Jaguar Land Rover’s (JLR), decision to invest hundreds of millions of pounds to enable its Castle Bromwich plant in the U.K. to build electric cars, as reported by the Financial Times, is interesting on a number of levels.

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Specifically, for JLR it underlines the drastic steps the firm is being forced to take following a collapse of sales over the last 18 months. Buyers have turned away from JLR’s diesel engine lineup — some 50% of JLR’s models are diesel-powered — amid a backdrop of wider automotive sales slumps across Europe and in China.

Switching to petrol engines is but a stopgap for a manufacturer whose range is skewed heavily to larger, less fuel-efficient models.

European environmental standards will require manufacturers to meet a fleetwide average of 57 miles per U.S. gallon by 2021 – already a demanding target with high mix of diesels and a number of electric options in its range.

But with a switch to petrol and following recent suggestions by the E.U. that the limit should be ramped up to 92 mpg by 2030, JLR could struggle to survive.

So, switching to all-electric for some of its key models — like the replacement for the XJ, the flagship Jaguar saloon— is, while immensely challenging, the only viable option.

The challenge — and the source of JLR’s reluctance to build its existing all-electric I-Pace in the U.K. — has been the lack of a U.K. supply chain.

Many of the drivetrain components, like motors, were produced by third parties but are increasingly being made in-house, according to thedrive.com. The most significant factor, however, is the lack of a significant automotive battery maker in the U.K., the Financial Times reported.

Perhaps the imposition of harder post-Brexit borders with the E.U. will encourage U.K. manufacturers to establish a major battery facility at some stage in the future — or, maybe, Castle Bromwich will be the last major automotive investment in the U.K.

Either way, for now sourcing major components from Europe is a brave move, particularly with so much uncertainty around about trade terms.

From a wider perspective, JLR’s investment suggests manufacturers do not believe politicians will carry through with such threats, despite all the current political posturing over a hard Brexit. It also suggests manufacturers believe there will be some form of a softer compromise that allows low-tariff or tariff-free trade with the E.U. and, more importantly, relatively free movement of goods. That, or some solution requiring only light touch border controls that allow just-in-time supply chains to continue to operate with levels of flexibility similar to the current regime.

All other U.K. car manufacturers are either keeping their cards close to their chests while waiting to see the outcome of the Oct. 29 deadline to leave the E.U., or are actively moving to Europe by announcing investment for new models will go into mainland European plants.

JLR’s move is against the current grain and raises the question of whether it has anything to do with the level of state financial support it has received, desperate as the government is to build momentum against the prevailing tide of lost investment to the E.U.

No automotive company invests in new facilities without going cap in hand to the government to see what help it can get; typically it is 9-10%, but it won’t be long before news leaks out of quite how much JLR has secured for Castle Bromwich.

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E.U. state aid rules set limits — but in a post-Brexit world, potentially anything could be agreed.

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When you think of the United Kingdom, you don’t normally think “automotive powerhouse.”

Sure, the U.K. has a long and illustrious tradition of making some of the world’s most iconic motorcars.

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Think Rolls-Royce, Bentley, Jaguar, Lotus, Morgan and, my own favorite, Aston Martin. The U.K.  is also home to most of the world’s Formula One racing teams research, development and production facilities.

Yet, at a less glamorous but arguably more important level, the U.K. automotive industry is not only key to the country’s manufacturing base, it also operates as one of the most sophisticated and integrated supply chains in Europe.

As the graphic below from industry site SMMT illustrates, over 80% of U.K.-made cars are exported — over 50% of them into Europe, but the rest worldwide.

On the supply side, more than half of the parts used in making those vehicles come in from overseas, linking Europe into one large, integrated manufacturing supply chain.

Source: SMMT

Vehicle manufacturing is the U.K.’s second-largest manufactured product export, making up 11.4% of the total. By comparison, the U.S. has automotive exports ranked down at fifth at only 8.4% of exports.

So, when automotive production declines in the U.K., even for one or two months, it has a significant knock-on effect to the rest of the economy.

