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    Rawhide Price Shock Caused by Leather Industry Changes

    LightCastle Analytics Wing

    The leather industry was shocked by a steep decline in rawhide prices during Eid-ul-Adha this year. This time of year is when a significant supply of rawhide is generated for the leather tanneries throughout the country, but people were seen throwing away the rawhides from their sacrificed cows due to an inability to get fair prices. A number of factors have been identified for this price shock, including a decline in global demand, the delay in building the industrial park for tanneries in Savar, and a lack of financing available to tannery owners.

    FIGURE: Leather Export Earnings / Source: Bangladesh Bureau of Statistics

    Leather is targeted as a priority industry by the government to reduce the dependence of exports on ready-made garments, but exports declined at a rate of 6% from the previous year, with a value of $1.08 billion in 2018 1. Although falling demand is blamed for the negative outlook, Bangladesh imported processed leather worth $100 million in 2018 1. Large-scale global and industry trends are to blame for the price shock experienced by individual traders and households this Eid, which shows that the drop in price was not as unpredictable as it initially seemed.

    Global Leather Market on the Decline

    The global leather industry was valued at $95.4 billion in 2018, expected to grow at a rate of 4.36% for the next 5 years 2. It has been suffering from price declines caused by falling demand and political instability from the US-China trade war.

    FIGURE: Rawhide Prices 2014-2019 / Source: International Monetary Fund

    The fall in demand has been caused by several factors. Firstly, cheap leather alternatives have been increasing in popularity. The leather alternatives market is expected to have a value of $85 billion by 2025, due to its affordability and environmental-friendliness 3. It is also considered “vegan” and free of animal cruelty, increasing its attractiveness to younger consumers. Over 56% of luxury consumers today are aware of the social responsibility stance of brands, with millennials in particular being susceptible to the effect on the environment and animal care 8. On top of that, alternatives are more durable and resistant to damage than leather.

    Millennial purchasing patterns can also be to blame for the decline. Leather goods are long-lasting and require care and many millennials would prefer products of a shorter commitment. Moreover, as leather is a luxury product, the upcoming recession means people are pulling back from unnecessary spending. Bags, belts, and shoes made of cloth or plastic are priced significantly lower than similar products made of leather.

    Political instability in the form of the US-China trade war has also impacted the global market. It has affected leather industries on both sides of the equation, and the impact on the Bangladesh economy has been significant. China, which was once Bangladesh’s largest leather export destination, has made close to zero orders in 2019 so far 4. As the demand for China’s finished leather products has been impacted by a 25% tariff by the US government, China’s demand and offered prices for raw and semi-processed leather have been impacted as well. When the trade war began in 2018, Bangladeshi leather exports fell by 12%, making long-term planning difficult with unpredictable tariffs and export-import patterns 4.

    Smuggling to neighbouring India is also a problem that is being faced by the market. This is done to enjoy the higher prices of the Indian market and also to avoid the transport costs to Dhaka from rural areas.

    Industrial Park Incompletion Affecting Export Orders

    Leather tanneries in Dhaka used to be located in Hazaribag, on the banks of the Buriganga. Without any waste treatment system, over 24,000 cubic metres of untreated waste were dumped directly into the river 1. The government then initiated a plan to build a 200-acre industrial park for leather tanneries in 2003 with a Central Effluent Treatment Plant (CETP), where the tanneries were ordered to shift to the industrial park. Around 150 tanneries were able to move and 40 had to shut down.

    Despite the initiatives taken by the government, the CETP is not complete as of 2019, leading to pollution of the nearby Dhaleshwari river and health hazards for workers. It is expected to be completed in March of 2020. The lack of a proper solid waste disposal system means that current manufacturing practices are considered harmful to the environment, leading to global brands refusing to purchase leather from Bangladesh. This is preventing exports to European and American markets.

