The phenomenal growth in Chinese primary aluminum production has to go somewhere and aluminum auto wheels seems to be one such application. Being a “finished product, wheels do not suffer the same export tax that primary ingot is subjected too and has largely contained excessive production capacity and actual demand to a form of balance in China. Semi’s producers however are not only encouraged by rebate for part or all of the VAT they pay on inputs but have positive export incentives as well.
Well the European Commission has decided enough is enough and imposed a 20.6% duty on aluminum car wheels imported from China in an attempt to halt a decline in sales and production for European wheel manufacturers. The duty is applied to Chinese imports for six months, with the option for an extra five years.
The EC launched an investigation into Chinese aluminum wheel manufacturers after a complaint by the Association of European Wheel Manufacturers last June of “dumping” where a product is sold below the cost of production. According to a report in the Telegraph newspaper, Chinese producers are said to be selling at below the cost to produce. The European producers of wheels cited in the case include AEZ of Germany, Speedline in Italy, and Ronal in Switzerland.
The report said imports of Chinese wheels had increased by 66%, from 3.7m in 2006 to 6.1m units by June 2009, and that China’s market share had nearly doubled from 6.3% to 12.4%. As a dispassionate report in the China Daily points out, European producers share of the market fell from 78% to 72% over the last year, although not all of that decline was due to China. Turkey also increased its sales to the EU. The Chinese producers denied wheels being dumped and said consumers would suffer if their more competitively priced products were denied to them. The commission stated they did not see that there would be any impact on consumers, but that is hard to square with the reality that prices will now rise for the main consumers which include BMW and Renault among others.
In another article covered by Reuters, the EU executive is reported to have extended punitive tariffs of up to 60.4% on Chinese steel ropes and cables that are shipped through South Korea to evade EU import tariffs.
The European Union, with a population of 500 million people and a gross domestic product in 2009 of more than 12 trillion euros, is the world’s largest trading bloc by value. As the article points out, the decisions could spark another round of retaliatory measures from Chinese authorities in the growing spat between two of the world’s largest trading powers.
The Eurozone has saved itself from oblivion with a massive E750bn aid package. So why is the Euro still weak and why, after a brief surge, are the markets not rejoicing? Surely the risk of a Greek default and the possible resulting contagion to Portugal and Spain was solved by the ECB/IMF loan package – right? Well no not completely. It has certainly shifted the cost of failure to keep the Greek economy afloat from the private sector and banks to the governments of Europe, but what now? Greece already faced civil unrest at the prospect of having to cut services and the public sector wage bill. Even as the country was on the edge of the abyss, workers were on the streets fighting police as if the country’s economic problems were not their problems. Now with the pressure off what incentive is there for Greece to solve it’s vastly inflated national debt? Unlike Ireland who also faced a potential run on its bond market and responded with a widely supported but crushing austerity package, Greece seems to feel this is someone else’s problem and it is unfair to expect them to solve it. As the following graph courtesy of the Financial Times shows, Portugal, Spain and Ireland have all devised and implemented credible debt reduction programs.
Not surprisingly we have not heard much if anything about Ireland as a possible defaulter over recent months. The Irish are understandably unhappy with the austerity measures imposed but they appear to be accepting them stoically as a collective price that has to be paid. Public sector workers have accepted pay cuts rather than massive layoffs in the spirit that this is a problem they have to work through together according to this article.
But for the rescue package to be successful, Eurozone growth will have to return. Yet as the FT points out in a different report, although Portugal, Spain, Greece and Ireland together represent only 15% of the Eurozone economy; Germany accounts for 25% alone. But 15% is not negligible. As Deutsche Bank notes, pre-2008 growth in periphery countries was faster than in the core economies. It predicts that, without that boost from the periphery, Eurozone growth will converge to the pace of Germany, France and Italy, of about 1.5% yearly. Even that may be optimistic if Germany cannot expand domestic demand. With so much of Greece, Portugal and Spain’s economic activity depending on demand from other Eurozone countries slow growth that will hardly support growth at home particularly as funding is being sucked out of the economy by the need to reduce public expenditure. Eurostat is still predicting modest growth (<+1%) from Portugal and Spain next year and a modest contraction (<-1%) for Greece. This seems optimistic if deficit reduction programs are to be effective domestic spending will have to be slashed in an anti Keynesian drive. So with growth among the countries main trading partners in the Eurozone weak where is the counterbalancing export demand going to come from?
