Articles in Category: Imports

We can’t believe we published this piece almost one year ago (May 14 to be exact) posing the question: “Will Congress Put a Stop to China Currency Manipulation? The answer then, a resounding no as a currency manipulation bill died a fast death. But that was then and this is now. The “China Manipulates its Currency political agenda, if you can call it that, has some new life. And some of that new life has come, quite frankly, from people like me (a former ardent free trader) who decided to pour over the data. A year ago (in that linked piece above) we published the RMB-USD exchange rates from 1981 to the present. And though back then, we asked readers to form their own conclusions the evidence has convinced me personally that the currency has been manipulated. That, however, does not represent the only evidence. In fact, we did some investigations of our own to look at just one portion of the metals market, steel imports and exports. Shockingly (or perhaps not, depending on where you sit) the US currently has a $6.3b trade deficit with the rest of the world. We also reminded readers that the domestic steel industry operated with an average 65% capacity utilization last year. Here are the trade numbers again for review:

So what is new now in 2010? Two fascinating bits of information; first China ran an $8b trade deficit this month (this hasn’t happened since April of 2004) according to Gordon Chang who wrote the affectionately titled book “The Coming Collapse of China. Second, Chang suggests a new movement in support of forcing China to revalue its currency appears to have taken hold (Chang quotes Paul Krugman who suggests a 25% surcharge on Chinese imports would make sense without a more freely floating currency). But MetalMiner readers know that Krugman wasn’t the first person to suggest such a solution. In fact, Warren Buffett first proposed such a policy way back in 1999. We covered Buffett’s ideas in a two part series in April of 2009, here and here.

This time around, a bill in Congress just may see the light of day and move to a full floor vote by the end of May (at least that’s what Senator Charles Schumer D-NY) hopes. The bill has at least some bi-partisan support as Senator Lindsey Graham R-SC) also wants to see some action on the bill suggesting currency reforms have not moved fast enough. The bill would place anti-dumping duties on products coming from countries that don’t act to realign their currencies.

How likely will China continue running a deficit? Chang doesn’t think too long because “Chinese officials think exports will recover this year. And, as he cleverly puts things, “Beijing it appears, is manufacturing a trade deficit.

–Lisa Reisman

There has been much debate about the strength of Chinese growth figures amid fears that any slow down in growth would have a detrimental impact on the global economy in general and the metals markets in particular. Surely a sudden drop in metals prices would be a good thing you say? Well yes, for a metals consumer it would be welcome but for anyone in the supply chain such as a distributor to be left with stock in a falling market results in losses and causes buying patterns to seize up as buyers hold off in the expectation prices will fall further.

So within reason it is good news that based on recent data it would appear the Chinese economy is still growing strongly in spite of the government’s recent increase in bank reserve requirements and credit tightening. Two of the key growth metrics are oil and copper consumption. Both commodities are widely used as benchmarks of industrial activity and easily tracked making the data arguably more reliable than government estimates of GDP growth.

As this graph from Reuters shows, oil imports have surged in 2009 following a brief dip in late 2008/early 2009 when the whole world seemed to seize up.

The headline increase of 19.4% over a year earlier is being driven by Beijing’s incentives to boost purchases of smaller cars, particularly in rural areas. Passenger car sales rose 55% in February from a year earlier, building on January’s rise of 116% year over year. Oil consumption meanwhile grew 9.4% in February over January. We will come back to these figures later.

Meanwhile, we mentioned copper consumption as another key metric.   Anyone following the copper market will know that there are two opposing forces in action at the moment. On the one hand, stocks are rising on global exchanges and (by the International Copper Study Group’s figures, posted in a different Reuters article) the global market is in surplus in 2009 and hence in oversupply. World refined copper production exceeded consumption by 365,000 tons in 2009, up by 63% from 2008, the ICSG said in its latest monthly bulletin.  The market was in a deficit of about 140,000 tons in the first half of 2009, which resulted from high Chinese apparent usage and reduced world refined production, but was more than offset by a surplus of around 500,000 tons in the second half of the year as a result primarily of the recovery of refined production and a coincident decline in Chinese apparent demand. Read more

We have not been alone in saying we could see a revaluation of the Chinese Yuan or Renminbi against the US dollar this year so anyone reading our columns will not be surprised to hear that no less than Jim O’Neil, Goldman Sachs chief economist agrees “something is brewing in China and a currency revaluation could be imminent. After defending the peg against intense international criticism for most of last year it clearly isn’t international pressure that is prompting the re-think. O’Neil thinks it is runaway growth that could be the spur.

The article in the Telegraph states that China’s economy grew at 8.7% in 2009 although growth was accelerating towards the end of the year, and is forecast to grow at 11.4% this year. The central bank has repeatedly tried to control domestic lending by banks. Just last week the central bank told lenders to increase their reserve levels by 0.5% to 16.5% by February 25, in an attempt to curb lending. However, a new survey shows that a similar increase in January had little impact, with Chinese banks approving 1.4 trillion yuan ($200bn) of loans last month, one of the highest monthly totals on record.

A rise in the Yuan would impact exports at a time when they are struggling because of the after effects of the world recession, namely depressed and sluggish growth in the developed world. But a revaluation would boost imports particularly from neighboring countries such as Taiwan, Thailand and South Korea. China features prominently in the recovery of the export-orientated economies of Taiwan and Thailand. Taiwanese exports to China, its biggest trading partner, rose 45% year-on-year in the fourth quarter according to a Financial Times article. China’s domestic market has also become an important market for Taiwan – exports for final consumption in China have grown from 17.8% of Taiwan’s total exports at the beginning of 2009 to 29.2% last month.

