Articles in Category: Imports

US companies buying from the southern Euro-zone states could be forgiven for looking at the unfolding debacle on the continent with glee, not from wishing their suppliers any ill will but simply because as the Euro crashes against the US dollar their purchase prices in dollars tumble with it. But before US companies ramp up buying and order the new corporate limo, spare a thought for the medium to longer-term consequences.

All is not well in corporate Europe in spite of most attention being focused on sovereign or state debt. Greek, Portuguese and Italian companies have been under performing the European average in the first-quarter earnings season reported in the FT as problems with public finances and lack of competitiveness take a toll on corporate profitability. A major regional Spanish bank failed to come to agreement on a possible merger over the weekend and the government had to rush out an announcement that Cordoba-based Cajasur can draw €550m ($660m) immediately from the state’s Fund for Orderly Bank Restructuring according to the Telegraph just to keep it afloat. Where they are others follow. The problems in Spain, although worse mirror those in other European markets where bank debts are even more of a problem than sovereign state debts. In fact much of the uproar over the recent E750bn (near $1,000bn) emergency fund has been that it is largely to insulate French and German banks from having to reschedule Greek and other southern state debts. The fund is directly insulating north European banks against the consequences of default in the south.  Like the US CDO crisis, the tax payer is stepping in to prevent bank failure.

In fact an FT report goes further to cast doubt on the solvency of many European banks. International Monetary Fund estimates suggest that the Euro-zone is well behind the US in terms of writing off bad assets even before the Greek crisis. The article quotes credible reports suggesting that the underlying situation of the German Landesbanken is even worse than previously thought. Last year, a story made the rounds in Germany, according to which a worst-case estimate would require write-offs in the region of €800bn about a third of Germany’s annual GDP. The author rhetorically makes the suggestion that if you were to add this to Germany’s public debt, you might jump to the conclusion that Greece should bail out Germany of course he wasn’t being serious but it graphically hints at the scale of the problem facing Europe’s banks.

Southern Europe is destined for a period of severe fiscal tightening, poor domestic and regional growth possibly recession for some southern states, banks trying to rebuild their balance sheets as they quietly write off debts and in some countries the rise of labor unrest and social disruption. Producers may find it harder to raise money from their banks to fund their businesses and the corporate bond market has already frozen up as a source of much needed capital according to this report.

Does this sound like cause for celebration? US consumers dependent on European suppliers would be well advised to dig a little deeper into their supply chain and establish with some degree of clarity just how sound that structure is. In most cases well-established firms will weather the storm and the lower Euro will certainly help, but there are going to be casualties.

–Stuart Burns

This is the second post of a three part series. You can read the first post here.

If I were an activist, I’d try to examine a few of the supply chain issues tied to this conflict minerals policy issue. The first area to examine involves truly understanding the complexity of managing a global supply chain. In all likelihood, the Intel supply chain for tantalum probably passes through at least 3 if not up to 8 different entities before the final product arrives as an assembly at Intel’s docks. For example, the tantalum comes from a mine which then moves to a processor then on to a refiner and then possibly to a company that converts it to the semi-finished form suitable for use in making a component. Next it goes to a tier three supplier who makes it into a capacitor who sends it on to a tier two ODM (original design manufacturer) who turns it into the finished electronic assembly where it goes to Intel. (This is an approximation of course, I haven’t analyzed Intel’s actual supply chain). The point we’re making is that tracking the raw material supply chain from mine to grave is not a simple feat.

Nor is keeping “conflict minerals out of the wrong hands. Just as Iran has gained access to nuclear weapons and/or materials used to make nuclear weapons despite all sorts of trade embargoes, “conflict minerals will too end up infiltrating supply chains. We’re not arguing this means one shouldn’t support the legislation. We’re just demonstrating the complexity of the issue.

Second, and perhaps a much bigger “beef we have with some activists in general involves conflicting points of view as to how to solve the problem. On the one hand, activists support “full and complete bans. That’s a perfectly plausible policy option but that doesn’t negate the need for tantalum in all of our electronic devices (of which activists require to build grass roots support for their positions). But what do we often see? We see activists take extreme positions wanting to ban mineral mining and exploration in the United States limiting supply options for these very same companies they have asked to stop buying conflict minerals. Sorry folks but these materials need to come from somewhere.

We’d like to re-state our support of The Conflict Minerals Trade Act introduced by Rep. Jim McDermott (D-WA) last November. In a follow-up post, we’ll examine Intel’s position on conflict minerals as per their own public statements and weigh the merits of some of their activities as well as suggest a couple of our own.