It seems growth is going to be slow to come back in Europe as a whole both inside and outside the Eurozone. Britain’s new government needs to push through a credible and effective deficit reduction program in the next 100 days before the markets lose patience. Of all European countries with unsustainable deficit levels only Britain, paralyzed by its general election has failed to put forward a plan to address it. So far demand for government gilts (bonds) have been strong and borrowing rates low but that won’t last forever. Fortunately the 25% devaluation of the pound over the last 18 months is finally feeding through into strong export growth and a surge in manufacturing activity, but at 3+% inflation is still at the upper limits of acceptability and a weak pound won’t help input costs.
The question marks that remain regarding the short-term efficacy of deficit reduction efforts in the Club Med economies and drag on growth from the long-term subsidy cost to the larger core economies will continue to reduce global growth and weigh on metal prices. This is probably not the end of the Eurozone sovereign debt crisis, as a source of uncertainty and volatility it has some way to run.
Export figures have made encouraging reading last year and this. According to David Huether, chief economist at the National Association of Manufacturers and reported in a Businessweek.com article exports rose 14% in the 12 months through February.
Does that mean the trade deficit that had so suddenly shrunk in 2008 as imports slumped has continued to contract? No unfortunately not. As the economy has grown at an estimated annual rate of 3.2% in the first three months of this year exports have grown at 5.8% but imports have grown at 8.9% according to Commerce Dept. figures quoted in the article. In fact the recession although originally appearing to help the trade deficit by cutting imports has probably exacerbated it in the longer term as manufacturing operations have closed and are unlikely to be replaced.
Does a trade deficit matter you may ask? Well certainly the US is not alone in moving from surplus to deficit. Along with nearly every major OECD market the US has migrated from making things to providing services, but the economy’s reliance on consumers for growth means that imports rob growth because as consumers spend more an increasing proportion gets spent overseas not at home.
According to the Bureau of Labor Statistics quoted in the article, U.S. employment in manufacturing over the past six months has been the lowest since March 1941. The March total was a little under 11.6 million workers, down 19% in just the past five years. Manufacturing’s share of GDP shrank from 25% in the 1960s to 15% in 2000 and just 11% in 2008, according to data from the Commerce Dept.’s Bureau of Economic Analysis. That is not to say the US doesn’t have world class manufacturing companies but increasingly they are manufacturing overseas. GM is on track to manufacture 2 million vehicles in China this year. According to their own data they produced just 2,084,492 vehicles in the US in 2009 meaning they could soon be making more cars in China than they do in the US.
Conventional wisdom says that in an affluent society manufacturing moves up the value chain as wage costs become too high for more commodity products. But even here there is scant comfort. In the first two months of 2010, the U.S. bought nearly $15 billion worth of advanced technology products such as computers from China, but sold China only $3 billion in high-tech goods, according to Commerce Dept. data.
Rising commodity prices don’t help the situation; the US is a major importer of oil, the price of which has doubled over the last 12 months. The disaster in the Gulf of Mexico may well have closed off one area of reduced dependency on foreign oil by taking deep water offshore drilling in US waters off the agenda for the rest of this administration’s time in office.
There is no easy answer to the trade deficit, as the economy recovers and consumers spend more the import bill will rise. The current strength of the US dollar as a safe haven in the sovereign debt crisis will only make matters worse by reducing exporters ability to balance the trade books.
In a recent Equity Research report, Credit-Suisse covered various measures of the Chinese economy to illustrate both the health of, and the risks to, China’s economy this year.