This trend is echoed in Thailand, where January’s exports to China grew 94% year-on-year, although admittedly from a low base in late 2008. The recovery was supported by renewed demand for electronics and rubber – the latter an indication of a recovery in automotive demand in China. So the west is not alone in hoping Jim O’Neil is correct in his belief that China is about to revalue. Any buyers of material on long term contracts from China should review margins and see if the figures being discussed a possible 5% increase are likely to impact their supply economics. Even if companies buy in dollars their supplier is operating in local currency and we all know that means sooner or later they will look to adjust prices to compensate for the change.

–Stuart Burns

We have long reported on anti-dumping cases involving metal products. In fact, some of the cases we have covered the longest (over two years) have made some new news but not for the reasons that many of you will guess. Most anti-dumping cases that make the news involve the facts of a case¦.a group of producers, steel union workers or some other “harmed industry files an anti-dumping case claiming goods from a certain market or country have been “dumped. The ITC (International Trade Commission) investigates and some sort of duty or countervailing duty gets applied to a particular HTS code. The most recent newsworthy stories involving metals include OCTG and line pipe from China.

But now we have an entirely different issue coming to the fore and one that will surely heighten trade tensions. That issue involves the willful attempt on the part of overseas suppliers to transship or create other illicit means of moving goods ordinarily subject to these new countervailing or anti-dumping duties via a different manner to avoid the duties. According to this press release issued by The Coalition for Enforcement of Antidumping and Countervailing Duty Orders comprised of steel wire products, steel nails, steel wire garment hangers and uncovered mattress innerspring manufacturers, “These US industries have developed compelling evidence detailing how certain foreign manufacturers are evading duties. In some cases, they are shipping these products to the US via third countries and then falsely designating it as the country of origin to evade duties, a practice termed as “transshipment. In other cases, an inconsequential modification is made to the product in third countries to avoid the duties. In yet other situations, false labels displaying a different country of origin are placed on shipments of products actually made in China.

Having worked for a rogue trader in another life, I can dream up a variety of ways in which Chinese manufacturers could circumvent the ITC ruling. A trickier way to create such a scheme involves establishing a company in an export trade free zone (my personal favorite would be Singapore). Goods then ship from China to Singapore where the products likely undergo additional processing (this could be something as simple as oiling the innersprings), whereby the goods go through a re-packaging and labeling process when it leaves the country as “product of Singapore.”  This scenario sounds plausible.

According to Panjiva, a website with global sourcing tools which allow for trend spotting, the bulk of imports this past twelve months for uncovered innerspring units still came from China which would suggest these Chinese exporters did not seek to avoid the duty. But in all fairness, Panjiva data does suggest that China market share has declined while the market share for the Philippines and Canada has increased.

Powered by Panjiva Trends

In the above referenced chart, 182 shipments came from China, 8 came from the Philippines, 5 came from Canada and 3 came from Hong Kong. For the other products, according to Panjiva data, it appears to refute the claims made by the coalition. But please don’t take our word for it, check out Panjiva trends and type in “steel nails “steel wire or “carbon steel threaded rod and see for yourself!

–Lisa Reisman

India’s auto market is booming, in part because new regulations are coming in later this year calling for stiffer emission standards on new cars which consumers fear will increase costs and reduce performance but also because India is rapidly becoming an export hub for the rest of Asia and Africa.

Maruti Sazuki the country’s largest producer with over half the market share saw its domestic sales rise 21% in January to 81,000 vehicles, while its exports rose three-fold to more than 14,500. According to the Financial Times this brought total sales to 95,650, its best ever sales performance in a single month and up 33% over January last year.

The Indian unit of Hyundai Motors which ties with Tata Motors as India’s second-largest passenger car maker reported a 42% rise in its January sales to 52,600 units, with increases of 41% in its domestic sales and of 43% in its exports. The 4WD SUV maker Mahindra and Mahindra on Monday reported a 71% year-on-year rise in sales in January to more than 30,000 vehicles.

Everyone and his brother appears to be piling into the market. Nissan is the latest to announce a major expansion on the back of an earlier decision to move production of their small car the Micra from the UK to India. They are to start production of their first made-in-India car near Chennai in May. The Micra will probably be made from kits and is intended for sale in Europe, but the new model will be 85% local content, a trend the company has suggested it will follow for its larger models in the future. At present, Nissan Teana and X-trail’s are imported as complete units but the plan is to bring in kits and assemble them at the Chennai works. This would significantly reduce the import tax and make both models more competitive in the local market. And here’s the encouraging trend, although India has had a stated aim of becoming an export hub for Asian car production, an aim the recent export figures suggests is becoming a reality, the fact remains much of the Indian auto industry’s growth is from the domestic market. Nissan is planning to add 55 dealerships over the next two years to meet the growing domestic demand.

The strength of the domestic steel industry, earning strong profits even as overseas divisions are losing it, is testament to the strength of domestic manufacturing, of which automotive is an increasingly important part. As with China, India’s consumers are playing a large part in fueling domestic growth and profits for metals companies and manufacturers, with so many aspiring to middle class life styles it shouldn’t be a major challenge to maintain the momentum, inflation not withstanding.

–Stuart Burns

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

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