Supply chain reaction - APLF MM&T

The best defence for a subdued fair is that such a mass gathering is more for meeting people and making new contacts than for actually inking deals. And while there is some truth to that, APLF this year reflected an ongoing period of struggle. During the opening press conference, APLF director Michael Duck reiterated how the global leather industry is still muscling through a challenging phase since prices for raw materials peaked in September 2014, and that just after APLF 2015, “Sagging demand for leather took its toll as prices slid by 40% to bottom out in July 2015,” he said.

“Cheaper crude oil prices resulted in cheaper raw stock to manufacture synthetics that have continued to highlight the fact that leather priced itself out of the market. It’s only in recent weeks that bargain-basement prices for splits have attracted buying interest from footwear manufacturers, but there is still a large backlog in stock weighing on the market.”

Complicating matters is an unfavourable macroeconomic climate, from China’s slowing economy, Russian sanctions and overall dampened consumer appetite. So despite low prices, and automotive being the one steady sector where demand for leather has been resilient, requirements have yet to spark. And seeing that Turkey was this year’s APLF focus country, there was a lot of attention heaped on its delegation in terms of its strategy going forward.

Ruken Mizrakli from the Istanbul Leather and Leather Products Exporters Association (IDMIB) and the Turkish Leather Council (TLC) said that although 21% of Turkey’s leather market is invested in Russia and Eastern Europe, being at APLF as the focus country is the ideal opportunity to help diversify its export destinations.

“This is what APLF can help to do,” she said, citing the US and Iran as possible attractive markets in which to invest. “It was cash, easy and fast business before the crisis and sanctions.”

In the mood

The consensus in and around the fair hallways over the three days was that, despite pockets of bustling activity, if you had product to sell, and many did, it wasn’t the turning point the industry needed. The first two days got off to buzzing starts despite talk regarding the slowdown in demand for leather from China in the beginning of 2016. So as long as China doesn’t get orders to manufacture subcontracted leather footwear from brands in developed countries, then leather demand will remain slack or worse. But a silver lining is that prices have remained stable recently, which is attributed to fewer cattle being slaughtered and some abattoirs closing, mostly in Brazil.

With large stocks of lower-grade hides to be moved from warehouses, this continues to blunt demand for fresh orders and so Chinese manufacturers are being tight-fisted, buying only what is necessary.

But expectations were realistic going into the fair for most, so the lack of orders came as no big surprise. The industry is in transition rather than an all-out decline, as the sentiment goes, so from across the supply chain, the onus is on each link to reassess its purpose. And what this year’s MM&T can certainly boast as an across-the-board success were all the satellite events that buttress the main expo itself. Many panel discussions specifically focused on the value chain and what it means for businesses in the years to come.

Talking points

One discussion in particular was entitled ‘Getting Smart: conceptualising what is needed to be the tannery of the future’, which featured on the panel Mike Larson, senior director of international sales, Tyson Foods; Luiz Paulo, technical sales manager, Getti & Kingwell Chemicals; Jon Clark, CEO, PrimeAsia; Craig Drew, deputy materials manager, Clarks International; and Mike Redwood from Leather Naturally.

Larson kicked off by emphasising how the industry will have to continue to move away from any commodity product thoughts.

“We see the wet-blue we produce not as a by-product of the slaughter plants but as a valuable, high-quality raw material for our tanning business,” he said. “This enables us to have a mindset to produce the best wet-blue possible. We will also need to be creative in our product mix, and seriously look at lime-split products driven not only by customer demands but also by Tyson’s internal demands for collagen.”

Larson also reiterated an industrywide need to continue to find cost savings at every point in the process and consolidate the customer base in the future. “Freight costs will increase in continued price compression on the leather industry, and our customer base in the future, I believe, will be smaller than it is today – that’ll be by design, while our volume to each customer will increase, and in some cases, increase substantially,” he continued. “I feel strongly that we’ll be further processing for some key accounts within the next two years, not only the splitting we do now but steps further into shaving, braiding and retanning. But we’ll only pursue this on a customer-needed basis.” Staying ahead of environmental guidelines from the government will also naturally be paramount.

In terms of the leather industry supply chain itself and how it can be configured to manage increased levels of risk and complexity, he said that we have to find a platform to get all sides working together.

