A truly unwelcome black swan event

Redwood Comment
Published:  09 March, 2022
Credit: nancekievill/Shutterstock.com

Dr Mike Redwood examines the potential fallout of Russia's invasion of Ukraine, the latest event to shake the world's, and leather's, global trade foundations.

Difficult adjustments after the pandemic while the global economy rebalanced were expected, to be followed by the bigger challenge of climate change.

Instead, we have an unexpected black swan event that could spiral out of control and bring severe disruption, no easy ending and the certainty of major long-term implications for the global economic structure.

Thinking narrowly of the leather industry, this is hitting in the midst of worries about inflation, labour shortages, new working practices impacting both the way of working and spending (think of those only going to the office on Tuesday, Wednesdays and Thursdays), continued shipping disruption with enormous cost rises and long delivery delays.

And don’t forget volatile raw material and chemical costs while the end market, as ever, remains highly unwilling to accept any price rises. These points were being clearly made at Lineapelle when tanners gathered in numbers for the first time since the start of the Covid-19 pandemic.

War in Europe in 2022

While it is impossible to ignore the horrors of the events, for the leather business this is quite an abnormal set of circumstances to negotiate. In times of war, the price of oil, the dollar and gold rise and this has happened. Given the countries involved, we should also worry about natural gas, oil, grain, fertiliser and metals such as titanium in a climate where all commodities have become tools of war. This will increase inflation for all and, in some countries, create a living standards recession, hugely reducing disposable income for buying items, including leather.

For leather, there is the raw material trade with Russia and Ukraine and major leathermaking countries like Turkey have done sizeable business with both for a long time. Also important is the trade in meat, with implications for raw material supply and prices. The days when leather was a major strategic war material are gone but there will be extra business for tanners involved in military footwear and other items given short-term re-equipping and the fact that so many nations will increase long-term defence spending.

Of huge significance are sanctions. They have been widely coordinated and much deeper than expected, creating shock waves far beyond Russia, which had expected to be able to work around them with their extra reserves as they did after both their offensives in Georgia and Crimea.

Some relaxation in these sanctions may be agreed if it becomes possible to negotiate a settlement, but Putin will need a lot of concessions to sell his invasion back in Russia. The complete removal of sanctions looks a very long way off and trading links will be transformed forever. This will push Russia towards China to fill the gaps in supply and demand that are being lost.

Largely in response to the actions of the Trump administration, but also following a longer-term playbook, China was already decoupling from the U.S. in some areas but not so much in matters related to the wider meat and leather industry. What is more, the leather industry has been working reasonably well within their new dual circulation system.

It looks certain in my view that both China and Russia will look to replace the dollar and Western banking system in their economies and Chinese technology companies will start working with organisations like Yandex. Despite everything, China has made enormous gains from what Angell said 100 years ago was “the economic interdependence between countries” or simply globalisation and free trade.

However, opening the National People’s Congress on March 5, Chinese Premier Li Keqiang emphasised the need for “self-reliance” as the top priority for China with secure supply chains and faster innovation in core technologies.

APLF Dubai

In the run-up to APLF Dubai, tanners will be scrabbling with scenario planning to discuss strategies with trusted colleagues from around the world. Depending on fast-moving events, there will be increasing pressure on countries to take sides. Where will Brazil be selling its meat in the future? New “resilient” supply chains the leather industry had planned will need to be reviewed.

It is now apparent that the pandemic plus this war will add real momentum to a retreat from the global integration, with implications for our industry which has been a world trader since the start of civilisation – in fact, the key material that allowed trading to happen at all.

This black moment will be unfolding when the industry checks in to Dubai for the APLF and there can be no doubt that the repercussions will still be high on the agenda when we return to Italy for Lineapelle in September. The leather industry will survive but let us hope for peace.

Mike Redwood

mike@internationalleathermaker.com

Follow Dr Mike Redwood on Twitter: @michaelredwood

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