Articles in Category: Exports

The latest in a string of anti dumping cases brought against China since the economic downturn has resulted in preliminary duties of 11 to 13% being applied on seamless steel pipe from China according to an article in Reuters. The latest case concerns seamless carbon and alloy pipe of 16 inches or less in outside diameter used in industrial piping systems to carry water, steam, petrochemicals, chemicals, oil products, natural gas and other liquids and gasses.

Quoting Commerce Department figures, the Washington Post stated that the volume of steel pipes imported from China more than tripled between 2006 and 2008, rising from $632 million to $2.6 billion, according to the Commerce Department. The China Daily defended the country’s steel makers by saying China was a large importer of steel before 2005, but massive investments in the steel industry have resulted in an increase in capacity. In 2008, China’s exports of steel pipes reached $3.2 billion, accounting for over half of the total US imports of steel pipes. But from January to November 2009, China’s exports to the US made up for merely 14% of US total imports. And, according to US figures, US imports of steel pipe shrank by 50% during the first 10 months of 2009, no doubt partly due to earlier calls from the domestic steel industry for anti dumping measures to be brought against Chinese producers.

Domestic steel producers led by US Steel and the United Steel Workers but signed by many others, claimed the subsidies from the Chinese government allowed the firms to overwhelm their U.S. rivals. The companies alleged that their Chinese rivals received discounts on raw material and loans from government-owned firms. Needless to say, the Chinese vehemently deny the claims saying they have to pay market rates for their raw steel and are funded by bank loans at commercial domestic Chinese rates. Unfortunately, the data provided by those bringing the case is not yet available to the public for wider review, but may be in early this month. They may be right that bank loans are not at commercial levels or that somehow state and private steel producers have been coerced into supplying the pipe makers with raw material at subsidized prices but until the data is made available, we have no way of checking. Knowing how ruthlessly Chinese companies tend to compete against each other, extracting the highest possible price they can in what is a cutthroat domestic market, we find it hard to believe they are being subsidized in terms of cheap raw materials but low cost loans are a distinct possibility, as we have written elsewhere the Chinese banks have been almost forcing loans onto the commercial sector. Cheap land and tax breaks in the early years of operation are also a possibility, conceivably reduced power tariffs – we have seen that for aluminum producers, but then loans and tax breaks are often extended to firms in the US too. All in all it is easy to see how a combination of small advantages could add up to a significant cumulative advantage justifying anti dumping tariffs, we eagerly await the details.

Meanwhile according to China Economic.net the Commerce Department set a preliminary duty rate of 12.97% on the Hengyang group of companies and 11.065% on the Tianjin Pipe Group Co and related firms. All other Chinese producers and exporters will face a countrywide duty rate of 12.025%, according to the site.

Some observers were casting around for a commodity on which the Chinese could retaliate and suggested soya, of which some $7.5bn is imported each year from the USA, but the Chinese were at pains to state they had no intention of retaliating and instead vowed to fight the case through the WTO.

Even though Chinese steel pipe imports had dropped to 14% of the US market they no doubt still played a significant price-benchmarking role for consumers. With that option effectively removed from the market, or at least handicapped by double-digit duties expect pipe prices to rise in coming months. Indeed the discount on imported pipe has already reduced from some $50/ton to barely $10/ton now as volumes have been impacted by the anti dumping cases. Domestic producers didn’t have a lot to cheer the last 12 months but they should now feel the future looks a little better.

–Stuart Burns

We have not been alone in saying we could see a revaluation of the Chinese Yuan or Renminbi against the US dollar this year so anyone reading our columns will not be surprised to hear that no less than Jim O’Neil, Goldman Sachs chief economist agrees “something is brewing in China and a currency revaluation could be imminent. After defending the peg against intense international criticism for most of last year it clearly isn’t international pressure that is prompting the re-think. O’Neil thinks it is runaway growth that could be the spur.

The article in the Telegraph states that China’s economy grew at 8.7% in 2009 although growth was accelerating towards the end of the year, and is forecast to grow at 11.4% this year. The central bank has repeatedly tried to control domestic lending by banks. Just last week the central bank told lenders to increase their reserve levels by 0.5% to 16.5% by February 25, in an attempt to curb lending. However, a new survey shows that a similar increase in January had little impact, with Chinese banks approving 1.4 trillion yuan ($200bn) of loans last month, one of the highest monthly totals on record.

