I. SALIENT FEATURES

1. The hides and skins and leather economy has undergone a number of significant changes during the past two decades. The present study reviews the developments of the hides and skins sector over the last two decades.

2. Hides and skins are produced as secondary products of the meat industry. Their output is virtually inelastic to changes in price and demand for leather but responds rather to forces driving the meat market.

3. This commodity group is characterised by its extreme heterogeneity, which is further amplified by the existence of numerous intermediate processing stages. There are major differences within types of hides and skins due to different breeds, sex, age, size of animals, climate and varying conditions of pasture and terrain. The quality of hides and skins may be affected by the methods used in animal husbandry, slaughter and curing.

4. Raw and processed hides and skins enter international trade in a variety of forms from air-dried pelts to finished leather.

5. There is no universal standard technology for the preparation of hides and skins and subsequent conversion into leather, and many processes are available. Eventually hides and skins are transformed into a wide range of end-products. The principal end-product is footwear, but the proportion absorbed by clothing and other fashion articles is growing. While synthetic substitutes have made inroads in some end-uses, leather has remained largely unchallenged as a high-quality and fashion material in its principal end-uses.

II. ECONOMIC SIGNIFICANCE OF THE SECTOR

6. The global value of production of hides and skins exceeded US$14 500 million in 2000 and the value of world leather production was estimated at about US$28000 million. The value of leather footwear produced was approximately US$70 000 million in 2000.

7. Global export earnings from raw hides and skins, leather and leather footwear increased markedly between the eighties and mid nineties. The aggregate value exceeded that of meat and amounted to almost US$45 000 million in 2000 with developing countries more than doubling their share of the world total during the two decades. However there are considerable regional variations. The Far East has become by far the largest exporting region among developing countries mainly due to its cost competitiveness in processing and manufacturing. The relative share of Africa and the Near East in total exports declined reflecting the difficulty these regions face in penetrating international trade in leather and leather products. A range of factors in these countries, some of which are addressed in more detail in the final section of this document, contribute to their inability to meet the quality and marketing demands of tanners in importing countries.

A. PRODUCTION OF RAW HIDES AND SKINS

8. The supply of hides and skins varies with changes in the size of herds and flocks and particularly with the number of animals slaughtered for meat. Output levels depend on slaughtering of animals which, in addition to the markets for meat, is influenced by those for milk and wool and show little response to changes in demand for leather.

9. Growth in world meat production slowed significantly following the economic recession of the mid-seventies. Since then, production has continued to increase albeit at a slower rate, particularly in the developed countries, which currently account for about 47 percent of total meat supply. In the developing regions, production growth slowed in the early eighties, due to the levelling off of per caput red meat consumption, and regained momentum in the early nineties. Developing countries now account for about 53 percent of total meat supply.

10. The production of bovine hides, sheepskins and goatskins followed these changes in meat production. However, rates of change are not identical with those of output for various meats as hides and skins are recovered from fallen animals, in addition to slaughtered animals, some hides and skins are wasted, and the size and weight of hides and skins varies. In some developing countries considerable wastage occurs through the non-collection of hides and skins, and damage deriving from poor livestock management practices as well as treatment during and after slaughtering. In addition considerable losses result from lack of market information, inadequate facilities for slaughtering, and poor preservation, handling and grading techniques. Further damage results from defective processing, and putrefaction. FAO has played a role in promoting production of these valuable raw materials. A regional pilot project to reduce waste of hides and skins and to increase their recovery was implemented by UNIDO, FAO and ITC between the years 1989 to 1992 Currently, a project to improve the grading and pricing system in African developing countries, is being implemented with the support of the Common Fund for Commodities (CFC).

11. Between the early eighties and the late nineties, world output of bovine hides and skins rose by 14.4 percent or about 1 percent per annum (see Figure 2). Output continued to grow strongly in developing countries, reflecting improvements in cattle husbandry and expansion in beef production. In the late nineties, production in the developing countries exceeded that of the developed countries, and as noted above their output accounts now for almost 53 percent of the world total. Latin America is the largest producer among developing regions.

12. World production of sheepskins grew by over 18 percent (1.2 percent per annum) during the past decade, and reached an all time peak in the mid nineties. As in the case of cattle hides, sheepskins output grew fastest in developing countries reflecting improved curing methods and better animal husbandry. Developing countries now account for more than half of the world sheepskins production (Figure 4).

