Industry News

Timothy Brightbill speaks with MetalMiner’s Taras Berezowsky on how the Trans-Pacific Partnership negotiations, held in Chicago until Sept. 15, may affect the US’ trade relationship with several Asian nations — including China — when a final pact is signed.

An international negotiations process between trade representatives from nine governments, including the United States, Australia and Malaysia, still ongoing here in Chicago, has wide-ranging implications for steel and other manufacturing industries and it doesn’t directly involve China or the WTO.

The Trans-Pacific Partnership (TPP), composed of the US and eight other nations in Asia and South America, is currently holding its eighth round of negotiations, the ultimate result of which will be a newly signed free trade deal no earlier than November. Last Saturday, several non-governmental entities, businesses and their representatives were given the opportunity to present their cases. While China is not a member of the TPP, their behavior looms large in the background of these talks.

Many of you may think: how is the US steel industry involved in these trade talks? Aren’t they rather protectionist?

Well, steel mills and other manufacturers want to make sure that the US government understands and accepts their positions before signing any more trade deals (which US labor groups have protested last week in Chicago, fearful of a “New NAFTA”). These positions, according to Tim Brightbill, partner at Wiley Rein LLP in Washington, D.C. include demanding fewer export restrictions and urging the US government to put “laws and mechanisms in place” to deal with the behavior of foreign state-owned enterprises.

MetalMiner had the chance to catch up with Brightbill, who presented at the TPP negotiations in Chicago on behalf of Nucor. However, he said, other steel mills and organizations such as the American Scrap Coalition have a vested interest in the outcome, and Wiley Rein has represented entire coalitions such as the rebar and long products industries specifically — in trade cases before.

Brightbill told MetalMiner that the TPP is envisioned as the new gold standard for trade negotiations, and anything that’s done will set a standard that hopefully will spread through all other trade agreements the US has. “There will be a disciplining effect on China, he said.

Check in for Part Two tomorrow, which details the relationship between the current state of US manufacturing, China, and state-owned enterprises. Disclaimer: Nucor is a sponsor of MetalMiner.

–Taras Berezowsky

It would seem the US is far from the only country to find China a tough competitor when it comes to their exports, and just as tough a customer when it comes to their imports.

A Reuters series of articles explores Brazil’s trials with unfair steel exports from China and iron ore producer Vale’s experience with iron ore carriers being blocked from docking at Chinese ports. The news service states Brazil will impose an anti-dumping tariff of $743 per metric ton on steel pipes, according to the government’s foreign trade chamber. The levy, which will be valid for five years, will also be imposed retroactively for 90 days to prevent importers from stocking up on goods the government is investigating over possible dumping charges. The initial target is steel pipes used in Brazil’s oil and gas industry, which is booming following big hydrocarbon discoveries in recent years.

The tubular products market is not the only sector to be suffering from Chinese currency-subsidized competition. Industry grew only 0.2 percent in the second quarter, compared with overall economic growth of 0.8 percent from the previous quarter. Although consumer demand remains strong supported by high employment and rising wages industry is suffering from high levels of imports. Brazil is facing the twin evils of a strong domestic currency (the real has soared as foreign investment flowed into the booming South American economy over recent years and raw materials like iron ore have flowed out), and the Chinese renminbi having fallen along with its peg to the US dollar. In recent months the peg has been allowed to shift a little, offering some respite, but few would argue that the renminbi is not undervalued.

The Iron (Ore) Curtain

Playing hardball on the flip side, apparently state shipping companies in China have taken exception to Vale’s attempts at reducing the cost of shipping iron ore between Brazil and China by blocking Vale’s attempts to unload cargoes at Chinese ports. The firm has invested in 19 out of a total 35 maxi ships, built by shipyards China Rongsheng and Korea’s Daewoo Shipbuilding, to cut freight costs from Brazil to China by 20 to 25 percent.

