Articles in Category: Macroeconomics

Several weeks ago, we published an article titled Industrial Economic Signals: Down But Not Out. At that time (January 4, to be exact) everyone was speaking the “R” word but the indicators weren’t saying it was so. We’ll know in a couple of days what the indicators are telling us for the month of January but if you pick up any local paper (I picked up Crain’s Chicago), you can’t go to far without reading headlines such as, “Winded City market mahem, recession darken local business mood”. The story goes on to describe a local castings company whose revenue has dropped by 15% while customers were demanding 15% cost reductions ‘or they would move their business to China or Mexico’ according to the article. (Have at it, we would say as the owner of that business….you aren’t going to get 15% savings out of China these days but we’ll leave that rant to another post.)

Back to the headline at hand. Wall Street, according to a recent Purchasing article, basically feels that prices of steel will increase sharply in Q1 “due to increased buying by service centers, benign imports, and increased export opportunities.” The article quotes Michael Willemse, the industrial products research analyst at CIBC World Markets, as saying, “these factors will offset weak end-market demand in North America” and allow the mills to get $660-$680 prices for March deliveries. The article goes on to say that many of the steel analysts in the last month believe the price of steel is set to rise.

But what goes up must come down. And in this case, we could see supply side cost increases pushing up prices in the first half of the year but weak demand would mean they wouldn’t stick. And we said that back in December when we first launched this blog. Read more

The last time you pulled up at the pump to fill your car with gas, did you wince when you saw the bill? Well, that’s why overall freight costs are headed north. The shipping lines usually lag the gas pump by about a month, so you won’t be surprised to hear Bunker (or fuel) surcharges are to be adjusted upwards. No surprises there, you say. What is different this time are the amount and the mechanism.

For many years, NVOCC’s (Non-Vessel Operating Common Carriers) like Exel, Kuehne & Nagel, CH Robinson, and others have been able to negotiate the freight rate and BAF (Bunker Adjustment Factor) in March/April and fix it for the year ahead from May 1. This year the lines are imposing an EBAF (you guessed it  — Emergency BAF) and the word is that  it will be in the region of an additional $280/20ft and $320/40ft — the ratio is usually the 20ft being 80% of the 40ft. How this will manifest itself in quotations remains to be seen. The lines may just quote one enhanced BAF figure, but behind the scenes agree part as regular BAF and part as EBAF, or they may actually call out the two surcharges. The fact is that they will be applied — and unlike previous years, they will be floating, adjusted month by month or quarter by quarter, so if gas gets to $4/gallon the EBAF will rise further. Read more

Just days after making our metals and currency predictions for 2008 I read that many notable commentators are supporting our comments on the Chinese currency. Driven by stubbornly high inflation, Beijing looks set (unofficially) to let the RMB appreciate significantly in the coming year in an attempt to dampen exports and reduce demand for imports, hoping this will cool the economy. With inflation running at 11.5% last year driven by growing exports and China’s foreign currency reserves just shy of $1,500B the government is desperate to bring growth back into single figures. Our call was from 7.3 to 6.7 over the year but Stephen Green of Standard Chartered Bank is predicting the RMB could rise to 6.17 per USD by year end. The effect for importers of Chinese product could be a 9% increase in prices on top of recent changes in export taxes export taxes and VAT rebates.

We have long said that China’s role as the low cost country of first choice is on a slow decline and for many commodities this is increasingly becoming reality. A weakening US dollar and rising efficiencies have made many US companies competitive in the international market place where they were once hopelessly over priced. Not that we would recommend devaluing the US dollar as a remedy for US competitiveness, as Britain found in the 1970’s and 80’s it is at best a short term solution, but as China’s dollar costs rise we may at least see the flow of more labor intensive jobs to China slow from the flood a few years ago.

From a personal point of view I will find it interesting during the coming year to see to what extent the currency and tax changes impact China’s consumption and exports of metals. As we have previously posted, the Chinese government has taken deliberate steps to try and reduce exports of basic steel products and certain non ferrous metals while at the same time increasing incentives for imports of other metals. The currency movements will amplify that process as imports appear cheaper to Chinese consumers but exports less attractive. Where Chinese consumption has been the main driver of price for certain commodities, like Copper, this could see the resurgence of Chinese demand and support for prices in the year ahead. The recent abolition of import taxes on refined Copper has already seen renewed buying interest.

So whatever your particular metal interest is 2008 is likely to see China continue to play a significant role in determining price and availability. We now have the additional dynamic of currency on top of supply and demand to increase the volatility.

–Stuart Burns

It’s easy to jump on the bandwagon of doom and gloom for the US economy. A falling dollar, a sub-prime mortgage mess, sluggish holiday retail sales and a whopping $9 trillion of national debt make it hard to conclude anything other than a recession for 2008. Since Q3, 2006 leading CEO organization Vistage has been predicting a Q2 2008 recession.

But the data is not yet supporting that position. Crain’s Chicago in late December reported on the National Association of Purchasing Manager’s latest business activity index for the Midwest which was at a healthy 56.6. Anything over 50 indicates growth. A reading under 50 indicates contraction. This survey is an interesting benchmark because it largely examines factory activity. The article goes on to say that these numbers are much better than economists forecasted. Perhaps the most interesting note however relates to pricing specifically, “prices paid fell to 63.8 from 76.2 a month earlier”.

What ramifications does this have for metals prices? It’s unclear. We’ll be coming out with our 2008 metals pricing predictions shortly. But many of those predictions are based on economic fundamentals. And though some of the large industrial bell-weather companies (e.g. Caterpillar) are having down years, it’s too early to call the sector out.

–Lisa Reisman

In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.

So here are the 2008 predictions:

Read more

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   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

Could aluminum prices rise in the face of a recession?

Citing opinions from some 25 metal market analysts, Harbor Intelligence is predicting a better than 50% chance that the aluminum price will rise in 2008, hitting a peak of over $2600/mt in 2008 and over $2700/mt in 2009. At the same time that Morgan Stanley is predicting a full blown U.S. recession next year, the Harbor report cites four price support pillars that will see aluminum price increases next year. Read more

1 170 171 172