A rise in the Yuan would impact exports at a time when they are struggling because of the after effects of the world recession, namely depressed and sluggish growth in the developed world. But a revaluation would boost imports particularly from neighboring countries such as Taiwan, Thailand and South Korea. China features prominently in the recovery of the export-orientated economies of Taiwan and Thailand. Taiwanese exports to China, its biggest trading partner, rose 45% year-on-year in the fourth quarter according to a Financial Times article. China’s domestic market has also become an important market for Taiwan – exports for final consumption in China have grown from 17.8% of Taiwan’s total exports at the beginning of 2009 to 29.2% last month.

This trend is echoed in Thailand, where January’s exports to China grew 94% year-on-year, although admittedly from a low base in late 2008. The recovery was supported by renewed demand for electronics and rubber – the latter an indication of a recovery in automotive demand in China. So the west is not alone in hoping Jim O’Neil is correct in his belief that China is about to revalue. Any buyers of material on long term contracts from China should review margins and see if the figures being discussed a possible 5% increase are likely to impact their supply economics. Even if companies buy in dollars their supplier is operating in local currency and we all know that means sooner or later they will look to adjust prices to compensate for the change.

–Stuart Burns

If someone asked us at MetalMiner what issue or theme has the greatest impact on metals markets I think we would collectively say “China’s economy. From steel to aluminum to zinc to iron ore, what China does (or doesn’t do as the case may be) and how the various markets react to that impacts all of us whether we sit in the US, the UK, Mexico or Italy. Let’s take a look at one news story from Friday – the Chinese government raising bank reserve requirements to reign in a bank lending spree that any market observer would call out of control (by the way, please don’t misconstrue that last point as self-righteousness¦.I am well aware that our own bank lending policies looked similar). Chinese banks will have to increase reserve requirements by 50 basis points in an attempt to put the brakes on new loans that exceeded $203.6b in January alone. According to a recent Wall Street Journal story, the number of new loans in January exceeded all loans made during the last quarter of 2009. We would argue much of the loan money has gone toward two areas the housing market (probably the largest chunk) and investment in manufacturing capacity.

Both result in dangerous bubbles. The first, well we all know first hand what happens when property markets turn bubbly but the second, over-capacity, does not equate to increased consumption a goal the Chinese authorities have said remains paramount to their economic growth strategy. And according to two leading Chinese economists, Mao Yushi, chairman of the Unirule (Tianze) Institute of Economics in Beijing and Ha Jiming, a former senior economist with the International Monetary Fund, and currently chief economist in Hong Kong for China’s first Sino-foreign investment bank, China International Capital Corp. in Beijing, both believe the real estate market is a bubble and both feel the government must turn excess capacity to consumption. Yushi believes the government must reduce taxes and spur investment in the private sector vs. the state-owned companies. Both also share some points of view on income. Yushi believes the government out to focus on improving income for individuals whereas Jiming suggests the government focus on income disparities between rural and urban dwellers. These suggestions, they believe, would help foster consumption. Finally, both economists believe the RMB must appreciate in value, a point that we have discussed at length on these virtual pages.

The policy change on reserve requirements represents a double-edged sword. To preserve Chinese growth for which both the investment community and our own economy depend (particularly if you believe Obama’s desire to double exports over the next four years), we all have a vested interest in a slow air leak on these bubbles. Metal prices of course take their cues from China economic data and forecasts. And though many a sourcing professional cringed at the rising base metal complex during 2009, we all know that the alternative feels much worse!

–Lisa Reisman

India’s auto market is booming, in part because new regulations are coming in later this year calling for stiffer emission standards on new cars which consumers fear will increase costs and reduce performance but also because India is rapidly becoming an export hub for the rest of Asia and Africa.

Maruti Sazuki the country’s largest producer with over half the market share saw its domestic sales rise 21% in January to 81,000 vehicles, while its exports rose three-fold to more than 14,500. According to the Financial Times this brought total sales to 95,650, its best ever sales performance in a single month and up 33% over January last year.