13. Global output of goatskins grew by 3.7 percent per year during the eighties and nineties. Production in developing countries, which dominate goatskin production, rose by almost 4 percent annually while the much smaller output of developed countries rose at an average annual rate of 1.5 percent (Figure 6). The Far East is the largest producer of goatskins, accounting for about 70 percent of the world total.

B. TRADE IN RAW HIDES AND SKINS

14. With lower labour costs and, in many cases, less stringent environmental regulations, developing countries have been able to compete successfully with the tanning industry of developed countries. Considerable investment has taken place in tanning capacity particularly in some Asian, and, to a lesser extent, Latin American countries. Consequently, developing countries in aggregate have expanded their tanning and leather manufacturing sectors over the past 20 years, utilising an increasing proportion of their domestic raw materials and becoming net importers of raw bovine hides and skins from the early seventies. The net imports by the developing countries in aggregate increased from 145 000 tonnes in the early eighties to reach 800 000 in 1999. (Imports are shown as negative exports in Figure 7).

15. The development of tanning activities in developing countries resulted in a dramatic change in trade flows in raw hides and skins, leather and manufactures. The reversal of trade flows has led to keen competition for raw materials between newly emerging tanning industries in developing countries with relatively limited raw material resources and traditional established tanners in developed countries. Recent data show that some leather producing countries with ample domestic supplies of raw materials, such as India, Pakistan and Thailand, are also importing considerable volumes of raw hides. At the same time, the competition for shares of end-product markets in major developed countries has intensified resulting in strong competition among developing regions.

16. Conversely, the role of developed countries has changed from that of net importer (in aggregate) to net exporter of cattle hides, reflecting the declining relative significance of the tanning industry in North America and Europe, mainly the result of strong competition from countries with lower labour costs and less severe environmental regulations. Exports from North America and Oceania have risen since 1970, and the net import requirements in Europe declined. The area of the former USSR became a net exporter in mid nineties.

17. Because of these developments, an increased proportion of global production now enters world trade (Figure 8). Globally, around 40 percent of the output of raw bovine hides now enters international trade an increase from 33 percent in the early eighties. World shipments rose on average by 2.1 percent per year during the eighties and nineties.

18. A structural change has also taken place in international trade of raw sheepskins and goatskins. With increased tanning capacity, developing countries became net importers of sheepskins in the mid-nineties. While they are still net exporters of goatskins, net export availability has fallen, reflecting a higher rate of domestic processing. Conversely, the developed countries as a whole are now net exporters of sheepskins and their imports of goatskins have been greatly reduced.

19. The share of the output of sheepskin which enters world trade fell from 46 percent in the early eighties to 38 percent in 2000, as a result of increased demand by tanners within producing countries (Figure 9). Oceania remained the dominant exporting region, despite some contraction, while shipments from the area of the former USSR increased markedly.

20. The proportion of goatskins entering trade channels fell from 23 percent in the early eighties to 7 percent at the end of the nineties, also reflecting rapidly growing utilisation in producing countries. Shipments contracted while production expanded. Developing countries, where tanning capacity rose fastest, reduced their exports of raw skins by an average of 1.3 percent per annum.

C. PRODUCTION OF LEATHER

21. Production of leather from raw hides and skins is a labour intensive and potentially polluting process. With lower labour costs and less-demanding environmental restrictions many developing countries have competed successfully with developed countries. In the mid Eighties, developing countries produced around 40 percent of the world's leather, but they now account for over 60 percent.

22. Light bovine leather is used in the uppers of leather shoes, and for a variety of other applications in apparel and upholstery. The sustained expansion of tanning capacity in developing countries is reflected in the growth in output of light bovine leather during the eighties and nineties. While world production rose by 1.5 percent annually, developing countries increased their output by 4.0 percent annually, lifting their share in tanning of this type of leather to over 55 percent. This growth was most apparent in the Far East. Developed countries as a whole reduced their tanning of light bovine leather during this period (figure 10).

23. Heavy bovine leather is used largely for the soles of leather shoes and has constituted a fairly stable 3 percent of total leather production for the past two decades.