–Lisa Reisman

As the German government banned the naked short selling of EU government debt and the stocks of 10 leading German Banks, the markets reacted with a mixture of disbelief and anger as billions were wiped of the value of shares across the main European bourses. What does this have to do with the US and why should it bother us what the Europeans do to hamstring their financial services sector?

Financial markets more than any other are a global business nowadays, if for no other reason than actions taken in one impact exchange rates and growth prospects that have a direct impact on fortunes in the US. The US dollar long on a slide has “enjoyed ” a period of robust strength these last few weeks as investors have dumped overseas assets suddenly perceived to be risky and brought safe US treasury debt and domestic stocks. Although that is good for servicing US debt requirements it is bad for the exchange rate as a weaker euro and stronger dollar choke off the early recovery in exports US manufacturers have been enjoying. The trade gap had already been widening since early this year and a stronger dollar will only encourage the import of more BMW’s and Mercedes and depress the exports of machine tools or earth-movers.

There could be some comfort taken if the action by the German financial regulator BaFin was necessary but some see it as a sop to beleaguered Angela Merkel’s party facing wavering support on the left. The kindest conclusion is that Germany was simply trying to cynically manipulate the bond market ahead of a large sale. The sense among EU members that Germany had acted solely in its own interests was compounded as an auction of £3.7bn of German government bonds within hours of BaFin’s announcement saw the country issue new debt at the cheapest rate since 1998, helped largely by the so-called “short squeeze” created in the bond market by the short selling ban, which forced many investors with short positions to buy debt. As an article in the Telegraph says coming a day after Spain struggled with a debt sale of its own, many EU governments will have found it hard to escape the conclusion the German ban was partly a cynical attempt to improve Germany’s finances.

Tempting though this theory is, the fallout has been so severe it is unlikely the explanation is that simple. Investors fear BaFin knows more than they are letting on and their move covers deeper problems. In a further Telegraph report the issues are analyzed in more detail than we have time for here but briefly a BaFin report a year ago voiced concerns that European bank write-offs from credit default swaps could top $800bn once losses caught up with them. The regulators shock move has many asking what is not being said about the state of German CDS losses and whether on lending to the Club Med economies could be about to push some over the edge. The short ban set off a flight of capital to Switzerland, BNP Paribas is quoted as saying US12bn flowed in Swiss Francs in a matter of hours. Another source at International Monetary Research is quoted as saying there was a major run on Club Med banks as nearly US$ 70bn of interbank lending was withdrawn, bank reliance on the ECB jumped by 22% or US$125bn in one week.

If investors fears are realized (and they have a tendency to be self fulfilling when the herd mentality sets in) growth in the Eurozone is likely to be further depressed for years. There is even the chance of a double dip as interbank lending dries up and businesses are once again starved of capital as in 2008/9. So distant and peripheral as Europe’s banking problems may seem the reality is we all have an interest in seeing them sort out not just their financial problems but the political issues that caused them.

–Stuart Burns

Last Friday the Associated Press reported the US State Department met with industry leaders to “discuss ways to ensure their products do not contain minerals illicitly mined in the eastern Democratic Republic of Congo, or DRC.” According to the press account, the specific metals targeted include: tungsten, tin, tantalum and gold. We have covered the issue of “conflict minerals in previous posts.

So we thought it might make sense to break down each of these metals in a bit more detail to identify the severity of the issue for US manufacturers. We relied on USGS surveys for each of the relevant metals. The first metal, tungsten, used primarily in electrical applications remains critical to manufacturers dealing with incandescent light bulb filaments, X-ray tubes and super alloys used in military applications. US imports for tungsten come overwhelmingly from China (>80%) followed by “other countries, Russia, Canada, Austria and Bolivia. Though eight out of ten of the world’s largest deposits exist in China and Russia, some tungsten from the DRC may enter the US. Tin, used in a variety of applications from cans and containers to electrical to construction to transportation comes primarily from China, Indonesia, Peru and Bolivia. Based on our review of USGS data, we believe less than 1% of the US tin supply comes from the DRC.

Since the electronics industry represents one of the largest end users for some of these metals, the industry has formed a trade association to align policies and education to improve working conditions and environmental stewardship throughout the electronics supply chain. The trade association specifically addresses tungsten, tin, tantalum and gold.

Gold used in the US, despite having multiple countries of origin primarily comes from Canada (30%), Peru (29%), and Chile (9%) also comes from “other countries (16%) according to the USGS. One critical issue in identifying “blood minerals if you will, involves understanding the raw material source all the way through the integrated supply chain. If a capacitor comes from China, does the end user OEM know where the raw material comes from? We’d argue, typically not, hence the attempt by the State Department to work with industry to identify mechanisms for creating better visibility into raw material supply.