The Indian unit of Hyundai Motors which ties with Tata Motors as India’s second-largest passenger car maker reported a 42% rise in its January sales to 52,600 units, with increases of 41% in its domestic sales and of 43% in its exports. The 4WD SUV maker Mahindra and Mahindra on Monday reported a 71% year-on-year rise in sales in January to more than 30,000 vehicles.

Everyone and his brother appears to be piling into the market. Nissan is the latest to announce a major expansion on the back of an earlier decision to move production of their small car the Micra from the UK to India. They are to start production of their first made-in-India car near Chennai in May. The Micra will probably be made from kits and is intended for sale in Europe, but the new model will be 85% local content, a trend the company has suggested it will follow for its larger models in the future. At present, Nissan Teana and X-trail’s are imported as complete units but the plan is to bring in kits and assemble them at the Chennai works. This would significantly reduce the import tax and make both models more competitive in the local market. And here’s the encouraging trend, although India has had a stated aim of becoming an export hub for Asian car production, an aim the recent export figures suggests is becoming a reality, the fact remains much of the Indian auto industry’s growth is from the domestic market. Nissan is planning to add 55 dealerships over the next two years to meet the growing domestic demand.

The strength of the domestic steel industry, earning strong profits even as overseas divisions are losing it, is testament to the strength of domestic manufacturing, of which automotive is an increasingly important part. As with China, India’s consumers are playing a large part in fueling domestic growth and profits for metals companies and manufacturers, with so many aspiring to middle class life styles it shouldn’t be a major challenge to maintain the momentum, inflation not withstanding.

–Stuart Burns

US Gross Domestic Product figures released by the Commerce Department last week suggested an economy returning strongly to growth. Expanding at the fastest rate in six years the economy surged by 5.7% in the fourth quarter beating many analysts prediction of 4.6%. However a closer look at the figures suggests the results are not quite as bullish as they seem.

First, where did the growth come from? Encouragingly a significant boost came from businesses investing in equipment and software, after living with a capex freeze for the last 12 months it would seem business is beginning to invest again. After rising at an annualized rate of 13.3% in Q4, investment contributed 0.8% points to overall growth according to an article in the NY Times. Consumer spending also increased at an annualized rate of 2% and because consumer spending contributes the largest proportion of GDP that rise was enough to raise overall GDP by 1.4%. Exports continued to benefit from the weaker dollar and imports continued to be restricted such that the 18.1% increase in exports netted out to a 0.5% increase in GDP.

On the downside it will come as no surprise that commercial real estate was negative as investment in commercial property fell at a rate of 15.4%. In addition, government spending actually reduced GDP as a 0.3% decrease in state spending and a 3.5% reduction in defense spending dragged down an 8.1% increase in non defense federal spending.

The real 800lb gorilla though is the change in inventory. Firms reduced inventory by “just $33.5bn in the fourth quarter compared to $139bn in the third quarter. That simple slowing in inventory reduction contributed a massive 3.4% of the overall 5.7% rise in GDP.

Which raises some serious questions about the strength of the underlying recovery and the possibility that the first and second quarters of 2010 will continue to grow at anything like this level. Several metrics suggest what we are seeing is a gradual return of manufacturers to buying for current demand rather than either a sustained restocking program or more importantly a rise in end-user demand. What we have seen is the tipping point where metals consumers like steel producer Nucor has worked scrap and pig iron stocks down to near zero and is now coming out into the market to buy raw material again, but not because their customer demands have increased. Capacity is still running at just 60-65% and end-user demand remains weak and is not showing much if any upward trend. Unemployment although traditionally a trailing indicator coming out of recession is a key metric in terms of a return of consumer confidence. Only when consumers feel secure in their jobs will they begin spending again. The nation shed 85,000 jobs in December and increasingly jobs that are created are part time reducing spending power.

An article by Steven Mufson in the Washington Post quotes James Young, chief executive of Union Pacific railroad. A year ago UP was scouring the country for places to park idle freight cars, about 60,000 of them Mr Young said. Today they still have 44,000 of them idle and 1,700 locomotives; with freight car loadings nearly 20% off the peak of two years ago. Clearly 44,000 idle cars is better than 60,000 but it suggests we have a long way to go, demand is not showing any evidence of coming back yet.

Electricity consumption has been falling consistently for 15 straight months according to the US Energy Information Administration suggesting industry is not significantly more active now than in previous months or this time last year.