    The Leather Working Group (LWG) is yet to give its certification to the Savar plant, limiting Bangladesh’s credibility to international buyers and forcing exporters to accept prices about 30% lower than the global average 5. Not only will the CETP need to be completed to get this certification, but water consumption will also need to be managed. Currently, it is 66 tonnes of water to tan one tonne of rawhide, whereas the international standard is 25 tonnes 5. Worker rights must also be ensured, by providing proper safety equipment for their exposure to harmful chemicals and waste, as well as emergency healthcare services.

    Financing Becoming a Challenge

    Relocating to the Savar industrial park required significant investment, leading to many tanneries facing a cash crunch. The recent liquidity crisis of the banks on top of this did not alleviate the situation. Not only are the financial institutions hesitant to lend to tanneries because of the leather industry outlook, but the delay in land registration approvals from the government is making it difficult to acquire loans. The government has attributed this delay to the tanneries not paying the instalments for the land price, creating a cycle of blame 5.

    Recent scams such as that of the Crescent Group have also affected the ability to raise finance. The company allegedly committed fraud by showing fake export orders from Hong Kong-based companies that don’t exist to raise money from a leading state owned bank, Janata Bank, exceeding $90 million in total 7. There was alleged collusion with the top management of the bank, as they did not follow regular protocol in verifying the information provided by Crescent. Thus, the credibility of the leather industry has been impacted negatively.

    The lack of finance is not only impacting the ability to invest and expand but also run daily operations. The sudden supply of rawhide during Eid-ul-Azha requires significant financing to purchase, preserve, and process. This lack of capacity for acquiring more rawhide is an additional reason for the steep decline in demand by the tanneries.

    Backward Linkage Has Scope for Improvement

    Demand decline and infrastructural problems combined have created a situation of supply chain collapse. Certain tanneries claim to still have unsold rawhides from the previous Eid-ul-Azha 1.

    Traditionally, rawhide supplied from sacrifices during Eid creates 40% of the annual supply for rawhide in the Bangladeshi leather industry 6. Traders visit individual households to bargain and collect rawhide from the sacrifice, collecting hides from over 8 million animals sacrificed annually, and then deliver them to the tanneries 4. This year’s price shock left them in a difficult position, with the common man lamenting the low prices and wholesalers and tanneries refusing to purchase the hides due to lack of export orders. The middleman had to suffer this Eid.

    Accusations of a syndicate created to deliberately fix low prices were made, to allow cheap collection during a time of high supply. This year’s fixed price was 50 BDT per square foot, which the seasonal traders used to buy from households 4. After collection, however, they faced difficulty in selling to wholesalers and tanneries, forcing them to either dispose the hides or invest in expensive preservation. The unstable supply variation and informal method of collection lead to a supply chain that is not sustainable.

    The government has announced plans to allow the direct export of rawhide, which was previously banned 9. While this will benefit the seasonal traders and wholesalers, as they will no longer need to depend on the tanneries for the purchase of rawhide, it will harm leather manufacturers as they will need to match the global prices whereas they are already facing difficulties purchasing at current prices.

    The Way Forward

    Bangladesh’s overdependence on ready-made garments for export earnings leaves the country at risk to external changes. Diversification of the export portfolio and manufacturing industry is crucial to reduce this risk, and the leather industry was considered to be at the forefront of this shift, with its large rawhide supply and cheap labour requirements. The government had set a 2021 $5 billion export target for the industry 1. To achieve the benchmark, structural changes within the industry have to be instituted.

    The main priority for the government should be the completion of the Savar treatment plant, which is long overdue. Next, access to short and long-term financing needs to be facilitated for tanneries to encourage them to invest in technology as well as increase operational capacity. The supply chain needs to be streamlined so that procured rawhides from Eid-ul-Azha can be sold and stored properly, discouraging exports of rawhide but allowing the option to be open to prevent a similar collapse next Eid.

    As global demand is on the decline, it is crucial for Bangladesh to ensure strong supply sustainability, and cope with the changing market. As the price for leather falls, leather may be redesigned as a non-luxury product. In either case, the government needs to keep local problems at bay by helping restructure the industry, which could contribute to renewed cost competitiveness.

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.