“There are many groups that seem to be going down their own direction,” he added, “but with a common goal, we have to find a way to reduce redundancy and increase effectiveness.”

Paulo detailed three pillars that move the leather industry in terms of what supply chain customers will demand in the future from tanners: technology, lead time and sustainability.

“We know leather is no longer a primary material,” he said. “So with the development of alternative materials, tanners in the future, in order to be prosperous and survive in the market, must follow these global requirements. By the time technology transforms communications, transportation and travelling, it makes the world smaller.”

Making the connections closer within the supply chain was a main point Clark discussed, which echoed Larson’s call for consolidation.

“One of the most important things is to do business up and down the supply chain with like-minded businesses,” Clark said. “And that’s one of the keys going forward: to create a bubble of people and support around the business with people who think the way you do; people who have the same value set and believe there is a correct path to move forward on.” That cohesion, and therefore value and indispensability, is more important than ever considering the current “at-once” demand against supply chains from consumers. “The reality is that the supply chain can’t meet that demand in every instance,” he added. “But the demand is there. The supply chain relies on pieces of it that create and offer their own identity.”

Voices in the room

Clark also concurred with Larson regarding commodities, and that a commodity business today will not be in business tomorrow. “Commodities, no matter what they are, will be replaced by something else,” he says. “Tomorrow’s world is going to call for much more versatility than what we’re able to deliver today. Our industry has to figure out how to deal with speed, which is contrary to what the leather industry has always been, with a massive pipeline with stocks and backlogs, delivery times over oceans, for example. All of that has to go away. Those who don’t adjust and evolve through technology and innovation will not last long. That innovation requires investment to places where it hasn’t gone before, of course, and that’s the wake-up call.”

From Drew’s perspective, the question to tanners is can we break that four-to-five-week delivery barrier, since tanners with the shorter lead times reap the rewards. “But it’s not just a tannery issue,” he said. “This is a relationship issue with the customer and the successful tanners of the future will be those that demonstrate and innovate all areas, and work with brands to maintain quality and integrity.”

Redwood concluded by explaining that we have to balance a complicated natural material like leather with the fact that there is some very precise chemical engineering going on. And that, as a result, the leather industry on the whole has been very slow at introducing modern methods of production management as opposed to technical management. “There’s been considerable effort back in the wet-end, where the hides are heavy and the volumes are large, to put in really good engineering to make those systems efficient,” he said. “But we haven’t been good at applying modern production skills to the way we flow leather through the factory. And if we’re serious about the industry and disruption, why are we processing leather in aqueous solutions? I think it’s time to move beyond that.”

Changing of the guard

On the second evening of APLF, International Council of Hides, Skins and Leather Traders Associations (ICHSLTA) members gathered for the 87th annual AGM and cocktail evening in Hong Kong. Elections were held this year, and Stephen Sothmann, president of the US Hide, Skin and Leather Association (USHSLA), was elected as new president for a two-year term, to replace outgoing president Nick Winters, president of Nick Winters Group. Victor Topper of Australian Hide Skin and Leather Exporters Association (AHSLEA) and Su Chaoying, President of the China Leather Industry Association (CLIA) were elected as vice-presidents. The group is also pleased to welcome New Zealand’s Animal By-Products Exporter’s Association as a new member.

Various topics were discussed, including the AQSIQ’s (China Quarantine Body) requirements in light of ‘Decree 159’ regarding the import of all non-edible animal by-products in China, including hides and skins.

According to the regulation, the animal health control systems of each exporting country will be audited by AQSIQ, and once the system is approved, a list of accepted producer/processor establishments will be created by the government of each exporting country. Once fully implemented, only those establishments included on the list will be authorised to export these products to China. The scope of the regulation covers raw or salted hides and skins, but is not expected to extend to wet-blue or further tanned products, nor will it cover commercial issues related to the trade.

The annual meeting ended with a presentation by Joe Gibson, of the Gibson Bass Stamper, an identification tool for the hides industry. Following the AGM was the third annual cocktail evening, which drew many industry leaders, international leather organisations, and representatives to hear Winters and Sothmann give their outgoing and incoming addresses, respectively, as well as a talk on China’s economic climate from Gary Yau, an economist at the Credit Agricole Group in Asia. ?