While any good news is, well good news, metal producers and processors should not get carried away by the latest GDP figures. The fact remains end-user demand is showing only the first tentative signs of improving and the GDP figures are more a reflection of inventories hitting rock bottom than they are a return to growth. If the end-user market were to come steaming back then the lack of material in the supply chain would cause prices to spike and lead-times to extend sharply but the reality is with unemployment stubbornly high and the consumer focused stimulus measures coming to an end that is unlikely to happen. The year ahead is looking a lot more positive than this time last year but it will be a slow and volatile recovery.

–Stuart Burns

President Obama’s actions to reign in the activities of the banks and China’s increase in bank reserve requirements have had a sobering effect on the markets. Both equity and metal markets have come off their highs and made investors pause for thought. The approaching Chinese New Year is also casting a damper on the Asian markets as no one wants to build a position, one way or the other, prior to a prolonged holiday.

So an article in Mineweb this week written by Simon Hunt founder of metals analysts Brooke Hunt in the 1970’s and now owner of Simon Hunt Strategic Services makes sobering reading whether you agree with all his conclusions or not. The gist of the argument is that inflation is becoming a problem in China and because of China’s preeminent position driving demand in the post recessionary world, if China stumbles we all fall.

First, the inflation element. The article states that there has been an extraordinary rise in liquidity in China with outstanding loans rising by 32%, M1 (narrow measure of money supply) by 32% and M2 (broader measure of money supply) by 28% last year, about double the growth rates seen in 2007, the growth peak of the last cycle. Last year, every 1RMB growth in GDP required a lending increase of 5.3RMB against a historic average of closer to 1.3.   Input prices are rising for manufacturing the article says; export prices are being forced higher across many products by an average of 10% with effect from January this year. With the economy being actively driven towards personal consumption and with so much liquidity in the system it is no surprise the housing market is experiencing inflation. Real estate prices are soaring according to many private sector (but unnamed) sources with prices in Shanghai and Beijing increasing by over 60% last year and by 80% in Shenzhen in December versus a year ago. Even the governments’ own housing index is showing an increase of 7.8% nationally in December 2009. There seems a huge disconnect between these unnamed sources and the government index but even half way between the two is a scary number.

The second issue is how do the authorities manage to reduce this surplus without causing a crash? Clearly they see inflation as a problem too, hence the increase in bank reserve requirements intended to take liquidity out of the market in gentle steps. There will be more of these gradual tightening moves intended to slowly take the froth out of speculative bubbles such as the housing market and inventory building. Simon Hunts’ position is it won’t work. His prediction is he expects to see the Shanghai stock market beginning a sharp fall over the next two months, the size of which will surprise analysts, a fall which should last until around the autumn, one that should be deep and serious. Moreover, actions now likely to be taken by the Obama Administration to control the activities of US commercial banks could intensify the fall in markets, not just in China but globally.  A sharply falling stock market in China will have the impact of taking a lot of speculative money out of the system; business and consumer confidence will weaken; the economy will grow more slowly; and funds will be taken out of metal markets. For most of 2010, we should see stock and metal market prices falling.

We wouldn’t want to say it can’t happen. Simon Hunt has been through several recessions before and is one of the most experienced metals analysts in the market. We feel the projection is excessively gloomy and once the Chinese New Year is out the way the markets will recover from their current nervousness, but much will depend on the actions of administrators in Washington and Beijing over the next 3-4 months, and how driven to act they feel by the economic data being released.

–Stuart Burns

I always get a chuckle when I read the mainstream press accounts on any company’s earnings announcements. Take a look at a few that came out no sooner than five minutes after Nucor’s announcement yesterday, “Nucor 4th Quarter Profit Drops 44%, Less Than Feared, Revenue Drops Off 29% or this one, “Steelmaker Nucor 4Q Profit Falls 44%. My boss from Arthur Andersen once had a very prolific phrase when somebody stated the obvious, “yawn. We couldn’t agree more. All the steelmakers and most metal producers came in with numbers showing declining profits, revenues etc. So instead, we think buying organizations ought to use these earnings announcements as opportunities to gain clues about the steel markets in general. We took away a few sound bites and thought we’d share them with you here:

  • Long products took the hardest hit and sheet mill sales carried the profits for Nucor in Q4
  • Margins declined from $459/ton average in 2008 to $290/ton for Q4 but raw material prices have started to increase
  • We heard demand will remain a long hard slog (our words, not theirs) but demand has increased in pockets. For example: power transmission, bridges, wind energy, and automotive
  • Certain industries remain flat such as commercial and residential construction; real demand (which refers to actual demand not counting stocking/re-stocking) will continue to struggle; growth will remain “arduous
  • Service center inventories have a 2.3 month supply (considered lean); Nucor sees more expedited orders, a strong order book for galvanized and galvanneal products
  • Nucor wants to grow its export sales from 11% of total sales to 15%. (AK Steel generates 19% of its total sales from exports) Exports have become a strategic growth initiative for at least a couple of domestic producers
  • Despite average capacity levels in the 60% range, Nucor has still invested in new plants including one for bar products, iron making, a galvanized line and several others
  • Nucor plant utilization rates will range from 60-65% in Q1. Will margins increase? Nucor didn’t completely answer that question but they did indicate that shipments are up, selling prices have increased and scrap prices have increased; margins will likely get healthier too

MetalMiner will release its 2010 steel price predictions within the next week to ten days. Click on the link below to receive notification when the report will be made available.

–Lisa Reisman

FORECASTED-STEEL-PRICES_011810_02

By now most of you may have heard that Venezuelan President Hugo Chavez devalued the Venezuelan bolivar earlier this week.   By changing (or some would say manipulating) its currency from 2.15 bolivars to the dollar to 4.3 bolivars to the dollar, Venezuelans will now enjoy skyrocketing inflation (some predict it could exceed 60%). With annual inflation of 27% already, Venezuela has taken a page out of the Zimbabwe Macro-Economic Policy guidebook (sarcasm intended). So who are the intended beneficiaries of the policy?

Clearly Chavez initiated the policy to bolster a weak economy by pushing exports. With this new strategy, US value-add manufactured equipment producers, particularly drilling and oilfield equipment, chemicals, industrial engines, and computer accessories makers will suffer as the price for their goods becomes only more expensive but prohibitively expensive. And already, the Wall Street Journal reported that our trade deficit widened by $36.4b in November due to a faster rise in imports vs. exports.

So the question becomes this is this currency manipulation? This University of Michigan site defines currency manipulation as follows, “The use of exchange market intervention to keep the exchange rate above or below the equilibrium exchange rate. The term is most likely to be applied to a country that keeps its currency undervalued for the purpose of making its good more competitive. The most interesting definition within “currency manipulation relates to the ‘equilibrium exchange rate definition’ which appears as follows:

“This is ambiguous, since there is no single agreed upon model of the exchange rate:
1. The exchange rate at which supply and demand for a currency are equal.
2. The exchange rate at which there is balance of payments equilibrium.
3. The exchange rate at which purchasing power parity holds, in some form.
4. The exchange rate at which the expected change in the exchange rate, in the near future, is zero.
5. The exchange rate at which the country’s international reserves are neither rising nor falling.

Vietnam devalued its currency by 5% late last year, in an attempt to boost exports. Japan did it too during their “lost decade. Venezuela has now devalued its currency by 50%. In fact, this Reuters article discusses how the “Fair Currency Coalition, comprised of many metal producing industries, particularly steel believes the Venezuelan currency devaluation serves as a proxy for understanding what China has been doing with its currency since 2000. The coalition is behind two bills in Congress S1027 and HR 2378, designed to “slap duties on imports from countries with prolonged misaligned currencies.

In a follow-up post, we’ll take a look at the Big Mac Index in conjunction with China’s currency as well as US currency history and discuss how it relates to our trade deficit.

–Lisa Reisman

Last Wednesday, the US ITC (International Trade Commission) in a 6-0 vote, ruled against Chinese OCTG producers and exporters slapping a 10.5% – 16% countervailing duty on this category of imports starting mid-month. On April 1, the anti-dumping portion of the case will also come up for a vote. Preliminary duties of 96% have already gone into effect. Whether the economy or the trade case has caused the steep drop in OCTG imports, we don’t know but check out this link from Panjiva to see the steep drop in OCTG imports.

