europeans went out into the rest of the world looking for hides. Determined buyers with hard cash in hand caused an earthquake in the hide commercialisation structure. When the Colombian government decided to intervene the worst had already happened and hide prices had rocketed to well above the values the domestic market could afford to pay. According to Pablo Narváez, managing director of the National Federation of Tanners (FNC), 'prices of raw and wet-salted hides never recovered their proportionality to those of the USA, Argentina or Brazil, just to give a few examples.' The current reality is that between 2000 and 2001, wet-blue leather exports grew by 158.7% in volume and 375% in value. The country has, therefore, become a supplier of low added value raw material. This has brought about job annihilation at a time when Colombia already shows the highest rates of unemployment ever. And the shrinkage of the domestic market has forced some tanners to produce just wet-blue for export. The sector also complains about massive imports of shoes from Asia which hit the $88.5 million mark in 2001, a 38.9% increase over 2000. In volume this represents 58 million pairs and an increase of 180.6% when compared with 2000. 67% of the shoes imported come from China. Colombian annual per capita consumption is estimated at three pairs for women and two pairs for men. According to these figures, in 2001 national shoe consumption would have reached a total 107.8 million pairs. Therefore, the logical conclusion would be that roughly 50% of the local market is covered by legal imports. On the other hand, shoe exports have gone up by 22.9%, from $32.8 million to $40.3 million, which in terms of volume exported means an increment of 166.6% having risen from 5.1 to 13.6 million pairs. The main destinations of Colombian shoe exports are Venezuela (36%) and Ecuador (17.7%). However, the Venezuelan devaluation at the beginning of this year had a huge impact on the local market. After all, Venezuela means annual trade of $38 million to the sector. In turn, the Colombian leathergoods industry has also been badly affected by imports from Asia which have grown 48.2% in units. The future According to expert Roberto Saban: 'Latin Americans are leaders in leather and skin manufacturing. Huge territories, fiscal incentives for industries to set up in the continent, specialised low cost labour and the great need for the migration of production from Europe and the USA turn the region into a highly promising area. Latin America, Saban asserts, 'sees its livestock grow without the need for subsidies and it is obvious that tanners will reach a higher degree of development and have better perspectives in countries such as Brazil, Uruguay, Paraguay and Argentina. 'As a matter of fact, we saw foreign and mixed companies (with part national/part foreign capital) set up very quickly in Latin America in the last twelve months. Moreover, today, setting up business in Latin-America is both cheap and easy.'