The headline PMI for April edged up 0.6 to 55.7 over March despite the quantitative tightening the authorities have been applying since the beginning of the year. The New Order Index has risen 1.2% to 59.3 with an increase in almost all sub sectors. This suggests the Chinese economy has broadly maintained solid growth with only new export orders remaining flat although at 54.5 still well into positive territory. Imports at 53.1 in April compared to 53.7 in March are still above 51.6 in the second half of last year but appear to be moderating. Although with flat new export orders, this suggests the economy will be back into a positive trade balance soon.
The not so surprising (for readers of MM reports over the last 3 months) but nevertheless disturbing increase is the Input Prices Index, which surged by 7.5 % to 72.6. Credit-Suisse says this is the first time the index has broken through the 70 mark since July 2008. Almost all sub-sectors saw rising prices in April but metal goods and metal smelting led the way.
Should this feed through into increased consumer price pressure interest rates may soon have to rise. The metals markets have reacted strongly to the minor quantitative tightening steps the authorities have enacted so far. Increasing bank reserve requirements and tightening lending criteria have actually been quite gentle controls so far as the government has tried to maintain the direction of property prices but reduce the pace of property price increases. But if inflation breaches 3% in the coming months, the bank expects the People’s Bank of China to raise interest rates and recommend an appreciation of the RMB. The impact on metals prices of such a move could be more significant than the impact of the gentle tightening in reserve requirements we have seen so far.
There is no doubt that China achieved phenomenal growth during the turmoil of 2009, growth that also contributed to an earlier return to health of other countries economies and certainly provided a beacon of confidence for struggling economies elsewhere to draw inspiration and optimism from. But now China could be about to pay the price for that phenomenal growth if they do not move decisively to stem inflationary pressures that for the first time are moving from expectation to reality.
Here at MetalMiner we have grown into the business of identifying and monitoring key variables that impact metals prices. Undoubtedly, some variables are more important than others but many variables apply to all industrial metals. We try to cover those variables as regularly as possible. The financial crisis in Greece, (which impacts the entire EU) as well as US GDP numbers, point to similar trends, subject of this post. Let’s take a look at Greece first and attempt to identify why it matters for most metal markets. A telling analysis of the situation appears in this week’s Economist in an op-ed piece entitled: Acropolis Now (subscription required). The Economist suggests three “warnings for the Greek debt crisis that extend beyond the Euro Zone. For brevity’s sake we will summarize here:
Economic Greece serves as a symbol of “government indebtedness it’s debt totals more than 115% of GDP and can no longer “grow out of its troubles, nor devalue its currency and therefore requires a bailout (and a big one at that!)
Political According to the Economist, Germany has “dithered in providing a bailout because of political fall-out within its own borders. But that country’s logic may prove more destructive than the alternative – shoring up Greece’s financial system. And as the Economist suggests, it may be in Germany’s self-interest to support Greece now since many of its own banks and private citizens who lend to Greece will lose money
The cancer can spread the sovereign debt situation in Greece has similarities to Lehman’s failure in the US and can cause weakness elsewhere. Portugal, Spain and Italy also suffer from significant indebtedness and a failure to act quickly to shore up Greece’s books could provide a signal to the world financial community to pull out of other risky countries.
A Lehman styled meltdown in Europe would not only cause the Euro to plunge against the dollar (it has already dropped 7%) but rattle nerves and harm those that had expected more from joining the Euro, “It has left millions of people in Europe facing not the wealth that they expected from adopting the euro, but a period of potentially breathtaking austerity they are ill-prepared for.
A plunge in the Euro harms US exports whose goods become more expensive. And though other western economies may look to Asia as a larger source of exports, a weak Euro will certainly impact US businesses. In addition, as many of us here in the States can attest to during 2009, panic creates a cessation of activity. Individuals and companies slow their buying when confidence becomes shattered and/or they operate in uncertain environments. Nobody wants a repeat of 2009.