China denied the record-breaking Vale Brazil, at 362 meters long the largest dry bulk carrier in the world, access to any Chinese ports and forced it to divert to Italy to unload as Chinese shipowners forced Chinese ports to support their position. The shipowners wanted guarantees the vessels would only be used for the Brazil-to-Asia iron ore route, not in competition elsewhere, where there is already a glut of bulk carriers.

Vale is reported to be looking to sell its 19 vessels, possibly to Bergsen, STX Pan Ocean and Oman Shipping (the other firms in the 35-vessel consortium) or most likely, according to Nigel Prentice of HSBC Shipping Services, to the Chinese themselves. If a deal is not struck, the Chinese could stonewall exports of iron ore indefinitely, although they may face a backlash from domestic steel mills who are already restricted in the number of major suppliers open to them. The likely outcome seems to be that some kind of discounted deal will be struck with one or more Chinese lines to take over the fleet, or take a shareholding in their control.

With ocean freight rates at near-historic lows, Vale seems sanguine at present, but what goes around comes around. The iron ore producer’s original concept of accessing lower freight costs by operating a fleet of super-carriers to allow them to compete more directly with closer Australian suppliers was a good one — but just because rates are low now does not mean they will remain low indefinitely.

–Stuart Burns

Guest commentator TC Malhotra contributes from New Delhi.

Indian steelmakers plan to increase prices by about 3-5 percent by the end of September, as the Centre for Monitoring Indian Economy’s monthly report reveals that domestic steel majors are expected to hike prices even further in October.

The Centre for Monitoring Indian Economy (CMIE) “expect[s] steel companies to hike prices in October-November once industrial and infrastructure construction activity gathers pace, according to a PTI report. The CMIE noted in its monthly review that it expects finished steel prices to average 7 percent higher in 2012 than in 2010-11. However, the CMIE has sharply scaled down its growth forecast for finished steel production for the fiscal year from 12 percent down to 9.5 percent.

The CMIE is an independent economic think tank headquartered in Mumbai. It provides information solutions in the form of databases and research reports. The CMIE has built the largest database on the Indian economy and its companies.

Indian steel companies have last raised prices in May 2011 and since then, steel prices are almost stable even as the industry has seen episodes like the ban on illegal mining in Karnataka state and some price hikes in iron ore and coking coal. Market analysts believe that because of iron ore shortages, production is decreasing and rising demand by large steel markets like China can force the steelmakers to hike the prices.

Most of the leading steel makers have yet to announce the price rise, but we’ve learned that main players such as Steel Authority of India (SAIL), Tata Steel, JSW Steel and Essar Steel are likely to raise their prices. Analysts say that the companies may increase steel prices by $25-$30 per metric ton sometime in the last week of September.

Market observers say that proposed increased steel prices in India will affect the global steel market at this stage, but further increases in price will definitely affect the European and the US steel market.

Analysts say that the higher prices of coking coal and iron ore mining companies are charging will make steel much more expensive in the coming months. The recent ban of iron ore mining at Bellary in Karnataka state has already dampened the spirits of steel producers, because sooner or later supply shortages and higher iron ore prices will take their toll on the steel industry.

The Supreme Court of India recently banned iron ore mining in Karnataka’s Bellary, Tumkur and Chitradurga districts, following the recommendation of the Central Empowered Committee (CEC), which detected illegal iron ore mining in these districts.

All the steel companies are heavily dependent on the Bellary, Chitradurga and Tumkur districts for iron ore. The industry has already cut production due to iron ore shortages.

Coal imports are also a matter of worry for the steel mills because any rise in international coal prices will directly affect them; many steel producers currently import a large portion of their coking coal requirement.

Steel players have also invested in projects overseas to acquire mines in coal-rich countries such as Australia, Canada and Russia to secure supplies.

–TC Malhotra

A year and a half ago, I took aim at a story first reported in the New York Times touting the benefits of the “slow steam initiatives as put in place by leading shippers. “Slow steam refers to the shipping industry initiative designed to slow down ships to create greater fuel savings, as well as reduce greenhouse gas emissions.