24. Global output of sheep and goat leather expanded more rapidly than that of bovine light leather. As with bovine light leather, output of sheep and goat leather in developing countries expanded markedly (figure 11) and their share in the total world output has grown from 44 percent in the early eighties to 66 percent in late nineties. The strongest gains in percentage terms occurred in the Far East, which continued to dominate production of sheep and goat leather, and in Africa. Tanning of sheep and goatskins declined in the developed countries during this period.

D. TRADE IN LEATHER

25. The geographic shift in tanning and leather manufacturing also led to marked changes in the pattern of world trade in the semi-finished and finished leather products.

26. Between the early eighties and the end of nineties , trade in bovine light leather expanded strongly at around 9.4 percent per year sustained by a strong demand for leather and leather products (figure 12). Exports of sheep and goat leather grew by an average of 3.1 percent per year (figure 13) while trade in heavy leather remained stable reflecting rising domestic utilisation.

27. The developing countries' share in global exports of light bovine leather rose from 39 percent to 60 percent but their share of trade in sheep and goat leather declined from 56 percent to 46 percent as trade from developed countries increased. The Far East surpassed Latin America as the principal exporting region of light bovine leather and remained the chief sheep and goat leather supplier among the developing regions.

28. Shipments of light leather from all types of hides and skins expanded in most developed regions during the eighties and nineties, particularly in North America.

E. THE FOOTWEAR SECTOR

29. As footwear is the principal end product of the hides, skins and leather sector, a commodity profile would be incomplete without an analysis of that sector.

30. Recent estimates show that global output of shoes with leather uppers now exceeds 4 500 million pairs, having increased by around 2 percent per year in the eighties and nineties(figure 14). Production in developing countries rose by 6.6 percent annually, reflecting investment in manufacturing capacities, and the developing countries' share in global output rose to 70 percent in the late nineties from 35 percent in 1980. As in the case of leather, the expansion in leather shoe production was most marked in the Far East region and to some degree in Latin America. Production declined in almost all developed regions, where labour costs are higher.

31. World trade in shoes with leather uppers expanded strongly with annual growth rates averaging 7.0 percent between the eighties and the end of the nineties (figure 15). Shipments from developing countries increased fastest at 16.2 percent per annum and their share in world exports rose from 20 percent in 1980 to 65 percent in late nineties. Latin American and Asian countries accounted for most of this expansion, reflecting investment in production capacity in a number of countries. Europe accounted for about 80 percent of the world export market in footwear in the late seventies, but it lost market share to the Far East over the subsequent two decades due to the strong competition from developing countries with considerably lower labour costs. The Far East now accounts for 56 percent of global trade compared with 33 percent for Europe.

32. Consumption of leather shoes in developing countries rose from 32 percent of the global total in the early eighties to 55 percent in the late nineties reflecting increased consumers' incomes, mainly in the Far Eastern countries. Per caput purchases remained constant at the world level, though in developing countries it increased from 0.3 to 0.5 pairs annually. Far Eastern consumers' purchases per head increased while in Africa annual purchases declined to one pair per 10 people. Divergent trends emerged in developed countries. In North America, demand per caput for leather shoes increased strongly. In Europe, per caput purchases appear to have declined to 1.5 pairs annually, and in the area of the former USSR demand decreased markedly in line with its economic crisis.

III. PROBLEMS FACING THE HIDES AND SKINS SECTOR

33. Production and trade in hides, skins and leather have developed considerably in recent decades, as shown in previous sections of this document. Hides and skins produced by the developing countries have increasingly been processed to higher levels prior to export and the developing countries' share in the global value of exports has risen from 20 percent to over 40 percent between the early eighties and the late nineties. Nevertheless there are still problems to be solved. These include losses from non-collected, damaged and poor quality hides and skins, problems posed by environmental constraints on the industry, and the impact of restrictive trade policies. Notwithstanding the progress made by the sector in the last two decades there remains scope to strengthen the hides, skins and leather sector in many developing countries, particularly in Africa, and thereby to increase export earnings and potential employment in those economies.

34. Despite past efforts to improve hides and skins quality and reduce waste, considerable losses are still incurred from the non-collection of this valuable material, and damage to hides and skins occurs as a result of poor livestock management, diseases, and inadequate treatment during and after slaughter. Waste of African hides and skins was in 1998 estimated to exceed US$800 million. A number of factors contribute to production in Africa remaining below its potential.