In a follow-up post we’ll examine the Q1 2010 GDP numbers and what that means for metals markets.
According to a Mineweb article, Scotiabank economist Patricia Mohr said in her monthly analysis that coking coal is set for further rises as world steel production in March at 120.3 million tons surpassed the previous peak in March 2008 of 119.9 million tons and a 30.6% increase on just one year ago.
Spot prices rose on the back of force majeure being declared on shipments from BHP’s Hay Point in Australia and major coal mine accidents in the US and China squeezed an already tight market. Most of China’s coking coal comes from Shanxi province where following a flooding accident in which 153 miners were trapped underground the authorities are likely to further tighten safety standards in the area. Shanxi province has 55% of China’s coking coal reserves and produces 40% of its hard coking coal. The government is trying to drive through consolidation of the many small mines into larger more responsible corporations, although ironically the flooding took place at Wangialing a 6mtpy mine 50% owned by industry champion China Coal.
China’s crude steel production remained strong this quarter up 26% year on year to 103 mt in Jan-Feb 2010 accounting for 47% of global steel output. China continued to be a significant net coking coal importer this year from being the world’s largest coke exporter in 2008, importing 7.33 million tons in Jan-Feb 2010 against exporting 13 million tons in 2008 according to an HSBC quarterly report to investors.
Meanwhile as demand remains strong and supply remains tight, BHP has moved a significant portion of its hard coking coal contracts to short term market based pricing for 2010. Q2 prices in Europe, China, India and Japan have been set at about US$200 per ton, a 55% increase over last year. HSBC is expecting prices to rise further in Q3/Q4, by 25% to US$250 per ton. As Shanghai coking coal prices rose 13% to RMB 1520 per ton (US$233/mt) from mid March, domestic prices are likely to rise further to match imported price levels. With China (and the rest of Asia and Europe) paying top dollar for both iron ore and coking coal they are unlikely to feature as major suppliers to the US market where mills are either vertically integrated with their own ore reserves, or benefit from long term price supply agreements, or are scrap based mini mills. Eventually global prices will feed through to the US market but for this year the US producers are on the right side of the cost curve.
Looking at the trade balance one may be forgiven for thinking the recovery is still very much in the balance. US trade numbers out this week showed the trade deficit widen to US$39.7bn in February (against a consensus US$38.5bn). Export numbers rebounded by less than anticipated while imported goods rose 1.7% in the month, recovering more than half of January’s 3.7% decline. Although the net trade position will drag on Q1 GDP, HSBC still forecasts 2.4% in a recent note to clients saying they expect to see this fall in exports largely offset by stronger inventories and consumption.
Meanwhile, the March National Federation of Independent Business (NFIB) survey was disappointing. The percentage of firms with job openings fell to just 9% which is only slightly above its all time cycle lows seen last year. Hiring intentions and firms planning capital expenditure also dropped suggesting the ability of companies to ramp up investment and add employees remains very much constrained.
Commentators had been hoping the weak dollar and gradual recovery in overseas markets would lead to a surge of exports. Steel firms in particular are hoping that rising raw material costs affecting overseas mills will give US mills an advantage in export markets. The same hope has been expressed in the UK for the last 12 months where the pound has dropped some 25% against both the dollar and the euro. Up to the end of 2009 though exports were all but unchanged but the Telegraph reports that in February exports jumped 9.5% and the trade deficit in goods narrowed the smallest since June 2006 at £6.2bn ($9.3bn). The issue for both the US and UK, and no doubt Germany whose economy is much more highly geared to the export of plant, equipment and machinery, has been that with the whole world in a recession no one is buying, at home or abroad. Now with signs of more robust growth in markets across Asia and the Middle East, if only tentative recovery in Europe and the US, the comparatively weak currencies of the US and UK should begin to have an increasingly beneficial impact during the balance of this year.