A commentator to that original post suggested the initiatives began as a result of EU regulatory oversight and/or increased taxes on fuels used in the shipping industry. In other words, the shipping industry may have suggested the initiative to reduce taxes on fuel. Regardless of motive for the initiative, we suggested back then that manufacturing organizations could expect to receive some of the following “benefits (sarcasm intended):

  1. Manufacturers will need to adjust (upward) inventory levels to account for the longer lead times
  2. Manufacturers will run a higher risk of not meeting demand (e.g. fulfilling customer need)
  3. Finance costs will increase
  4. Increased WIP (work in process) due to decreased throughput

That original post elicited a comprehensive response from the head of corporate sustainability at Maersk Lines. That response suggested that Maersk makes up for the slow-steam initiative with additional value-added services specifically by finding or offsetting “the additional ocean transit elsewhere either on our side (we can do a lot more to increase efficiencies in connection with port arrivals as an example) or on our customers side, as well as by stressing that customers demand reliability “of equal or greater value than speed. But now a new study published by Centrx, BDP International and St. Joseph’s University measures the specific impact felt by manufacturers as a result of the slow steam initiative.

And the Survey Says¦

Of all the different potential impacts on businesses (freight rates, inventory levels, cash flow, production scheduling, customer service, competitive position or no impact), inventory levels impacted a majority of companies (52%), followed by customer service (ed. note: fulfilling customer need) (50%) and finally, production scheduling (45%). I failed to note production scheduling in my original hypothesis on the impact of these initiatives.

Other interesting findings include Asian manufacturers citing decreased customer service levels as their No. 1 supply chain impact, while the Europeans have noted greater impact from cash flow challenges when compared to North American and Asian Pacific manufacturers.

In response to “slow-steam, manufacturers have, according to the survey, undertaken a number of initiatives including: increased inventory levels, added technology to improve supply chain visibility and a greater number of strategy decisions (though the study provides no additional information on that last point).

Of course from a sourcing perspective, it should come as no surprise that manufacturing organizations have thought through how ocean carriers ought to use the fuel savings from these initiatives not surprisingly, the vast majority of firms stated that freight rates should decrease, though nearly half in the Americas noted the cost savings could go toward improved customer service on behalf of the steamship lines.

But perhaps the most interesting finding tells us more about how industry views ‘green policies’ in general: “When asked if the economic benefits of slow steaming are worth the cost and inconvenience, 50% of respondents agreed, 40% disagreed, and 10% had no opinion.”

–Lisa Reisman

Hot on the heels of our articles (here and here) a couple of weeks ago about China’s C919 sub-200-seat, single-aisle contender with Airbus’ A320 and Boeing 737, comes Russian Sukhoi’s single-aisle 100-seat SuperJet in competition with Bombardier of Canada and Embraer of Brazil.

Source: blog.flightstory.net

Not that serious aviation experts are really ranking the SuperJet on par with the established players just yet (certainly not more than they would place the C919 on par with the A320 or 737), but the rise of emerging market plane makers is an interesting trend which will have subtle yet far-reaching effects on the aerospace metals supply market in the decade ahead.

Show Me the Sukhoi

Arguably Russia’s Sukhoi has a better pedigree than China’s COMAC. Although seasoned travelers all have a scary domestic Russian flight story aboard an aging Tupulev to tell at dinner parties, the reality is Sukhoi did build some impressive military jets even if their commercial offerings left a lot (and I mean a lot) to be desired!

The firm claims it has orders for 176 of the new SuperJets on its books, including 15 for Mexico’s second-largest airline InterJet. The firm hopes to sell 800 and has sold 25 percent of the firm plus given marketing rights to Italian engineering firm Finmeccanica’s Alenia Aeronautica. Sales are being run out of Venice for non-former Soviet markets and application has been made for European certification.

