With the coronavirus pandemic having been brought under control in China, APLF thought that it was an opportune time to find out exactly what is the current state of China’s leather industry. APLF approached the Chairman of the China Leather Industry Association (CLIA), Mr Li Yuzhong, to find out the facts of the situation in mid-March 2020.
Q: As of 10 March, what percentage of tanneries are operating nationwide and specifically what is the state of tanning activity in Hubei province?
A: According to the industry survey, as of 10th March, over 90% of the tanneries in China have resumed operations. However, the actual capacity utilization rate remains low. Tanneries are facing problems such as restrictions on labour mobility, limited supply of protective equipment and the interplay between upstream and downstream industrial chains. In addition, under the influence of the rapid spread of the coronavirus around the world at present, it takes times for production to be completely resumed.
There are not many tanneries in Hubei province. The existing tanning companies in Hubei are still awaiting the approval of work resumption from the government. It is expected that they will soon restart their operations.
Q: Can you estimate the average level of production of leather and are the tanneries well-stocked with raw and semi-finished material to accelerate operations?
A: Tanning companies started to resume production successively after the Lantern Festival. However, the production is less than 40% of the capacity in general due to the epidemic. Starting from March, tanneries’ production has improved, and some companies have operated at over 70% of capacity.
Since tanneries had already established a procurement plan for hides before the outbreak of the COVID-19, the supplies of hides and wet blue leather can generally meet the demand of enterprises. The current supply of hides is sufficient in the market. As the coronavirus circulates across the world, various nations will implement corresponding measures. Their impacts on global hide production and shipping remain to be seen.
Q: Have Chinese buyers returned to the US hide market to secure supplies or are they looking at other countries (such as Brazil) from where to import raw materials necessary for production?
A: Over the years, China and the US have built a stable relationship upon the supply and demand of hides. The US is the largest supplier of imported hides and one of the main suppliers of imported semi-finished leather especially wet blue leather in China. With regards to imports: Under the influence of the US-China trade war, in 2019, the volume of US imported hides in terms of total volume of imported hides in China decreased by 1.7% but still ranked first; the volume of US imported semi-finished leather in terms of total imported semi-finished leather in China decreased by 1.6%, which still ranked second after Brazil. In 2019, China imported 387,800 tons of hides from the US, which accounted for 37.4% of the total volume of imported hides in China;
48,000 tons of semi-finished leather were imported from the US, which accounted for 7.4% of the total volume of imported semi-finished leather in China. Meanwhile, with the changes in leather market demand and the international trade situation, China is gradually changing the structure of hide imports. Changes in import states and ratios will continuously take place. However, it is no doubt that the US remains one of the most important hide supplier of China. China and the US have signed a Phase 1 trade deal and since 2nd March, Chinese tanneries can apply to the central government for exemptions of additional tariffs on 41015019 (a whole piece cow hide weighing more than 16kg) which is imported from the US. That product is the major type of hide imported from the US to China. Currently, some enterprises’ applications have been approved. This is very favourable news to the trade of hides between China and the US, which encourages the Chinese tanning companies to increase imports of US cow hides.
Q: Is the situation at major Chinese ports now unblocked for the import and export of supplies and finished goods after economic activity resumed and after the extended Lunar New Year vacation?
A: Ports in China are implementing normal customs procedures on imported goods and no special restrictive measures have been taken. After the Lunar New Year vacation, imports and exports have returned to normal since the staff returned to work.
Q: It was widely reported that the Purchasing Managers Index declined to just 35.7%. Does CLIA expect this indicator to recover so as to put China back on the road to economic growth If so, within what time frame?
A: Since the coronavirus outbreak began, the whole country has responded to the call of the Chinese government and adopted very effective control measures. As the virus has been under control, economic activities are gradually returning to normal. The CLIA believes that the production and operation of the Chinese leather industry will progressively improve and there will be a steady increase in various indicators including the Purchasing Managers’ Index under the sound leadership of the Chinese government. However, we note that different control measures against the coronavirus have been adopted by nations across the world, bringing uncertainties to the global prevention and control of the epidemic. The export growth of Chinese leather products might therefore slow down under the influence of adverse factors such as logistics restrictions.
