Articles in Category: Global Trade

It never ceases to amaze me what a mess politicians can make of business issues. Often the implications have a global impact far outside the limited issue they were trying to address. For example, the Chinese government has been trying to curb exports of basic steel products with repeated changes to the VAT rebates and export tax regime for the last year or more. To their credit, the removal of incentives and application of additional taxes has had a significant effect on reducing exports if not actually curtailing new investment in steel mills ” the stated aim of the exercise. On the plus side, domestic consumers of basic steel products will have seen fewer prices rises in their raw material than they would otherwise and enjoy shorter lead-times compared to overseas consumers.

So far so good, no harm done you may say. Well not quite. In India, the emerging auto parts producers are facing their toughest time in years just when the auto parts market both domestically and regionally is booming. Why? Because of the changes in China. Read more

You’d think that with the current high price of metals, an impoverished country like Zimbabwe would be doing everything in its power to court foreign investors and others to invest and grow the economy. But you would be wrong.

In an unbelievable move last week, 84 year old President Robert Mugabe essentially nationalized all public companies by enacting a law which requires such companies to give up a 51% majority stake to indigeneous Zimbabweans according to this Mineweb article. The metals angle here? According to the article, Zimbabwe is second only to South Africa in world reserves of platinum and chrome.

The insanity of this law is proven out by taking a look at Zimbabwe’s history under the er ugh um leadership of Robert Mugabe. Under Mr. Mugabe,  Zimbabwe has:

  1. Passed a land reform bill in 2000 effectively forcing whites to give up all of their farmland to less experienced indigenous  people which resulted in shortages of basic commodities and a crippled economy (66% of the people are employed by farms); the move also made Zimbabwe, a net exporter of foods a net importer
  2. In 2007 he put in place price controls resulting in panic buying and empty store shelves
  3. From just a numbers perspective, GDP is now at -6%. Industrial production growth (including mining) was at .5% (you can see where Mugabe’s new law will take the numbers), unemployment is 80%, life expectancy is 39.5 years, and 24.6% of the population has HIV/AIDS

The list of Mugabe Ëœaccomplishments’ goes on and on ” an unsustainable fiscal deficit, the philosophy of printing money to pay for the deficit, an overvalued exchange rate, and GDP per capita of $500 per year.

The new law, which will affect mining giant Rio Tinto, Impala Platinum Holdings Ltd and Aquarius Platinum Ltd will likely speed up the country’s decline ¦further increasing its inflation rate, already the world’s highest at 100,000% (no that isn’t a typo).

What a shame with world record pricing for gold, coal, platinum, chromium and iron ore and historically high pricing for nickel, copper and tin Mugabe couldn’t leave well enough alone. We’ll continue to see high prices for platinum and chrome as Zimbabwean exports fall off the map. But sadder still is the fate of the 12 million citizens subject to Mugabe’s hair brained policies.

–Lisa Reisman

I won’t pretend that there aren’t times when the global metals markets perplex me. Take the last couple of months. The US has clearly been heading for a recession, mild or strong remains to be seen but certainly it’s going to get worse before it gets better. Europe or at least southern Europe is looking decidedly sick. That once famous construction led boom [bubble] does appear to be just that. And the economies of the Club Med region and Ireland are all showing signs of strain. The UK will not be far behind as a combination of rising tax levels and falling property prices takes their toll on consumer spending. Lastly Japan is on the brink of a recession as the rise of the yen chokes off whatever mild growth manifested itself last year. Only the BRIC countries are showing robust growth fuelled by rising living standards, young demographics and generally sound economic management (I’ll stay off my soap box on that one, so far so good). Yet, and here is the source of my frustration ” contrary to the sound logic of supply and demand, the metals markets, instead of a steady easing of prices as demand in the major economies slows, have been rising strongly during February when common sense suggests global growth will be much lower in 2008 than it was in 2007. It reminds me of one of those ore trains with an engine at both ends; one pushing, one pulling. In this case the engine of supply/demand fundamentals has decoupled and the only driver of the train is speculative. Read more

In a bizarre move driven by anticipated changes in Chinese export taxes, steel imports in the USA surged by nearly 35% as tonnage increased from 1.98m tons in December to 2.66m tons in January, according to the Precision Metalforming Association in Purchasing.com.  That is still some 18% below January 2007, and against a back drop of much reduced imports over the last 6 months as the weak dollar and rising world prices have made imports unattractive. This is bizarre in part because the changes in the 13% export rebate never actually happened at the year end, but also bizarre because much of the surge in process these last few months has been possible because of reduced imports. Read more

A handful of Indian farmers in the state of Orissa are holding up a $12b investment by Korea’s POSCO, Pohang Iron and Steel Works, presumably for a high displacement payout but officially protesting at having their agricultural land used for industrial development.