Certification will be one thing; widespread acceptance of Russian aircraft may be another. While passengers in emerging markets and discount airlines may be willing to compromise their trust in the plane maker for a lower fare, major western airlines may take longer to be persuaded. An article in the NY Times explains the firm has already had talks with Delta and SkyWest about possible sales, but buyers will be only too well aware that memories run deep of multiple plane crashes in the former Soviet block and those are the ones that hit the headlines. Although the new plane is said to look and feel like a modern airliner, with pleasant furnishings, bright lights and quiet, high bypass engines, it’s the accident record travelers will likely focus on.

Good For Russian Metal

Still, Sukhoi is something of a national champion and will receive considerable support. It is probable the plane will be produced in significant numbers and a slow acceptance may be engendered overseas. The return of volume aircraft manufacturing will encourage Russian aluminum and titanium producers to focus on domestic supply at the expense of exports. Europe has become reliant on Russian aluminum and titanium supply for a significant portion of their commercial market needs.

As Russian mills divert material not just to aerospace but to a robustly growing domestic economy, less material will be available for export, putting upward pressure on prices. Sukhoi’s regional SuperJet does not need to make major inroads into the US or even Europe to have an impact on both established players or the supply chain. Significant sales to cost-conscious new entrants in places like India or Indonesia could still amount to substantial sales, impact established plane builders’ prospects and affect the metal supply chain.

–Stuart Burns

Guest commentator TC Malhotra contributes from New Delhi.

Indian government-owned National Aluminum Company Limited (NALCO) has finally decided to commission its expanded refinery capacity this month, according to a Hindu Business Line article.

The company is enhancing production capacity at the refinery in Damanjodi, nearly 400 kilometers from state capital Bhubaneswar, from 1.58 million metric tons to 2.1 million metric tons, which will be further upgraded to 2.28 million metric tons.

The company has earlier estimated that the expansion plan may cost Rs 44 billion ($978.2 million), but now it is believed that the second phase of expansion could see a 10 percent cost increase.

Indian business daily Hindu Business Line has quoted B.L. Bagra, CMD of the state-owned company, as saying that though the additional cost would be recoverable from the original contractors, it is expected to be within 10 percent of the approved cost estimate.

The work at the refinery lagged after a Maoist attack there two years ago, forcing several contractors and their workers to leave.

Later this fiscal year, the refinery capacity will further be upgraded to 2.28 million metric tons when the additional equipment under the second phase is put to work.

NALCO is considered to have been a turning point in the history of the Indian aluminum industry. NALCO was incorporated in 1981 in the public sector to exploit a part of the large bauxite deposits discovered in the east coast of the country.

NALCO’s 1.58-million-ton alumina refinery, having three parallel streams of equal capacity, is located in the valley of Damanjodi in the eastern Indian state of Orissa. In operation since September 1986, the refinery is designed to provide alumina to the company’s smelter at Angul and export the balance alumina to overseas markets through Visakhapatnam Port.

Almost all the major players in the Indian aluminum industry have their own alumina plants. Besides Nalco, other major aluminum companies in India include government-owned Hindalco, Balco and Malco. Balco and Malco have already been acquired by private player Vedanta Resources.

Hindalco has plants at Renukoot, Belgaum and Murib the Renukoot in the northern state of Uttar Pradesh has alumina production capacity of 700,000 tons per year. Hindalco’s Belgaum plant is located in the south Indian state of Karnataka. The Belgaum unit currently has an alumina production capacity of 380,000 tons per year, while the Muri alumina plant in Jharkhand State has got an alumina capacity of 450,000 tons per year.

India is the world’s fifth largest alumina producer, with aluminum production of about 2.7 million tons, accounting for almost 5 percent of the total aluminum production in the world. India has about 3 billion tons of bauxite reserves, which account for almost 7.5 percent of the world’s 65 billion tons of reserves. Indian bauxite reserves are expected to last over 350 years.

In India, the industries that require aluminum mostly include power (44%), consumer durables, transportation (10-12%), construction and packaging (17%).

–TC Malhotra

BMW has revealed details of just one of the projects they have been spending all those millions of euros of profit on recently. Building on test-bed trials they ran with electric Minis over the last couple years, BMW has released details of two concept cars which they hope will be sufficiently different from all the other EV and hybrid offerings out there to generate volume sales. Although the two vehicles fall under the same, Apple-like i-project designation, they are substantially different in many ways.

