Articles in Category: Exports

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

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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

All of a sudden there are multiple datu points around the US economy that indicate a positive trend. Businesses unexpectedly increased their inventories by 0.2% in October, halting a slide of 13 consecutive months of decline. The small gain was set against an expectation of a 0.3% decline, raising hopes that businesses will begin restocking their depleted inventory, helping support the economic recovery.

The trade gap fell to $32.9 billion as exports rose 2.6% according to a Reuters article, the sixth straight monthly gain. Imports rose 0.4%, partly reflecting lower oil imports. “U.S. exports appear to be improving much faster than the domestic economy, suggesting that much of the improvement seen in the manufacturing sector reflects strengthening economic conditions abroad and the impact of the weaker dollar,” said Nomura Securities economist David Resler.

In October, manufactured goods exports were 2.8% higher than in September, with capital-goods exports rising 3.7% over the month, according to the National Association of Manufacturers quoted in the Wall Street Journal. “21 of the 32 capital goods categories showed growth indicates that the export recovery is broadening,” said Frank Vargo, a vice president of   the trade group.

Retail sales in the United States have risen for the second straight month, boosting hopes that a major component of US economic activity is rebounding said an ABC News report. Consumer spending makes up two-thirds of the American economy and is a key to US economic growth. So when the US Commerce Department says retail sales rose 1.3% last month, more than double the 0.6% increase analysts had expected even flat spending in other sectors can’t dampen a positive trend.

A forecast for a 2.4% annualized growth rate in the fourth quarter was unchanged from last month mostly due to economists’ belief that the ‘cash for clunkers’ incentive program, which expired in August, pulled demand for vehicles forward into the third quarter according to a poll carried out by Reuters. Construction is still flat but building materials showed 1.5% growth suggesting DYI may be picking up if home starts aren’t.

All in all a positive end to a horrible year and a good note on which to be starting the new decade.

–Stuart Burns

Several weeks ago, a gentleman that we know (no, this is not an Eliot Spitzer story), mentioned to us that he was looking to re-source a number of different assemblies that he currently has in China, hopefully to Mexico. The assemblies are fabricated parts, quite heavy by weight, powder coated with some welds. It’s a classic mid-market assembly….relatively low volume (less than 10,000 assemblies annually), high individual dollar value but low aggregate value (a couple of hundred thousand dollars). The gentleman, leading the effort at the company, shared his frustration over not identifying a single source in Mexico that was remotely competitive. How uncompetitive were the Mexican sources? Nearly double the delivered costs from China! Read more

The German manufacturing sector has been enduringly robust over the last 30 years. Even recently, a developed mature economy which still generates a lot of its GDP from manufacturing has proved extremely resilient in the face of persistently high European Central Bank interest rates and rising raw material costs. Much of this is down to efficiency improvements squeezed out of the manufacturing sector in the first half of the decade, investments in automation, outsourcing of components and services to Eastern Europe and low wage inflation. Germany is the core economy in the Euro zone, those EU countries that have adopted the single currency.

One advantage manufacturers in the Euro zone have enjoyed over the last few years has, perversely enough, been a strong currency. But that hurts exports you will (rightly) say, look at how a surge in exports is helping US manufacturing in a period of domestic downturn. Quite right but the flip side is it reduces the cost of not only imports but in this case any dollar denominated purchases. So commodities, at least oil and base metals which are largely dollar driven products, should have proved less inflationary for Euro zone manufacturers than for US manufacturers.

Three years ago aluminum was trading at $2000/ton and one Euro equalled $0.84. This week, aluminum is at $3000/ton and one Euro equals $0.63. So US consumers have seen a 50% increase in the cost of their raw material, but Euro zone consumers have only seen a 26% increase. The position becomes even more pronounced in copper. Prices  have moved from $6700/ton three years ago to $8360/ton this week, an increase for US consumers of 25% but for Euro zone consumers only 4.8%.

Fine you say but then they come to export and that turns on its head as the strong Euro makes them less competitive, negating the benefit of lower raw material cost increases. True but only a portion of any country’s production is exported, less still is exported outside of the trading block. For the Euro zone  only 21% of GDP is derived from exports, made up of both goods and services, the other 79% is internal consumption. As this is goods and services, the value of goods is closer to 15%, so in reality for much of the Euro zone, commodity price increases have been modest compared to the US. This is perhaps why the ECB can afford to focus on inflation rather than boosting the economy. So far the economy has been doing just fine, thank you very much.

Currency is an oft overlooked piece in commodity costs, because most commodities are either traded in dollars or at least price fixed in dollars.   We tend to ignore movements in other currencies. For a US consumer that is fine but for a global manufacturer or company engaged in extensive overseas sales, currency becomes as big an issue as metal costs ” making an already complex two dimensional game into a three dimensional nightmare.

MetalMiner is developing some tools to create greater clarity in this area in the months to come. Anyone interested in receiving further details can pre register below:

–Stuart Burns

Compounding changes to the China import/export tax and VAT rebate schemes in July of 2007, additional changes were announced on December 14 for implementation on January 1. With help from Jason Zhang, our metals expert in China, we review these changes and offer some early insight into the likely effects.

Broadly, there are three different changes that have been made or are taking place that will affect the markets going forward. These changes specifically include: import duties, changes in export duties and changes in the RMB/USD exchange rate. Read more

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