Posco is apparently looking for some 4000 acres of land, of which 90% is government owned and a further 300 acres is agricultural. Posco officials say even these 300 acres are barely worked and though they cover 8 villages, 7 have already given their consent. Many in the State of Orissa have long held Maoist sympathies. Out of a population of some 32 million, 87% live in villages and one third of the rural population does not even own the land on which they work work. There have been several other small localized protests to industrial development in India that has led to bloodshed. In particular, two projects of the Tata Group last year in Orissa and West Bengal. Like this one, apparently agitated by outside sources with a political agenda. Read more

One of our men on the ground in China left a message on my cell phone Sunday night, “Lisa I have to discuss a US import issue with you.” Hmm I thought, it seemed a little dire. I wondered what this was going to be about. I awoke to an urgent email, “As you know, there is a large spring company called L&P (as in Leggett & Platt) ¦they are prosecuting spring factories which are located in China, South Africa and Vietnam. I hope we can get more information about anti-dumping duty etc. from you ¦please come back to me as soon as you can.”

Sure enough, a quick Google search yielded a couple of mentions. Apparently the situation is as follows, according to Bed Times (I didn’t name it that trust me) Leggett & Platt filed an anti-dumping petition on December 31.  In their petition they  took a broad swipe at covering a range of innerspring products requesting, “that the term “uncovered innersprings” include both pocketed and non-pocketed innerspring units.” The petition goes on by suggesting the material harm incurred by the US innerspring industry is significant as the anti-dumping duties to  be collected on these imports must be large enough to “offset the amount of the dumping, which the petition  alleges can exceed 100%.” Read more

Forget oil, coal prices have been going through a bull market for the last year with the curve taking on hockey stick proportions over the last four weeks. Spot prices for thermal coal used in power stations reached $130/ton last week, a 37% increase from the beginning of the year following a 73% rise in 2007. Power station prices reached $145/ton CIF North European seaports in response to severe coal production and shipping constraints in Australia, China and South Africa, three of the largest coal producing countries. Vessels queuing at Australia’s Newcastle port face a month delay and production has been hit by bad weather in Australia’s NW territory and China. Price pressures are exacerbated by critically low inventories according to Goldman Sachs.

All eyes are now on the 2008 annual contracts which, like the iron contracts just concluded, will be under pressure from the high spot prices to show another dramatic rise. Goldman Sachs are predicting thermal coal to rise to $110/mt starting in April, when the new prices come into effect. This represents a rise of 98% from last year’s $55.65/mt.

China has switched from being a coal exporter of 83m tons five years ago to a coal importer today as power demand has rocketed and new coal power stations can not be built fast enough to meet demand. Vietnam, China’s largest supplier, plans to reduce exports by 32% this year due to rising domestic demand for power and   coking coal. South Africa, a net coal exporter will have to import over 22m tonnes this year to replenish depleted stocks. Australia cannot increase exports because of port congestion; new investment is planned but will take a long time to reach fruition.

Cement producers (the third largest user after power and steel) outside Asia are switching from coal to petroleum coke as a cheaper alternative, an option not open to the steel industry.

Meanwhile the steel producers are quickly pushing through price increases on the back of rising costs. Like thermal power companies, the steel industry buys the majority of its high quality coking coal on longer term agreements, usually negotiated annually. Prices have more than doubled this year to over $200/ton but the effects won’t kick in until May-June just as several of the world’s economies may begin to show a softening of demand.

With oil and gas prices high and coal rising fast, do not expect any respite in electricity costs this year. The cost of power may not immediately hit the big western metals producers who buy their power on longer term contracts but it will certainly affect producers in developing countries where contract terms tend to be of shorter duration. This will hit the small to medium sized metal smelters in Asia, Africa and South America particularly hard. These producers have been cushioned from rising power and ore prices by rising refined metal costs over the last few years but the relentless surge in power and ore prices may well meet a stagnant refined metal price if the demand curve flattens towards the end of this year.

What will that mean for metal prices? It’s anyone’s guess but there could be a lot of pain out there if high power prices agreed to now can not be sustained with high metal prices as the year unfolds.

–Stuart Burns

Metal Bulletin recently reported the predictions of V. Mahadevan, president of the Indian Institute of Foundrymen. Within three years, he said, India could replace Japan as the third largest producer in the world of castings. The expansion is driven by the demands of the rapidly developing Indian auto industry — not just demands for domestic cars like the new Nano, but also demands to support India’s plan to become a regional hub for auto components and assembly.

As a long admirer of Bharat Forge’s focus on developing world-class heavy forgings capabilities, I can certainly believe that there are many more firms in the market for engine and drive chain components, and they could likely face successful results. Bharat Forge have been major suppliers to Mercedes Benz, Ford, GM and a host of other international names for many years ” and, I should add in the interests of full disclosure, a good customer of mine.

When browsing the IPO lists on the Mumbai stock market during 2007, anyone could notice that company after company was over-subscribed as they came to market. And what did they all have in common? They were castings manufacturers.

Read more

I can’t say that I am shocked by these survey results which were just released over the weekend by buying consortium Prime Advantage. According to the press release, of the 100 member companies that responded to the survey, 46% said that raw materials, “which include stainless steel, nickel, copper and other metals and plastics were a major concern in 2008.” Energy costs came second with 17.5% citing this as the biggest cost pressure.

