Gold bulls are predicting the yellow metal will break $2,000/oz by the end of this year, yet gold’s much-vaunted status as a safe haven has not been in evidence during recent market turmoil. You would have thought the threat of a global banking meltdown if Italy fails would be enough to promote a flight to safety by buying gold. After all, the bond markets have reacted to worries in Europe by not just pushing up Italian premiums to unsustainable levels over 7 percent, but also French and even German bonds have risen.

Yet gold has done little more than rise 4 percent this month, with the only visible support coming from Asian buyers stepping in on the dips. Buyers have come from both the Asian investment community and from the physical market, particularly Indian buyers ahead of the upcoming wedding season. Support is evident at $1,750 according to Standard Bank, placing something of a floor under the metal in spite of limited appetite to push prices higher.

Although gold has risen by nearly a third this year, a Reuters article rightly identifies the driving force as rising liquidity as the developed world’s central banks, including the US Fed, Bank of England, the ECB, Bank of Japan and Swiss National Bank, have sought to lower interest rates and/or exchange rates.

Rather than safe haven, the most likely primer for a push higher will be if the ECB has to print money to support bond purchases of Italian and Greek debt. Germany’s unwillingness to fund a bailout for Greece, let alone Italy, a reluctance extended to blocking the ECB from turning on the printing presses, is probably all that’s keeping the euro firm. Any sign of a relaxation in their position will be taken as a positive sign for gold.

Of course, the Germans are well aware of the perils of funding a bailout, pumping money, or allowing the ECB to pump money, into the European economy by buying up bonds, which will weaken the euro and lay the foundations for inflation in the medium term. Interest rates will have to stay low to fund the mountains of debt and yet rising inflation will mean we have, in practice, negative interest rates a recipe for gold price increases.

Inflation is already uncomfortably high in the UK, but the UK is outside the single currency; only German fiscal discipline (some would say stubbornness) has kept it under control in Europe, but the Bundesbank may, against all previous assertions, decide they have no choice other than to allow the ECB to print money and step in as a lender of last resort. A Greek default or exit from the euro would be problematic but containable — the same for Italy would not. French banks alone are said to be holding over 300 billion euro of Italian debt. For Italy to default or leave the euro would leave French banks with unsustainable losses hence Nicholas Sarkozy’s desperate attempts to coerce the Germans into some form of bailout.

The next week or two could be crucial. We are not by nature gold bulls at MetalMiner, but even we would admit the European debt crisis has just about the only conditions capable of giving gold a sustained push higher.

–Stuart Burns

The US has had not one, but two huge policy developments come around this week. The US Senate voted Tuesday to pass the Currency Exchange Rate Oversight Act of 2011 (S. 1619) with 63 for and 35 against, much to the chagrin of a number of Republicans including John Boehner. (Subsequent action by the People’s Bank of China to depreciate the yuan further stoked the flames of a potential trade war, and could become a follow-up post in and of itself.) Then on Wednesday, the Senate and House both voted   to pass the South Korea free trade agreement which has spurred controversies of its own.

What stands at the core of this flurry of policy activity free trade spins off many thoughts, opinions and writings about how the US can compete in today’s global marketplace. Today, we’ll focus on just a tiny sliver of the issues surrounding free trade and economic advantage — how the country’s workforce and culture of education compares to others in Asia and Europe; namely, South Korea and Germany.

The New York Times ran a story about President Obama’s budding buddy-buddy relationship with South Korea’s president Lee Myung-bak a relationship that’s uncharacteristic of Obama, as he tries to keep his personal ties with leaders as cool as possible. While most of the article is a non-story about this “man-crush, as the paper puts it, it mentioned key differences between Koreans and Americans:

  • More South Koreans graduate from college than Americans
  • South Korean schools are hiring more and more teachers to satisfy parental demand; American teachers are increasingly being laid off to cut costs
  • 90 percent of South Korea’s population has access to a high-speed broadband network, compared to only 65 percent of Americans

While these differences seem largely anecdotal, they point to a different educational approach. In the EU’s largest exporter and richest country by GDP, educational approaches are also much different than in the US, especially regarding vocational and technical training. Germany has higher corporate taxes, higher numbers of unionized workforce, and more vacation days per worker, yet is able to pay its workers more and still have a $184 billion trade surplus (as of 2010). Marko Slusarczuk, an analyst at the Institute for Defense Analyses, recently expounded on a why that is, in a Manufacturing and Technology News article:

  • Germany splits its students into a two-track system as early as 4th grade; you’re either on the academic or vocational track (Berufsfachschulen), onto which two-thirds of students are placed, while less than 20 percent of American students choose vocational/technical programs
  • There’s no social stigma in Germany over pursuing the trades, while the opposite has become true in the US over the past several decades
  • Every German vocational student undergoes a rigorous apprenticeship program, while in the US, most apprenticeship programs require students to be at least 18, which does not ensure maximum participation, and the for-profit nature of many trade schools is at odds with how apprenticeships are run through companies

Slusarczuk’s point is that our future manufacturing base and subsequent success is dependent upon government setting an example for more effective education priorities. Instead of pushing students into four-year college programs, or a jobs (spending) bill, they must put more focus on reversing the mentality Americans have regarding education, especially if we want to compete with the likes of South Korea, Germany and others. If we keep entering faulty free trade agreements, the education and apprenticeships in those types of countries put our economic prosperity at a major disadvantage.