Arguably, the U.K. has not faced such a challenging period since its darkest days in the 1970s. According to the Financial Times, car production in May dropped by 15%, its 12^th straight month of decline. Production for the domestic market was 25% lower than the same period last year, while export output dropped over 12%. All of this comes with the backdrop of a fundamentally cheaper exchange rate following the 2016 referendum to leave the E.U., which should have made U.K. exports significantly more competitive.

Source: Financial Times

Part of the reason for the decline, after years of bad press, has been buyers’ sudden change of heart regarding diesel engines.

Some manufacturers, like Jaguar Land Rover, were producing over 90% of their fleet with diesel engines and have been frantically trying to adjust to the market’s growing aversion to oil burners. But equally, it has to be said, carmakers are taking the opportunity to switch investments in new models from the U.K. to the E.U. mainland (in case the U.K. fails to secure a true free trade agreement with the E.U.).

Any form of partial free trade agreement that involves border checks and/or tariffs will have a detrimental impact on the ability of automotive companies to run an integrated, just-in-time supply chain with their European parts suppliers.

Automotive companies see this as a significant risk and, when faced with choices, have opted to favor investment in their European plants, even though the U.K. operations have traditionally performed more efficiently.

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In the unlikely event the U.K. concludes a true free trade agreement — by which I mean one, like now, that does not require border checks — it is possible some of this decline will be reversed.

However, it will take years before carmakers will have enough trust in the political relationship between the U.K. and E.U. to feel comfortable investing hundreds of millions in new models to be made in the U.K.

In the meantime, automotive is unlikely to get back to its recent 2017 peak.

Late last week, a CMO of a B2B mobile technology company published a lightly scathing take on the mainstream media’s characterization of the current “trade war” (a “farce,” according to the headline), by making the case for, among other things, reshoring.

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Ostensibly reporting from the World Economic Forum in Davos, Switzerland, where representatives from participating countries such as Vietnam are worried about high-skilled manufacturing jobs skipping over them en route from China back to the Western world, the author writes that “we’ve really missed the point giving the trade war so many column inches.”

“While the cost of aluminum may sting now if you are importing,” he writes, “it’s an effect of the death throes of a model of production from the end of the last century,” going on to conclude that the future will belong to manufacturers who reshore their operations.

The article cites stats coming from the Reshoring Initiative, a firm that we at MetalMiner have had on our radar since roughly near the end of the Great Recession, and whose founder has been a key source for us in keeping our finger on the pulse of reshoring trends over the last several years.

That founder, Harry Moser, joins us as the first guest in conversation with Lisa Reisman on our new podcast series, “The Maker-to-User Trend in the Time of Tariffs.”

Maker-to-User in the Time of Tariffs: Background

After the U.S. Commerce Department’s Section 232 findings in early 2018, President Trump took action — and the rest is history.

This new podcast series takes a closer look at the U.S. manufacturing landscape in our present time of trade tariffs, and how manufacturers themselves are affected by the tariffs (winners and losers).

For example, just over 90% of manufacturing industry respondents in a recent, informal MetalMiner poll indicated that the Trump tariffs have hurt their respective businesses, via increased material costs, inventory woes and longer lead times, among other effects.

However, other manufacturers — for example, Honda — have posted healthy profits over the last year.

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Ultimately, we’re interested in what all of this means for the “maker-to-user” trend that we’ve seen gain steam the past several years.

For an excellent primer on the “maker-to-user” movement and trends, download our free white paper on the topic here.

Listen to more episodes and follow the MetalMiner Podcast here.

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Strengthening the domestic steel and aluminum industries and bringing jobs back to the sectors stood out as one of the primary stated objectives of the Trump administration’s Section 232 tariffs on steel and aluminum.

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Detractors have argued that while the tariffs could spur employment in primary metal producing sector, employment in metal-using sectors could suffer by virtue of higher prices.

For example, The Beer Institute was among the metal-using industry groups to express displeasure with the Trump administration’s decision to maintain the metals tariffs on Canada and Mexico (even as the countries came together in agreement on the United States-Mexico-Canada Agreement).

