Articles in Category: Imports

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

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

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

Calls for a halt to the dollar’s slide by foreign owners of US assets such as the Chinese and fellow trading blocks like the EU and Japan that are struggling to compete with a weak dollar have been joined by a supporter from an unexpected quarter  recently.

Klaus Kleinfeld, chief executive of America’s Alcoa is reported in the FT as saying the aluminum producer took a $57m hit in the third quarter due to the weakening dollar and Levi Straus took a $16m currency hit in the second quarter. While these and other companies like Yum Brands and Biomet reported in USA Today don’t go into much detail about exactly where the losses arose, when corporations are manufacturing in so many locations, Alcoa operates in 31 different countries, local currency movements impact the bottom line when the costs are rolled back in the dollar denominated corporate accounts.

Most of the cost increases are going to come from those countries that have strong currencies, often boosted by a heavy reliance in commodities such as Brazil, Australia, South Africa, etc. Manufacturing costs are incurred locally but the products manufactured and often exported are usually sold in US dollars.

Some US corporations like Levi Straus use currency hedges according to Roger Fleischmann, Levi’s Treasurer. If the market moves the wrong way, profits are preserved but the hedge shows up as a currency loss on the books.

Timing has been another problem this year. As subsidiary costs and sales are rolled up into the corporate books they are at the mercy of timing, come in at the right time and the exchange rates give a kind number on the costs, come in at the wrong time and they are valued as a loss. The third quarter hit many firms in that fashion.

Finally, firms that rely heavily on imports, either of components or raw materials can also suffer as the dollar weakens. What’s good for the exporter is bad for the importer, and on balance the US is a net importer.

–Stuart Burns

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

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

The brass producers and distributors are under pressure, and I don’t just mean water pressure [pun intended]. Copper and brass shipments in the USA have been down since the summer of 2007 due to continued cut backs in new housing construction starts. The housing industry is by far the largest end user of copper and brass products at around 40% of total consumption and finds it way into faucets and valves, brass fittings, HVAC or electrical wiring and connectors. The average new US single family home uses some 400 pounds of various brass and copper products. And, if the public begins to reduce spending on home remodels, there will be an even greater affect on the brass market because the ratio of sales for remodelling to new build is 3 to 1. According to Forbes, the news has not been pretty for building products manufacturer Masco and Home Depot Read more

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