The last and final metal and likely the most controversial, involves tantalum.  Tantalum is primarily used for powder and wire in capacitors and according to Commerce Resources (an exploration and development company for tantalum, niobium and other rare earth metals according to their website) suggests the annual growth rate of tantalum is in the 8-12% range though other reports suggest the growth rate looks more like 7%.  Regardless, material today comes from China, Brazil, Canada and likely some from the DRC but perhaps not directly.

We applaud the State Department’s move toward working with industry to identify solutions to end the use of conflict minerals. But unless/until Congress, the Administration and environmentalists wake up to the fact that supply constraints are real, and we need viable sources of US and/or “friendly regime supply, I fear conflict minerals will still make their way into our electronics goods supply chains.

–Lisa Reisman

The other day I wrote a post discussing whether or not an iron ore surcharge applied by US domestic producers was justified. Our conclusion? Not exactly based on the make-up of the domestic market with 50+% of production using electric arc furnace making methods (some state that number is now over 60%) vs. China’s 9.1% and the fact that one of the US’ largest integrated producers is largely “self-sustained from an iron ore perspective (US Steel). We estimated their market share at 25%. But one way the US can’t remain immune to rising iron ore costs involves steel imports from China. Let’s take a look at the numbers.

As we reported in the earlier piece, China will produce 612 m metric tons of steel, up by over 22% from 2009, according to the World Steel Association (we’ve seen other reports of China production reaching 675m metric tons this year). China produced 500.5 m metric tons in 2008. In 2009, China produced 567 m metric tons. Though China’s steel exports by dollar value and volume to the US appear much smaller then say Russia, Japan’s or Canada’s, check out some of these latest statistics according to trade publication Steel Home “April Chinese finished steel exports surged to 4.31 million tonnes (mt) last month, up some 29.4% sequentially as well as 205.7% from year-ago April levels. Finished steel imports actually declined in the month, down some 8.0% from 1.63mt to 1.5mt. Net finished steel exports rose to 2.8mt in the month, up 65.3% from March and 1438.1% from year-ago levels, for the highest monthly posting since October 2008.

Clearly all that cheap money sloshing around in China has found its way into the hands of state-owned (and/or privately held) steel producers. Excess capacity is exported. Is this good for US buyers?   One may think so from a short-term perspective but let’s look at it in a different way. Chinese producers, known to be less efficient than Western producers (that 90+% of China production comes from integrated steel production methods, many relying upon aging and antiquated equipment) are “buying up iron ore, causing prices to rise, only to turn around and export the excess finished products to undercut Western producers. And though we have attempted to make a case that much of the domestic US steel industry should not be affected by rising iron ore prices, at least 25% of the US market may still face rising prices. So here is a thought for you to consider – by buying China steel products, are US buyers actually helping fuel rising iron ore prices?

Meanwhile, the trade deficit will likely increase from $39.7b in February to $41b in April, according to University of Maryland Smith School of Business Professor Peter Morici. Morici makes several additional claims including: “At 3.5 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds to demand, as well as, “Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies. Stuart touched on some of these arguments in his earlier post today. And we remind steel buyers that the US currently faces a $6.3b steel trade deficit.

–Lisa Reisman

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.

–Stuart Burns

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.

–Stuart Burns

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.

–Stuart Burns

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.

–Stuart Burns

It’s China again and it’s driving copper to over $8,000/ton. “To some extent this has never been a fundamental story, it’s been the weight of money,” said Robin Bhar, analyst at Credit Agricole quoted in a Reuters article.

When it comes to copper, it’s a balanced market, moving into deficit and it’s the China story again.” Since the beginning of `February the price has powered up some 25%.”

Source: LME

From a lull around the time of credit tightening in China and the Chinese New Year imports of unwrought and semi-finished copper surged 41.6% on the month, surpassing estimates by traders and analysts for the second straight month and reflecting strong term and financing inflows to the country according to Reuters. Sentiment is said to be helped by the formal provision of a $30bn loan for Greece should the country decide it needs it and a weaker US Dollar which usually yields rising metals prices. Nevertheless investment in copper has been helped by ETF inflows running at high levels and a return of risk appetite among investors.

How much longer this run will last remains to be seen. The fundamentals for copper are certainly better than some metals. Supply and demand are broadly in balance but Andrew Harding Rio Tinto’s head of copper said in an interview last week he expects to see a deficit in global copper supply next year after a balanced market this year, with China likely forced to draw down strategic reserves to help meet demand. He went on to say the company could struggle to maintain its copper production rates for the next few years as ore grades decline, until the massive Mongolian Oyu Tolgoi project comes on stream in 2013.

Although one would expect mining executives to be bullish for their products it does seem his position is shared by a large part of the investing community for whom a move above $8,000 per ton will be a buy signal to push the price up further.

–Stuart Burns

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