Many US companies have decided they cannot wait for a recovery in the US and are actively trying to develop export markets according to a Chicago Tribune article citing various examples of firms in the state. If U.S. companies doubled their export volumes, 2 million new jobs would be created, President Barack Obama’s administration is quoted in the article as saying. But others point out that exporters often end up hiring workers overseas or moving production there entirely. That may be the case medium to longer term, but it doesn’t seem to be sapping the enthusiasm of many firms both sides of the Atlantic to secure export contracts. The fact is with consumer spending likely to remain depressed for some time to come growth is not going to come from internal consumption this year.
We can’t believe we published this piece almost one year ago (May 14 to be exact) posing the question: “Will Congress Put a Stop to China Currency Manipulation? The answer then, a resounding no as a currency manipulation bill died a fast death. But that was then and this is now. The “China Manipulates its Currency political agenda, if you can call it that, has some new life. And some of that new life has come, quite frankly, from people like me (a former ardent free trader) who decided to pour over the data. A year ago (in that linked piece above) we published the RMB-USD exchange rates from 1981 to the present. And though back then, we asked readers to form their own conclusions the evidence has convinced me personally that the currency has been manipulated. That, however, does not represent the only evidence. In fact, we did some investigations of our own to look at just one portion of the metals market, steel imports and exports. Shockingly (or perhaps not, depending on where you sit) the US currently has a $6.3b trade deficit with the rest of the world. We also reminded readers that the domestic steel industry operated with an average 65% capacity utilization last year. Here are the trade numbers again for review:
So what is new now in 2010? Two fascinating bits of information; first China ran an $8b trade deficit this month (this hasn’t happened since April of 2004) according to Gordon Chang who wrote the affectionately titled book “The Coming Collapse of China. Second, Chang suggests a new movement in support of forcing China to revalue its currency appears to have taken hold (Chang quotes Paul Krugman who suggests a 25% surcharge on Chinese imports would make sense without a more freely floating currency). But MetalMiner readers know that Krugman wasn’t the first person to suggest such a solution. In fact, Warren Buffett first proposed such a policy way back in 1999. We covered Buffett’s ideas in a two part series in April of 2009, here and here.
This time around, a bill in Congress just may see the light of day and move to a full floor vote by the end of May (at least that’s what Senator Charles Schumer D-NY) hopes.The bill has at least some bi-partisan support as Senator Lindsey Graham R-SC) also wants to see some action on the bill suggesting currency reforms have not moved fast enough. The bill would place anti-dumping duties on products coming from countries that don’t act to realign their currencies.
How likely will China continue running a deficit? Chang doesn’t think too long because “Chinese officials think exports will recover this year. And, as he cleverly puts things, “Beijing it appears, is manufacturing a trade deficit.
China remains the main driver of growth in world steel production and is expected to account for around 70% of the increase in world steel output this year. Strong growth in steel production is also expected in India, Brazil and the Russian Federation. The positive outlook for global steel production will support increased demand for steel inputs, principally iron ore and metallurgical coal. Following a decline last year, a substantial increase in metallurgical coal contract prices is expected for the coming financial year because of strong global demand for coal. World metallurgical coal demand is strong, driven mainly by expanding steel industries in China and India. Iron ore prices are expected to rise substantially in the upcoming round of contract negotiations for iron ore fines and lump. Factors that are expected to contribute to an increase in iron ore prices include strong growth in global iron ore demand, led in particular by production growth in China’s steel industry, rising iron ore production costs, the introduction of an iron ore export duty by the Indian government and a significant depreciation of the US dollar over the past year.
