Articles in Category: Global Trade

The Challenge for Global Logistics

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There are some industries, as there are some products, which have long promised but failed to deliver. Think of robotic house servants: Ever since the 1960s, the idea of robots to clean your home has been supposedly just on the cusp of becoming a reality and yet here we are at the start of 2008 and they are still tantalizingly out of everyday reach. The Global Logistics market may seem a long stretch from domestic robots, but the idea of a seamless global logistics service from factory production line in Chongqing, China to shop shelf in Omaha, Nebraska has been a concept on the verge of reality for decades. Sure, Wal-Mart has achieved phenomenal profitability by creating just that level of sophistication, but they are the world’s largest retailer, and in terms of resources and focus, they are in a class of their own. The 3PL market, however, even with recent consolidations, is still a fragmented industry with many small to medium players covering restricted geographic areas or with niche expertise in certain supply chain functions. The top dozen logistics providers worldwide only account for 16% of the market, leaving many small to medium players lacking the financial muscle to invest in technology and infrastructure.

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A recent tongue-in-cheek article on Spend Matters about the U.S. becoming the low-cost country source for Europe due to a falling dollar looks like it may have substance as well as humor on its side. Rolls Royce has announced that they are establishing a manufacturing and assembly facility in Virginia to service the growing corporate jet engine market and the sophisticated manufacture of Blisk components for the U.S. Joint Strike Fighter F136 engine. These components are bladed discs machined from large solid titanium forgings, and Rolls Royce gained acceptance for their use on the F136 project two years ago in collaboration with DutchAero. Could the strength of the Euro against the dollar be the prime motivation behind this move to Virginia? Rolls Royce certainly states the exchange rate as one of three principal reasons for the move.

Meanwhile, Bloomberg has reported that U.S. exports are surging on the back of the weak dollar and cited aero engines as a specific example. With the credit crunch, volatile equities, and a slumping housing market, it would appear technology exports are the one bright spot on the horizon for the U.S. economy.

–Stuart Burns

I saw yet another tidbit of news this week that will further erode the savings coming from China’s steel exports. This Interfax news article reports a 5% export tax increase (from 20-25%) for all steel billet and long products coming from China. Long product refers to rebar and wire. There are no changes to the export tax on flat products such as hot rolled coil or cold rolled coil. This likely does not come as a surprise to many American buyers of China steel products.

The cost of imports has been slowly increasing both with the VAT rebate changes as we reported several months ago in conjunction with  MFG.com   and an appreciating RMB. So where is it all going? Our call is nothing but up. In addition to the currency changes and VAT, there does not appear to be any slowdown in China demand for metals products. In fact, some metals face supply shortages. On the face of it, we don’t see what will stem the rising China price. Add on top of all of this are two key underlying trends in American politics today – curbing the trade deficit and protecting US jobs. One can see how the China price is not going to get any lower.

But what the politicians and mass media fail to talk about is that trade with China is not just about Chinese jobs vs. American jobs (or the steel pipe producer in the US vs. the one in China) but also American jobs vs. American jobs. There are two American jobs at stake in these transactions….the steel producers’ jobs (who happen to have a far more effective lobbying campaign going) and the jobs of those who buy steel products…all of the value add assemblers and parts suppliers within every industry in the US. And unfortunately, they do not have a very effective lobbying campaign. Who ever said a rising tide lifts all boats?

-Lisa Reisman

Good Morning Vietnam: Investments Underway

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About a year ago, the media declared that Vietnam was the next big LCCS market after China. Intel helped found these rumours when establishing their largest overseas manufacturing operation with a one billion dollar investment near Ho Chi Minh City. But then things went rather quiet. One of the problems quickly realized by small- to medium-sized companies is that there is no component supply market infrastructure. Vietnam can offer some great Greenfield incentives, land, tax breaks, and low labour costs, but for the most part, you have to import your raw materials. This position is borne out by a quick review of projects started over the last year. They are all major corporations establishing manufacturing facilities where they will either feed off adjacent newly established producers or import the raw materials. As if there wasn’t enough investment in the steel mills in China, Thailand’s Tycoons and Taiwan’s E-United are jointly investing in phase one followed by a further $1.5 billion in phase two, with plans to build the world’s largest steel mill with a capacity of five million tons per annum. In addition, Posco, the Korean steel producer, has a $1.13 billion investment underway to build a 700,000 ton CR steel plant, possibly with the intention of feeding off of the slabs produced by Tycoon. Meanwhile, the European Commission is being inundated with claims for unfair dumping made by European producers against China. They haven’t seen anything yet. $1.83 billion

— Stuart Burns

More Changes for Chinese Exporters

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It looks like China will be making further changes to its export rebate structure by the start of the new year, according to Susan Schwab, U.S. trade representative, after trade talks with Chinese authorities. At this stage, the extent to which these changes will apply to export subsidies and VAT rebates is still unclear. Amid mixed support from the home crowd, Schwab claims that this agreement, just two weeks ahead of the Bush administration’s twice yearly trade talks in Beijing, was forced through threats of WTO sanctions. Schwab’s assertion that these rebates are unfair has a slightly hypocritical ring coming from a country which provides massive subsidies to its farming community and consequently distorts the international market for a range of commodities, making life particularly difficult for some developing countries. (The U.S. is not alone in this, since the EEC is just as bad — but as committed free marketers, we are opposed in principal to all forms of subsidization.)

Manufacturers in many countries — the EEC block being typical — are VAT neutral, being able to both claim back VAT they pay on purchases and collecting VAT for the revenue service on sales. When it comes to exports, these companies are not required to charge any VAT, yet they can claim back the VAT on their raw materials. In China, this is not possible without the VAT rebate structure manufacturers pay VAT on domestic purchases, and it’s next to impossible to claim it back if they export finished goods. At present, most commodities have a partial VAT rebate structure, but this has been systematically reduced over the last 18 months under pressure from the U.S. and EEC trading blocks. Combined with a gradually appreciating currency, this has choked off exports of some products, notably steel and certain non-ferrous metals, although clearly not enough for the AFL-CIO, a federation of 54 unions representing 10 million U.S. workers who have demanded stronger action to reduce the rising trade deficit. Whatever your politico-economic position on this subject, the fact remains that steel products in particular are set to become more expensive from the turn of the year, just as massive steel manufacturing investments in China begin to come on stream increasing capacity. Expect the rollercoaster ride for the steel markets to continue in 2008 as supply and demand in different product sectors drive price increases and decreases between markets.

–Stuart Burns

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