The compact four-seat i3 is an all-electric, largely urban vehicle which looks crushingly awful in the above photo of a test car courtesy of autoexpress.co.uk, but somewhat more attractive in the artist design image alongside its stablemate, the i8 below, from BMW themselves.

Both vehicles, while platforming many new ideas that have been gestating at BMW, have some notable design similarities. In particular, BMW states that the weight-saving by building the cars from carbon fiber on top of an aluminum chassis allows them to use significantly smaller and lighter (and therefore cheaper) lithium ion battery packs. We have to take them at face value here; it doesn’t sound intuitively obvious that the saving on a lighter battery pack is greater than the cost of carbon fiber + aluminum (minus what the body would have been using steel).

In addition, in the life cycle of the car, carbon fiber is a very expensive material, both to produce and to repair in the event of an accident, but maybe that is part of the issue — car producers don’t pay for repairs, but they do pay for the battery supplied with the car. Is it preferable to keep battery costs down at the expense of long-term repair costs? A US automotive blog site called autoblog advises the not-so-sexy i3 is powered by a 150-horsepower electric motor and a lithium-ion battery pack that reportedly provides up to 100 miles of range. The battery can be 80 percent recharged in one hour on a rapid charger or fully recharged in 6-8 hours on a 220v mains outlet. All that weight-saving is evident in the specs though; the i3 will weigh only 1270kg (2800lbs), a useful 250kg less than the Nissan Leaf, and is scheduled to come to market in 2013.

The more sexy i8 is a different concept, a two door 2+2 seat hybrid sports car with electric motors running the front wheels and a 1.5-liter turbo-charged three-cylinder petrol engine driving the 1480 kgs (3263lbs) car from 0-62 mph in just 4.6 seconds 0.3 seconds faster than the M3 Coupe and to a governed top speed of 155 mph via the rear wheels. Fuel consumption is said to be in the region of 90 miles per imperial gallon and deposits now will not see a delivered car before 2014.

Full details on both cars can be found on the BMW press site here. In addition, BMW in the UK has a clever graphic display showing how the carbon fiber body fits around motors and internal components connected to the aluminum chassis. As one would expect with a concept car, specifications are still limited.

BMW is, to its credit, taking the evolution of the car in a more holistic fashion than their peers. They are said to be pouring $100 million into research and development around the i-series inter-connectivity with the outside world. For example, the sat nav takes you to the closest parking spot to your destination and then seamlessly connects with an app on your mobile phone to navigate you through pedestrianized areas this is a European car, remember to your final destination. No doubt such innovations will be rolled out through all of BMW’s range, some even before the i-cars come to market. The question is, will BMW’s use of carbon fiber and aluminum eventually take over from their use of steel and aluminum as the primary method of automobile construction? That will be an interesting trend to follow over coming years as an aluminum man, I am just pleased to see my metal playing a role in both design approaches.

–Stuart Burns

Novelis, the global leader in producing rolled aluminum products, posted record profits last quarter totaling $62 million, compared with $50 million in the same period in 2010, according to a Novelis press release and conference call. Novelis has a pretty bullish outlook on the aluminum market, betting that demand will be hearty enough to sustain its plans for expansion worldwide.

The 24-percent year-over-year increase in profit and 16-percent year-over-year increase in adjusted EBIDTA (up to $306 million) puts Novelis in sound territory going into H2. Sales during the quarter were up 23 percent, to $3.1 billion. Novelis buys 3 million tons of aluminum per year. And according to their CEO Phil Martens, they’re just getting started.

“We are on track and on budget with all of our global expansion projects, including our Brazil and Korea mill expansions and our strategic automotive investment in the U.S., Martens said via press release.  “These expansions, coupled with our debottlenecking initiatives, will add 1,000 kilotonnes of additional capacity and position us well to meet our customers’ needs today and well into the future.”