Does that sound like a fair assessment of the market? Well it is but it does not come from March 2010, it comes from a December 2007 report published by ABARE, an Australian government economic research agency, but it could equally have been written today. The fact is steel market supply conditions today, just 12 months after the worst recession since the 1930’s, are right back where they were in the boom times of the last decade. The speed with which the supply market has managed to drive prices back to prerecession levels has to be an indication of the oligopoly that is the global iron ore and coking coal market. Even major vertically integrated producers like SAIL and Tata of India, operating as they do in a protected market behind tariff barriers are almost unchallenged in asserting that steel prices will go up by 25-30% this year according to the DNA India website. Even though freight rates for bulk carriers have fallen in recent months, CFR China port prices for Australian and Brazilian iron ore fines have not fallen. Indeed prices continue to rise. Reportedly JFE, the Japanese number two steel producer with a reputation as a hard nosed and canny negotiator has just settled with BHP Billiton for a 55% price increase on quarterly coking coal contracts from April to June. The price increase from $129/ton top $200/ton has taken the industry by surprise, not just with the size of the increase but because JFE have forsaken the annual contract and accepted a quarterly formula. Spot coking coal prices have risen sharply to about $220-$240/ton after a drop in China’s domestic production forced Chinese steelmakers to import. China imported about 30m tons of coking coal last year, up from only one million tons in 2008. Beijing’s shift to an importer follows a clampdown on illegal and unsafe mining operations, but has enabled the Australian miners to keep the market tight as demand has dropped elsewhere.
Although Asian demand remains strong, there is little hope iron ore or coking coal prices will come down. Steel makers and consumers are in a catch-22 situation. Strong demand suggests a solid recovery which holds out the hope that eventually producers in OECD markets will achieve decent capacity utilization. However, a fall in raw material prices would realistically only come about because of falling demand. If raw material demand falls sufficiently to impact prices it will likely only come about because of a sudden and unexpected drop in Asian production. As Asia is providing virtually all the global growth at the moment that would not bode well for any of us – like it or not rising steel prices are probably preferable to the consequences of falling ones.
No this is not an archive article from the 1960’s this is 2010 and the US manufacturing sector is buoyant. No doubt aided and abetted by a very weak dollar, US manufacturers are finding their products both competitive and in demand around the world according to the LA Times. Unfortunately manufacturing’s share of the economy has all but halved since the late 70’s to just 11.5% but producers across a wide range of metal goods from new industrials like Nano Solar Inc to established global leaders like Caterpillar are seeing export sales up. Caterpillar exports more than most companies even make in total so when their exports pick up 20% we are talking big numbers. Export sales are up from $10.5bn last year to $12.6bn this year and the firm is hiring again says the Central Illinois News.
President Obama is trying to double exports in five years and increase research and development to 3% of the nation’s economic output. However, he can’t take any credit for the current surge — that is largely down to the weak dollar. The challenge will be maintaining that export performance and limiting imports if the currency comes back, without risking a trade war by taking overly protectionist steps. The country cannot afford the tax incentives necessary to boost R&D while it is running such huge public debt and federal deficits, laudable as the objective is.
Supporters point to the nation’s abundance of private capital and its history of turning creative ideas into commercial products. They point to continued U.S. leadership in such key industries as aerospace, biotech, optical communications and memory chips. Notably, Intel’s $2.5-billion retooling of its wafer plant in New Mexico, for example, will soon make a 32-nanometer processor, two generations ahead of the chip that Intel’s new China factory will churn out this year. But one or two success stories like this are not a substitute for developing the clusters of R&D, high tech manufacturing and support services required to keep the US at the forefront of modern manufacturing. The reality is as manufacturing is shifted overseas, the supply chains are lost and bringing that manufacturing back in the future becomes increasingly difficult without those established supply chain services. Fortunately in the metals industries although manufacturing capabilities have been slimmed down in the last 20 years the US is still home to some of the most sophisticated steel and non ferrous metal forging, rolling, extruding and treating companies in the world, but their numbers are dwindling. Take aluminum extruders for example. Where rolling companies have weathered the recession relatively well, several extruders have gone out of business like Indalex. Some facilities will be preserved but many will be closed down permanently.
Although it is highly encouraging to hear US manufacturers are doing well presently we would suggest there should be no let up in the government seeking to find ways of encouraging manufacturing enterprise with a favorable tax and regulatory regime because the dollar will not always be weak. As we know only too well the good times do not last forever.