• The cultural patterns and lifestyle of African traditional livestock producers, although rapidly changing, are often not geared to commercial livestock rearing and often provide a poor base for industrial production of meat and hides and skins. The pastoralists who keep large stocks of cattle and small ruminants typically keep animals in part as a show of wealth and for traditional purposes such as "life insurance", bride price and for slaughter at festivities.
• Poor infrastructure, including the lack of good roads, inadequate facilities for dipping and veterinary disease controls, lack of village level slaughter slabs and drying sheds with water and hygienic conditions has a major effect on the quality of the African raw hides.
• In many cases, prices paid for skins and hides do not reflect the grade of material. In some countries, prices are set unpredictably, with high prices paid for all grades when supplies are short, but with lower grades finding no market at all in other years. Producers do not have a consistent incentive to improve the quality of their output. Higher levels of collection and improved quality in African producing countries could be attained with appropriate grading and pricing of raw materials. To this end a project to introduce appropriate grading and pricing systems for raw hides and skins is currently under way, financed by the Common Fund for Commodities, in four African countries.

35. Environmental regulations have the potential to damage the economic health of the industry. Complying with environmental regulations imposes considerable costs on the industry, and the search for means to contain such costs must be pursued to reduce their impact on processing and trade. The increasing stringency of environmental regulations has stimulated the development of cleaner technologies, while encouraging a shift in tanning activities from developed to developing countries where, in many cases, the environmental constraints are less binding. Nevertheless, the costs of complying with environmental regulations in developing countries are significant, and the application of cleaner technologies is often constrained by high capital costs of the investment required. Consequently technology and finance continue to be required for the introduction of cleaner technologies in developing countries.

36. Trade in hides and skins continues to be limited by various barriers imposed by both importing and exporting countries. Such barriers, which prevent trade of hides and skins and derived products from reaching its full potential, include import tariffs and quotas, export taxes, and bans on exports.

37. Restrictions on imports limit the opportunities of exporters and also reduce the supply of material available to processors and manufacturers in importing countries. Tariff escalation is a characteristic of trade in these items. Raw hides and skins are allowed free entry (subject to technical and sanitary requirements) into many countries, and despite some reduction agreed to under the Uruguay Round of negotiations, tariffs imposed on leather and leather products remain significant. Trade weighted average tariffs for developed countries have been estimated at 3.5 percent for leather and 7.3 percent for leather products. For some individual countries, however, tariffs on some products such as leather footwear remain as high as 50 percent or more. Restrictions on the sanitary status and chemical composition of raw and semi-processed material, while intended to protect the health and safety of human and animal populations in importing countries, also have the effect of protecting the producers of those goods.

38. Restrictions on exports of raw hides and skins also have adverse effects on trade by limiting supplies to tanners, and thereby distort competitiveness. A review of these export restrictions, which are applied by many developing countries, was undertaken by the Sub-Group at its 5^th Session in 1996. Continued pressure to reduce trade barriers would facilitate expansion of trade and lead to higher export earnings for producing countries.

39. Developing countries often have difficulty in obtaining information needed to effectively export their commodity, and buyers in developed countries increasingly need to find new sources of supply. Participation in trade missions and fairs and the publication of trade information are ways in which contacts can be established and information exchanged between buyers and sellers. Leather trade fairs and associated events held in recent years in Johannesburg, Cape Town, and Casablanca, under the sponsorship of the International Trade Centre UNCTAD/WTO(ITC) and commercial trade interests have promoted trade contact. The increasing availability of internet technology is further overcoming these barriers. However, in this fragmented and diverse industry, the limited availability of trade information remains a constraint to the effective development of exports, particularly from African countries. Active involvement of the leather and leather product associations may play an important role.

40. Synthetic substitutes have made little inroad into the leather sector. However, there is some potential for synthetic substitutes to more effectively penetrate the market, and the Sub-Group has on previous occasions expressed the view that developments in this field need to be monitored in order to prevent any future loss of market share.

41. The development strategy adopted by the Sub-Group at its fifth session in 1996 (CCP: ME/HS 96/9) identifies the major directions in which the efforts of the Sub-Group might be directed in order to promote the further development of this sector. These are:

a) Wastage of hides and skins: non-collection and damage
b) Statistical intelligence
c) Restrictive trade policies
d) Environmental constraints
e) Commercial trade information
f) Market competition from synthetics

42. Delegates may wish to consider making changes to the strategy in the light of experience of the past five years, or to re-affirm in its present form.