“It is disappointing that President Trump did not lift tariffs on aluminum as the United States, Canada, and Mexico announced a new trade agreement,” said Jim McGreevy, president and CEO of the Beer Institute. “Aluminum used to make beer cans has nothing to do with our nation’s national security, and continuing to impose these tariffs on some of the United States’ closest allies unnecessarily increases costs on our nation’s vibrant beer industry–which is a crown jewel for American manufacturing.”

Those criticisms aside — it is still too early to make any grand conclusions about tariffs and their impacts on jobs, whether for or against — let’s take a quick look at employment figures in primary metals manufacturing for the year.

According to the Bureau of Labor Statistics (BLS), preliminary October data show employment in primary metals manufacturing reached 381,900, down 300 from the September total of 382,200. Meanwhile, the industry saw primary metals manufacturing employment of 379,100 in January 2018, marking a 0.7% increase from January to October.

U.S. primary metals manufacturing employment, 1990-2018. Source: Bureau of Labor Statistics

The fabricated metals sector fell slightly to 1,495,400 jobs in October, down from 1,495,500 in September. Fabricated metals employment hit 1,462,000 jobs in January 2018.

U.S. fabricated metals sector employment, 1990-2018. Source: Bureau of Labor Statistics

The metal ore mining sector added 200 jobs, going from 38,900 to 39,100 in October.

Meanwhile, the manufacturing sector as a whole made gains in October, adding 32,000 jobs last month and 296,000 in total so far this year.

U.S. manufacturing employment, 1990-2018. Source: Bureau of Labor Statistics

“It’s good news that factories hired 32,000 new workers in October,” said Scott Paul, president of the Alliance for American Manufacturing, in a release earlier this month. “If there is any employment impact from tariffs or retaliation, it’s being more than washed away by the overall strength of the manufacturing economy. That said, tariffs alone aren’t going to keep manufacturing strong.

“We need to see structural economic reforms in China, a better deal for workers through fairer trade agreements with Mexico, Canada, Japan and the European Union, as well as a renewed effort to crack down on exchange rate misalignment and manipulation.”

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Those are the numbers — the jury is still out on the overall efficacy of the tariffs, and to what extent the tariffs have contributed to new jobs this year in primary metals manufacturing.

Thus far, companies like U.S. Steel have credited the tariffs in jobs announcements this year. U.S. Steel on June 1 announced the addition of 300 jobs related to the restart of a blast furnace at its Granite City plant in southwestern Illinois. (Prior to that, in March, U.S. Steel announced the restart of another blast furnace at the Granite City plant, which included the addition of 500 jobs.)

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A new Cold War — does that sound ridiculous? Does it sound alarmist?

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It would have been a month or more back, but today it is a plausible statement.

A post by Edward Luce in the Financial Times refers to a Bloomberg expose reporting on how China’s People’s Liberation Army has installed secret micro-chips on motherboards that were used to operate big corporate data servers, giving them unprecedented access to American military and technology secrets on an epic scale.

The microchips are said to be smaller than a grain of rice and thinner than the tip of a sharpened pencil, yet could provide backdoor access into the most secret of American technology. We quote Luce when we say, according to Bloomberg, China may have infiltrated U.S. military hardware, including drones, fighter jets, and so on.

It must be said, major retail hardware providers like Apple vehemently denied the existence of such malicious chips, but Bloomberg’s investigation has been going on for three years and begs the old saying — no smoke without fire.

The investigation apparently is still ongoing. But the consequences, coming on top of an escalating trade war and recent military skirmishes in the South China Sea, herald a new superpower rivalry.

There may be some who scoff at the suggestion that China could rival the U.S. as a superpower, but that is to misunderstand the trajectory of history.

China is on the rise, faster in terms of technology than it is even economically.

Take these secret microchips. As Luce points out, the creation and clandestine inclusion of such sophisticated technology is so hard to pull off that it was likened by a professional hacker to getting a unicorn to jump over a rainbow. It would take years, the article suggests and the deepest knowledge of how to manipulate the most cutting-edge technology across the global supply chain, for China to do this — yet, it did.