The case has created strong opinions (arguments?) both pro and con. Here is a quote from a recent Washington Post article, suggesting that China, “asserted that the global economic slowdown was the real reason for lower demand for U.S.-made steel pipe. Personally, I think that argument is hogwash. Though the end result of this case will be an increase in price for US buyers, the reality is that China has a distorted export tax and VAT scheme which incents Chinese producers to over-produce these products and export them to the US. The second factor leading to the flood of imports involves an undervalued RMB. Both create the net effect of making Chinese goods much cheaper then they would have otherwise been. We have written about both of these points previously here and here, among many other posts.

Many will claim this case as an example of protectionist US trade policies. And ordinarily, we might concur but the facts of this case suggest the ITC made a good decision. Let’s look at this a bit differently shall we?

As a buying organization, we all want to see maximum price competition and therefore would advocate policies that support imports. But if the US allows a flood of OCTG imports (which it did¦the case at $2.8b represents the largest trade case ever and the trade case documentation along with Panjiva data all show massive imports of OCTG), the downward price pressure could force domestic producers to shut down lines (we should add that OCTG has a lengthy supply chain including iron ore and coking coal producers to flat rolled steel producers who produce for this end application) and in some cases, shut down those lines permanently which would ultimately result in higher prices for domestic manufacturers. A buying industry such as oil and gas always has an interest in trying to preserve as many supply options as possible, despite aggregating company specific demand with fewer suppliers to achieve price leverage.

Let’s borrow an example from the world of rare earth metals. Once upon a time, the US produced neodymium and had a supply chain that could process, refine and make neodymium into magnets. But that part of the market went by way of China as they (the Chinese) undercut US producers and flooded the market with their magnets. The domestic neodymium industry also lacked the powerhouse lobbying organizations of the domestic steel industry. Today, to my knowledge, only 1-2 neodymium players exist in the US. Buying organizations around the country all rely on Chinese producers. It would be a tragedy for the US oil and gas industry to have to depend upon China OCTG because we killed our own domestic industry.

Does this case represent a good decision on the part of the ITC? I don’t buy the steel industry’s arguments in every case but I do on this one. Buying organizations what do you think?

–Lisa Reisman

China’s relentless growth continues and looks set to push the country from being the number three economy in the world, overtaking Japan to take second place behind the US. China’s National Bureau of Statistics has upgraded the 2008 figure to $4.6 trillion and with growth generally acknowledged as more than 9% for 2009 and while Japan contracts, that should put China above Japan in 2010. According to the World Bank, Japan’s annual output was the equivalent of $4.9 trillion last year, but it is expected to shrink by 6.6% this year said a post in the Telegraph newspaper.

“The big underlying factor propelling China’s growth is the continued migration of people from the agricultural sector to the more modern economy — industry and services,” said David Cohen, an economist at Action Economics in Singapore reported in the Washington Post. In the longer term that is no doubt correct but in the short term growth has been fueled by a massive stimulus program both in terms of infrastructure investment and bank lending estimated to have doubled from a year ago and dangerously set to continue. According to another Telegraph article, Chinese banks pumped 10 trillion Yuan ($1450bn) into the economy this year and they are expected to inject another 8 trillion Yuan in 2010. This might appear like retrenchment, but that is still nearly twice the 4.6 trillion Yuan of the loans disbursed in 2008 according to the article.

As exports have slumped of course the authorities have had to keep the financial tap turned wide open in order to keep growth going and  markets hungry for all the massive capacity investments that have come on stream. Steel, cement, aluminum are all running at close to capacity with limited export markets. So an early curtailment of stimulus measures would result in massive over production and widespread unemployment. Which is why the stimulus program will continue well into 2010 and why the risk of inflation will become a more entrenched problem for China over the next two years. There is not much doubt that China is going to overcome Japan as the second largest economy next year, or that once that milestone is passed China will not continue to expand for the rest of the decade. Although global growth is slow and export markets remain weak, China is going to be stoking the fires of internal inflation with its domestic stimulus programs and some day there will be a reckoning. Phenomenal as the last decade has been it is hard to see how a China less reliant on exports can continue to grow at near double digit rates and not fuel an inflationary bubble that is going to be painful to solve.

–Stuart Burns

1 39 40 41 42