Last quarter, the company posted 767,000 tons of shipments, up 3 percent from the 746,000 tons during the same quarter in 2010.

Looking Ahead

Later, during a conference call, Martens said that Novelis “expects aluminum demand from the auto industry to increase by 25 percent by 2015, with demand from the electronics sector growing 10 percent to 15 percent and demand from the beverage can sector growing 4 percent to 5 percent. Although electronics and beverage can demand has slowed down in Europe, they’re still quite bullish on the car industry; furthermore, they indicated that expansion plans would not be hampered by global volatility surrounding stock and commodity markets.

One should look no further than my colleague Lisa’s series on The Car Wars to see that aluminum sheet and coil are taking more prominent places in the various sectors, replacing steel in the auto sphere and glass in beverage packaging.

Of course, one must also keep an eye on the rising demand and increase in price of aluminum scrap. A big part of Novelis’ strategy is to increase their use of recycled aluminum scrap from 34 percent now to 80 percent by the end of the decade, as Senior Vice President Erwin Mayr told us at the Harbor Aluminum Outlook Conference. (For an excellent rundown of Novelis’ macro outlook, click here.)

A recent WSJ article highlights the scrap shortages in copper and steel markets, as well as in aluminum, saying that it may not be until the end of the decade that we see replenishment in global scrap supply. US shredded steel scrap is up about 33 percent since last year, and finished HRC is up 25 percent, according to the article.

If anything, Novelis’ sheer size and reach across the globe is a good indicator that industrial demand in the aluminum market should only grow, as the replacement factor and rate of recycling both drive its popularity. While a good thing for producers (including the likes of competitors Alcoa and Norandal), buyers should make sure they have forward sourcing strategies firmly in place to ride out any price increases.

–Taras Berezowsky

TC Malhotra contributes to MetalMiner from New Delhi.

India’s coal reserves have been assessed at about 286 billion tons this year, about 3.25 percent higher than the previous year’s 276.8 billion tons, according to a published report.

Citing the National Inventory on Indian Coal Resources published by the Geological Survey of India, the Indian newspaper Business Line reported that of this, the Geological Survey estimates proven reserves to be 114 billion tons, or 40 percent of the total reserves. The latest proven reserves represent a 3.6 percent increase over the previous year’s 110 billion tons.

According to the report, at current level of production of about 550 million tons, the coal reserves will last for more than 100 years, Coal Minister Sriprakash Jaiswal told the upper house of the parliament (Rajya Sabha) in a written reply.

However, exploration is a continuous process and new resources get added year on year, Jaiswal was quoted as saying.

How Coal Plays Into Indian Metals Production

India is the third-largest producer of coal in the world. However, the country’s domestic consumption is large and as a result, India net imports coal to meet the needs of power companies, steel mills and cement producers.  Furthermore, non-coking coal reserves make up about 85 percent while coking coal reserves are the remaining 15 percent.

India’s coal demand is expected to increase multifold within the next five to 10 years, due to the completion of ongoing power projects, and demand from metallurgical and other industries.

Government-controlled Coal India Limited (CIL) dominates the domestic coal supply market with an 80 percent market share, although some industrial consumers, typically in the power and steel sectors, have access to captive mines.

CIL’s non-coking coal production has grown by 3.7 percent annually between 2007 and 2011, below the rate of coal-fired capacity additions (7.2 percent annually over the same period). Its production target for 2012 is 452 million metric tons, only marginally up from 431 million tons recorded in the 2011 fiscal year.

Despite all this, the Indian coal ministry projects a coal supply shortfall of up to 142 million tons in 2012.

The Big Picture

Estimates put proven reserves worldwide at more than 847 billion tons. There are recoverable reserves in around 70 countries, with the biggest reserves being in the US, Russia, China and India. Other important coal producing countries include Australia, India, South Africa, and Russia.

China is the largest producer of coal in the world, while the United States contains the world’s largest ‘recoverable’ coal reserves (followed by Russia, China, and India).