Roughly 75% of U.S. smartphones and 90% of semiconductors are made in China; it is safe to bet that domination is set to decline, but it can’t happen overnight.

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In a heated and politically charged scenario, it is not unrealistic to think government will mandate or reward firms that reshore technologically sensitive supply chains, with profound implications for what has become a hugely interdependent world.

Chances are you’ve probably heard the term “farm-to-table,” the increasingly popular culinary movement that prioritizes local sourcing. Some restaurants even tout their local sourcing on their menus, listing vendors from whom they acquire their foods — whether it’s beef, cheese, beer, or fruits and vegetables, they want you know where the elements on your plate originated.

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The same mentality can be applied to manufacturing at large, particularly in a world currently dominated by tariffs.

MetalMiner’s latest white paper, “‘Farm-to-Table’ Becomes ‘Maker-to-User’: How a Manufacturing Movement is Emerging,” explores the concept of local sourcing, in addition to evidence suggesting local sourcing is picking up steam among U.S. manufacturers.

The paper looks at import trends by sector and analyzes the various benefits of local sourcing, which include the positive impact on local economies, greater flexibility and innovation, and shorter lead times.

In addition, with the U.S. engaging China, a major supplier of just about everything — including parts and a wide variety of intermediate goods used in final products — as part of its Section 301 investigation of China’s trade practices, manufacturers might find themselves in a bind if a product they import is subject to a tariff. Given the number of products that have already come in for new tariffs (or could be subject to new tariffs, once the U.S.’s $200 billion tariff proposal goes through its review process), the odds are good that a manufacturer is going to be affected in some way.

Following along the lines of our recent discussion about risk mitigation with Resilinc President and CEO Bindiya Vakil, local sourcing can do just that: mitigate risk and offer manufacturers peace of mind in an increasingly volatile trade climate.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

You can read about all of the above — and much more — by downloading the new white paper here.

In an approximately 80-minute speech ranging from jobs and manufacturing to North Korea and Iran, President Donald Trump’s first State of the Union address also touched on issues impacting the metals industry — albeit, perhaps not as directly as one might have expected.

(As a brief aside, according to the American Presidency Project, which tracks the length of State of the Union addresses, Trump’s speech was the third-longest since the speech lengths were tracked beginning with the Johnson administration. Bill Clinton’s State of the Union addresses of 1 hour, 24 minutes and 58 seconds and 1 hour, 28 minutes and 49 seconds are the only addresses longer than Trump’s speech last night.)

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Many in the metals industry were looking for good news regarding infrastructure (including, as we reported this morning, Nucor President and CEO John Ferriola during Tuesday’s quarterly earnings call). On that front, Trump called on Congress to put together a $1.5 trillion plan for infrastructure spending.

“Tonight, I am calling on the Congress to produce a bill that generates at least $1.5 trillion for the new infrastructure investment we need,” Trump said. “Every Federal dollar should be leveraged by partnering with State and local governments and, where appropriate, tapping into private sector investment — to permanently fix the infrastructure deficit.”

He also referred to streamlining the construction permitting process and reclaiming the country’s “building heritage.”

However, for those in the metals industry looking for policy specifics, particularly with respect to trade cases, Trump did not offer much.

For those paying attention to the ongoing Section 232 probes of steel and aluminum imports – of which Chinese excess capacity and state-aided commodities is a focus of much discussion — the president did not refer to those, or any other ongoing trade cases. This isn’t necessarily surprising for a State of the Union address, which are often short on policy specifics or nitty gritty minutiae, a which Section 232, Section 301, and other anti-dumping and countervailable duty investigations could fall under, depending on whom you ask.

Even so, the omission stood out, even as China — along with Russia — was mentioned as a threat.

Trump mentioned China three times: twice during a story about a North Korean defector and another time in a general call for defense spending. (Reuters reported recently that Trump is expected to ask Congress for $716 billion in defense spending for 2019, which would mark a 7% increase from 2018.)`

“As we rebuild America’s strength and confidence at home, we are also restoring our strength and standing abroad,” the president said. “Around the world, we face rogue regimes, terrorist groups, and rivals like China and Russia that challenge our interests, our economy, and our values. In confronting these dangers, we know that weakness is the surest path to conflict, and unmatched power is the surest means of our defense.”