Given the past two years, it is no surprise that raw material price pressures remain top of mind for purchasing professionals and owners of small businesses. What is ironic is that 66% of respondents “plan significant capital improvements in 2008, including equipment upgrades such as press brakes, turret punch presses, plus equipment for laser cutting, robotic welding and stamping”. On top of that, 59% of respondents expect a revenue boost in 2008.

But aren’t we in a recession? Well, maybe but not all manufacturing has been feeling the pinch. A colleague of mine who is a turnaround professional recently told me that he has seen manufacturing companies whom he thought would never export again, do more of that of late than in the last 10 years combined! Just last week Caterpillar (my favorite economic bell-weather) reported a 20% jump in exports of machinery and equipment in 2007, according to this Crain’s Chicago article. So it’s no wonder that we see companies worry about raw material pricing yet continue to make capital investments.

The state of the US dollar is undoubtedly a boon to many US manufacturers as their exports are now much more competitive. Foreign competition as my partner Stuart rightly points out, is down at the moment but what happens when, “they [US manufacturers] will once again face their normal level of foreign competition… I wonder how bullish they would be then?” Good point but if you are of the school of thought that the dollar had been “wrongly” priced previously due to certain “bubble” industry sectors and the dollar continues to trade as it has been for awhile, we’ll continue to see strong exports. Of course what goes up also goes down and vice versa.

But one thing we can bank on, it appears certain that raw material pricing will remain volatile and a concern for manufacturers.

Editor’s Note: If you are concerned about raw material volatility, take our free  MetalSaver quiz  for cost savings ideas. –Lisa Reisman

BHP Billiton, the world’s leading diversified mining company, tried to win over smaller rival Rio Tinto through a hostile bid last week to create the world’s third-largest corporation,  behind Exxon Mobil and General Electric. The proposed corporation would become  what Purchasing.com calls “a mining giant worth approximately $400 billion and possibly  … the world’s largest iron-ore supplier” — or, at the very least, a formidable opponent for Vale of Brazil, the current top supplier of iron-ore. A merger could also create the world’s largest producer of copper and aluminum. Despite a 3.4-to-1 takeover offer, however, Rio Tinto seems to have little interest in the deal at its current value. Rio Tinto chairman Paul Skinner wrote a letter to shareholders on Monday explaining the board’s view, noting that the current  unsolicited bid of $147.4 billion  undervalues the company and its stronghold. He stressed that no action is needed on behalf of the shareholders. A copy of the letter can be found online through various news outlets, but here are some quick excerpts:

— “BHP Billiton’s offers, while improved, still fail to recognize the underlying value of Rio Tinto’s assets and prospects.”
— “Our plans are unchanged and will remain so unless a proposal is made that fully reflects the value of Rio Tinto.”
— “BHP Billiton’s announcement is not a firm offer for your shares or ADRs (American Depository Receipts). There is currently no formal offer to consider. You do not need to take any action.”

BHP already increased their  bid to give Rio shareholders 44 percent  of the combined entity rather than the 36 percent  they offered in November. If  a mere half  of Rio shareholders endorse the bid, a hostile takeover could occur. Don Argus, BHP Billiton chairman, released his own letter this week, sending a forceful message to  his company’s shareholders. In the letter, he  told  BHP shareholders, “The offer we have made [to Rio Tinto] is both compelling and responsible and, very importantly, is value enhancing for you.”

The inner workings of the possible deal and legal arrangements between these dual-listed companies tend to be complicated, as the International Herald Tribune disclosed this week. The above-linked article describes a diverse assortment of separate legal arrangements in Australia, Great Britain, and the U.S., all of which will be necessary for these international companies to come to a complete agreement.

Earlier this month, China’s steel sector responded to fears of such an agreement. State-owned Aluminum Corp. of China (Chinalco) decided to purchase a hefty 12 percent of Rio Tinto’s London shares, accounting to nine percent of the entire company, with help from Alcoa Inc. Approximately $14 million was spent on this foothold, which Chinalco hopes will not only prevent the birth of an imposing super giant  — this will be no fledgling infant, as a combined BHP/Rio company could control more than a quarter of the world’s iron-ore  — and diversify Chinalco’s focus.

Similarly, the International Iron and Steel Institute  recently announced that a merger between Rio Tinto and BHP Billiton should not be allowed. The merger, they say, is not in the public interest and would likely create a monopoly.

London-based Rio Tinto will release its full-year earnings this morning at 6 a.m. local time. Bloomberg predicts that second-quarter earnings have amplified, estimating, “[Rio Tinto Group] may report second-half profit rose 9.4 percent because of record iron-ore production and its $38.1 billion acquisition of Alcan Inc.” The figures released today could have a dramatic  effect on the future of the company and its role with BHP Billiton.

Readers, what do you think? How will this play out? How should each company respond to the situation? As always, we would love to hear your thoughts in our comments section.

–Amy Edwards

Update: Rio Tinto Group earnings for 2007 are now available online. –AE

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