India has the fourth-largest reserves of coal in the world. Coal deposits here occur mostly in thick seams and at shallow depths. Indian coal has high ash content (15-45%) and low calorific value.

Coal accounts for about 67 percent of the total energy consumption in India. The energy derived from coal in India is about twice that of energy derived from oil, as opposed to the rest of the world, where energy derived from coal is about 30 percent lower than energy derived from oil.

The use of beneficiated coal has gained acceptance in steel plants and power plants located at a distance from the pithead.

Growth Should Continue

The World Economic Outlook released by the International Monetary Fund confirms the likely continued high growth trajectory of Asia.   Along with China, India is likely to be an important part of this economic growth.

The International Energy Agency has consistently demonstrated India’s continued status of being a key consumer of fossil fuels, both now and in the future.

–TC Malhotra

With stock markets the world over plummeting last week (the Dow lost more than 500 points, the biggest single-day drop since December 2008), there may seem to be nothing but dark days ahead. If manufacturing numbers (PMI, etc.) are any indication, growth is elusive.

By this token, the U.S. and global auto production and sales numbers may tell us a lot about where steel, aluminum and lead may be headed in H2. Although sales and profits at certain auto companies in the US have been reported higher than expected, the global outlook may not look so good.

The Big Three US automakers all reported positive sales; GM’s sales increased roughly 8 percent (214,915 total light vehicles), Ford was up 9 percent (177,419), and Chrysler/Fiat’s sales spiked 20 percent (111,439), according to Ward’s auto data.

However, the prospect of US economic recovery is looking dim these days, if you listen to the talking heads of these companies. “Chrysler’s U.S. sales chief, Reid Bigland, called the market “tougher than a cheap steak,” while his equivalent at General Motors Co, Don Johnson, said “consumer confidence is pretty fragile right now because of everything that’s happened in the past few months,” as quoted in a Reuters article.

Look To Incentive Spending?

And that’s why incentive spending by these carmakers in the US and Japan may be taking more of a front seat, according to Reuters. Based on information from Edmunds, the car research firm, domestic auto manufacturers may look to increase incentive spending to match that of Japanese brands. Toyota and Honda’s spending is much higher, since the tsunami set back their production this past spring, and

“Japanese brands increased incentive spending about 25 percent to $1,990 per vehicle from June to July, compared with a 4.5 percent rise to $2,919 per vehicle by the U.S. automakers, according to Edmunds.

However, these deals surely cut into profits, and GM, for one, proved that it didn’t have to rely on them in July. According to an AP report, GM was able to pull back its rebates in the wake of the Japanese disaster, since Toyota and Honda’s inventories were down. The report cites that GM’s incentive spending per vehicle fell 20 percent to $3,022 in June, according to TrueCar.com. That led to GM doubling its profit to $2.5 billion in Q2.

But many are saying that won’t last. Mainly, raw materials prices continue to trend higher, and that cost allowed GM to raise its prices. However, that may not be sustainable. On the flip side, if steel prices soften in H2 this year, profits may decrease again, coupled with the still-stagnant consumer demand likely to continue.

Global Slowdown

Globally, car sales are either mediocre or falling in China and India, the two largest auto markets in Asia. The Chinese Association of Auto Manufacturers (CAAM) reported only a 0.65 percent increase in production and 1.4 percent increase in sales in June, according to their website. (This is crucial for GM, whose China sales are key to their health.) Increases in both production and sales seem to have leveled off to match corresponding months in 2010, continuing the softening growth trend in China:

Source: CAAM

And in India, car prices are getting much higher due to interest rate increasing, prompting their national auto association to drastically downgrade sales and production — MetalMiner’s TC Malhotra detailed this scenario in a recent post.

All of this points to perhaps much lower auto demand in the second half of this year. We’ll wait to see what effect Japanese restocking will have in the fall, as well as how the rolled steel and aluminum prices are trending. On the consumer side, if the unemployment rate drops significantly in H2 and brings spenders back into the auto market, then we could have a different outcome.

–Taras Berezowsky

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