In addition, the word “steel” was only mentioned once in the speech, and that in a metaphorical sense when extolling Americans’ perseverance and the “steel in America’s spine.” Aluminum was not mentioned once during the speech.

While anti-dumping and countervailable duty investigations didn’t get their time in the State of the Union sun, Trump did once again reiterate his stance on what he perceives as bad trade deals — particularly relevant in the shadow of North American Free Trade Agreement (NAFTA) renegotiation talks that concluded Monday in Montreal, capping the sixth round of talks focused on revamping the now 24-year-old trilateral trade deal.

On trade, Trump said the “era of economic surrender is over.”

Trump signed an executive order withdrawing the U.S. from the Trans-Pacific Partnership on his first day in office. He has also consistently attacked NAFTA, which he has called the worst trade deal ever made, citing the loss of American manufacturing and jobs.

Very concerned after #SOTU about the direction of Trump’s trade and infrastructure policies. Trade was all rhetoric, nothing new, and could have been given by Obama, Bush, or even Clinton. Infrastructure included no Buy American commitment. We’ve got work to do.

— Scott Paul (@ScottPaulAAM) January 31, 2018

In general economic indicators, Trump touted job creation figures, saying that since the election (a time frame which of course includes the final months of the Obama administration), “we have created 2.4 million new jobs, including 200,000 new jobs in manufacturing alone.”

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

According to the Bureau of Labor Statistics, 2.1 millions jobs were added in the 2017 calendar year, down from 2.2 million in 2016.

Rising wages would traditionally sound a warning bell for manufacturing companies, but a recent article in The Economist explores many positive aspects of the current surge in blue-collar wages in the U.S.

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Stagnant wage growth since the financial crisis has not only been a reflection of poor productivity growth but also, many would argue, laid the foundations for the populist support which swept Donald Trump to power. The Economist notes that in the five years following the end of the recession from June 2009, wages and salaries rose by only 8.7%, while prices increased 9.5%. In 2014 the median worker’s inflation-adjusted earnings, by one measure, were no higher than they were in 2000.

Yet in 2015, the article notes, the median household income, adjusted for inflation, rose by 5.2% followed in 2016 by another 3.2%. Rather than abating, this year to the third quarter wage growth for factory workers, builders and drivers outstripped that for professionals and managers, with some blue-collar workers seeing rises of 11% in the buildings trade.

Unfortunately, this is not being paid for by rising productivity.

In the manufacturing sector, for example, the article notes output per hour worked is just 0.1% higher than a year ago and remarkably has not grown at all in the past five years.  To the extent rising wage costs are being met, it appears to be due to a cheapening dollar. On a trade weighted basis, the article says the dollar has fallen by almost 9% since the start of the year. A weakening dollar and growing world economy have increased demand for American goods, with exports up in the first three quarters of the year by nearly 4% over 2016.

More encouragingly, a rising oil price has spurred investment in the tight oil and gas markets.

Data from Baker Hughes show that the active oil rig count in America has risen from 568 a year ago to 907 today. Indeed, so significant as the oil and gas industry been that the article reports UBS data saying that energy investment has driven nearly three-fifths of all economic growth in 2017. As a result, however, wage growth has not been equal in all regions. Southern oil states such as Texas and Oklahoma account for almost all the acceleration in manufacturing employment this year, whereas those areas that have been in long-term manufacturing decline have seen almost no growth at all.

So far, inflation has remained subdued despite the proportion of male prime age workers remaining close to a record low of 89%, with nearly all growth coming from increases of women in the workforce. Hopefully, rising wages will encourage more male jobseekers in the 25-54 age range to return to the workplace — a development that will be needed if rising wages are not to spur greater inflation.

And inflation is showing the first signs of reawakening. Whether that is due to unemployment falling to a 17-year low or other effects is not clear, but the Federal Reserve Bank of New York’s underlying inflation gauge has jumped to 2.96%, a post-Lehman high.