Q: Have factories in the main footwear manufacturing areas such as Wenzhou and Guangdong resumed activity?
A: The whole country, excluding Hubei province, has resumed footwear manufacturing in general. Before 10th March, both rates of employee attendance and actual capacity utilization were lower than that in the same period last year because of the coronavirus. The situation is getting better as the epidemic is brought under control. For example, the employee attendance rate is rising gradually with a few companies having reached the highest level. Belle, for example, resumed operation on 24th February with an employee attendance rate of around 70% in early March and 90% in mid-March; Jihua 3515 resumed operation in late February and the employee attendance rate has almost reached 100% at present.
Capacity utilization rate is under the influence of various problems like limited supply of protective equipment, low operational rates in upstream industrial chains, dramatic declines in sales in downstream enterprises as well as impacts on follow-up export orders caused by the rapid coronavirus outbreak around the world. Companies’ actual capacity utilization rate will be lower than that in the same period last year for the long run.Larger companies will generally perform better than SMEs in the circumstances mentioned above.
Q: How intact are the supply chains to the factories that are currently working?
A: Companies in the supply chains and footwear manufacturing are recovering at the same time. Because of the epidemic and low operating rate in downstream companies, there are not many orders. Some large footwear materials companies have an employee attendance rate of over 70% and capacity utilization rate of over 60%, whereas small companies are confronted with a bigger challenge. All major footwear materials markets of the country have resumed operations in early March.
Q: Is there evidence that orders have been redirected to other countries such as Vietnam and Cambodia during the factory shutdown?
A: Since the outbreak of coronavirus is a sudden incident, there is no mass relocation at the moment. Although there might be very few cases of order adjustment in the early stages of the coronavirus outbreak for a short period of time, southeast Asian countries highly depend on Chinese supply chains which had also been impacted by this sudden outbreak that led to shortages of raw materials in these countries. China has developed a manufacturing system with the largest scale, the most extensive category coverage and the most comprehensive supporting facilities in the world, which play a significant role in the global industrial chain and supply chains. Thus, the resilience of the Chinese industrial chain and supply chains is relatively strong. China puts efforts in resuming work and production and returning the economy to normal operations and hopes to provide significant support and security for maintaining stable and safe global industrial chain and supply chains.
Q: Have most migrant workers returned to work or are they still hampered by travel restrictions?
A: Currently, most migrant workers have returned to work except those in Hubei. During the early period of work resumption in mid to late February, traffic restrictions indeed hampered the flow of migrant workers. Enterprises and local government organizations arranged chartered buses to areas where migrant workers concentrated to bring them back to work. Now, the country has opened to traffic, except in some special areas, so it is now easier for the industrial workers to return.
Q: Does the CLIA expect the overall situation to normalize in the next 3 to 4 months within China?
A: As the development of the Chinese footwear industry is entering a new cycle in recent years, the growth rates of various indicators have slowed down. The influence of the industrial cycle coupled with the sudden impacts brought about by the coronavirus will further lengthen the duration of the industrial cycle. The epidemic has been brought under control in China and it is expected that the impacts of this sudden incident will only affect the domestic market of the industry for the short term. As the epidemic is under control and people’s lives get back on track, it is predicted that the number of domestic orders will return to normal as well. However, since the coronavirus continues to spread across the world and there is no obvious turning point at the moment, the number of export orders is expected to keep falling in this situation as we cannot predict the trend of the coronavirus. On the whole, it is quite challenging for the situation to normalize in the next 3-4 months.
Here you can find the full interview: http://www.aplf.com/en-us/leather-fashion-news-and-blog/blog/44056/aplf-interview-questions-on-state-of-china-leather-industry-for-mr-li-yizhong-chairman-of-the-clia
In the picture above, the Chairman of the China Leather Industry Association (CLIA), Mr Li Yuzhong