Free Sample Report: Our Annual Metal Buying Outlook

Nevertheless, rising incomes for lower and middle earners will not only have the beneficial effect of reducing inequality. By spreading wealth amongst the wider population, it will be a greater spur to GDP than if it were concentrated in the hands of a wealthy few.

In case you missed it, just before President Trump went on his Asia tour (including a state visit with China’s President Xi Jinping), the U.S. finally went on record in ruling that China is still not a market economy for purposes of determining anti-dumping duties.

To folks inside the Beltway on the front lines of trade policy, this is a big deal.

In fact, it’s China’s single-biggest trade issue, said Tim Brightbill, partner at Wiley Rein LLP in Washington, D.C., in the second episode of our series, “Manufacturing Trade Policy Confidential.”

So what will this mean for the U.S.-China relationship?  What will happen if the U.S. slaps China with even bigger tariffs after the Section 232 investigation is completed? Will China retaliate? How?

Listen to the full episode!

Manufacturing Trade Policy Confidential: Background

With everything that’s been happening on the international trade policy front over the past year, we wanted to give metal buying organizations more insight into the issues they may not be reading or hearing enough about — or at all — in the mainstream B2C media.

What better way to do so than go straight to the source — or sources — and interview some key movers and shakers on the manufacturing and policy fronts? So we’ve started a brand-new series called “Manufacturing Trade Policy Confidential.”

If you’ve visited MetalMiner’s digital pages over the past several months, you’re no stranger to the phrase “Section 232” — shorthand for the U.S. Department of Commerce investigation into whether certain steel imports constitute a national security risk, under the namesake section of the U.S. Trade Expansion Act of 1962.

The outcome of the investigation (findings from which were slated to come down last summer but have been delayed) could have significant effects on upstream and downstream manufacturing organizations, ranging from metal producers to buying organizations – even the mom-and-pops.

But Section 232 is only one small part. Trade circumvention, China’s non-market economy status, domestic uncertainty amidst proposed tax plans and many other issues have pushed us to start this new podcast series.

We’ll be publishing several more interviews in the coming weeks and months – stay tuned!

Listen to more episodes and follow the MetalMiner Podcast on SoundCloud.

Welcome to the (re)launch of the MetalMiner Podcast!

(We’re calling it a relaunch because, well, remember this?)

With everything that’s been happening on the international trade policy front over the past year, we wanted to give metal buying organizations more insight into the issues they may not be reading or hearing enough about — or at all — in the mainstream B2C media.

What better way to do so than go straight to the source — or sources — and interview some key movers and shakers on the manufacturing and policy fronts? So we’re starting a brand-new series called “Manufacturing Trade Policy Confidential.”

New Series: Manufacturing Trade Policy Confidential

In this first episode of the series, MetalMiner Executive Editor Lisa Reisman interviews Michael Stumo, CEO of the Coalition for a Prosperous America.

Stumo’s concerns, and those of his organization, cut across industry sectors and political leanings. In this conversation, Stumo outlines what he sees as the most crucial elements to consider in today’s trade environment, touching on everything from China to the German Mittelstand to Alexander Hamilton as economic visionary.

Manufacturing Trade Policy Confidential: Background

If you’ve visited MetalMiner’s digital pages over the past several months, you’re no stranger to the phrase “Section 232” — shorthand for the U.S. Department of Commerce investigation into whether certain steel imports constitute a national security risk, under the namesake section of the U.S. Trade Expansion Act of 1962.

The outcome of the investigation (findings from which were slated to come down last summer but have been delayed) could have significant effects on upstream and downstream manufacturing organizations, ranging from metal producers to buying organizations – even the mom-and-pops.

But Section 232 is only one small part. Trade circumvention, China’s non-market economy status, domestic uncertainty amidst proposed tax plans and many other issues have pushed us to start this new podcast series.

We’ll be publishing several more interviews in the coming weeks and months – stay tuned!

Follow the MetalMiner Podcast on SoundCloud.