Education, vocational training and manufacturing should not, in other words, be mutually exclusive definitions.

–Taras Berezowsky

We don’t normally look to Mervyn King, governor of the Bank of England, as a luminary of the financial world. Not that Mr. King isn’t a clever fellow, but he has a rather unfortunately stodgy image that belies his considerable intellect. However, comments in the bank’s Inflation Report this week make such interesting reading that they deserve examination here.

“There is only one way for the world to go, he is quoted as saying in the Telegraph, “for the pent-up losses caused by the vast debts amassed in the boom to be shared between creditors and debtors. This, he said, meant that “in the world economy between creditors in the East and debtors in the West, and within the euro-area between creditors in the North and debtors in the South.”

The problem is that there are two ways the situation can be resolved; either voluntarily, as surplus countries like China let their currencies appreciate, or violently, in the context of a downturn in the world economy. Unusually for a central banker, he pulled no punches in placing at least some of the blame on China for pegging its currency to the dollar and in the process amassing huge quantities of the currency that it essentially lent back by buying US treasuries, keeping US rates low and stoking the debt buildup around the world.

Under normal terms of trade when a country does well, runs a surplus and enjoys booming exports, its currency appreciates relative to the currency of the countries it is selling to; as the currency appreciates, competitiveness declines, creating a natural balance. This was not allowed to happen with the Chinese yuan, creating the imbalances we have today. But China was not alone in being the target of his criticism.

In the same way, Germany has benefited from its membership of the weak euro, and this has boosted exports in a manner that would never have happened if Germany had retained the deutschmark. The currency would have been much stronger and exports would have been lower as a result. Those funds were recycled internally in loans to poorer, less fiscally disciplined southern European states, countries that are now so uncompetitive and so indebted they are unlikely to ever be able to repay debts.

King is suggesting that creditors such as China and Germany are as much to blame for the current situation as debtors like the US and UK, and that creditors will have to share in the pain with debtors who so far have borne the brunt of the sacrifices by way of austerity measures. China will face further currency appreciation, which will devalue its US debt and reduce its export competitiveness, and Germany will have to absorb losses through rescue schemes and write off sovereign debt held by its banks — if they do not, then a prolonged global recession is the alternative outcome.

In King’s view, the global economy is back on the precipice and it is the world’s creditor nations that are holding the rescue lines.

–Stuart Burns

(Continued from Part One.)

Meanwhile, German industrial companies are boosting investment in plant and equipment to ease capacity constraints driven by overflowing order books. Capacity utilization in a number of industrial areas, from chemicals to electronic equipment and cars, has reversed from a dramatic low to peak levels within only one year. According to an FT article, last year Germany’s gross investment into plant and equipment increased by 9.4 percent to €167.4 billion ($228.5 billion) in real terms, reaching growth levels seen in 2006 and 2007 and following a drop by a fifth in the year before. Analysts expect absolute investment numbers this year could reach the record level of €201.6 billion seen in 2008 as major automotive and engineering firms roll out multi-billion dollar investment programs.

So what are you worried about, I hear you say — surely this is great news for Europe, and what’s good for Germany is good for Europe, right? Well, yes, up to a point; the problem is the two-speed Europe is set to become even more decoupled. A rising Germany lifts all boats, as can be seen by the improving fortunes in France and the Benelux countries, but the peripheral economies of the Club Med and Ireland are not going to benefit to the same extent. Worse, the economic agenda for the single currency will soon have to be set by Jean Claude Trichet and the ECB to manage the central majority rather than the peripheral minority. On the back of this sharp return to growth, unemployment in Germany is dropping from 7.7 percent last year to a projected 7.0 percent in 2011: compare that to Spain’s 20+ percent or, worse, the 42.9 percent reported in a NY Times article for the 16-24 year age group.

Coupled with and as a result of the improving financial position in Germany, the country’s public sector deficit looks set to fall below the EU’s 3 percent ceiling, one year ahead of schedule, further strengthening Germany’s financial credentials.   This improving economic position is encouraging some of Angela Merkel’s coalition partners to start rattling the pot for tax reductions. Mr Brüderle, a leading Free Democrat, said unexpectedly speedy deficit reduction meant “room for maneuver on unburdening our citizens and gave him confidence that “tax cuts will come before the end of this parliament in autumn 2013.

In part Germany has benefited from the ultra-low interest rates that have prevailed across Europe since the financial crisis, but falling unemployment, surging demand, reducing personal tax rates and high rates of investment coupled with a low interest rate environment add up to rising inflation, a cocktail the German dominated ECB is only too well aware of. In a recent statement, Jean-Claude Trichet, president of the ECB, warned that inflation pressures in the Eurozone must be watched closely. Ominously he added that he would not let Greek and Irish economic weakness delay interest rate increases if they were needed. The ECB has shown itself to be extremely hawkish on inflation, not hesitating to raise rates even on the eve of the financial meltdown in 2008. The prospects for the peripheral eurozone economies are dire if rates are raised early and significantly, and yet with the major economies growing strongly, rate rises are inevitable. Europe is looking increasingly like a bipolar situation with each side’s priorities irreconcilable with the others.

–Stuart Burns

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event:

Register for the live simulcast today!

We may be hearing the phrase “Europe has some problems” (not for the first time), and the issue at stake is that strains are showing yet again in trying to contain multiple different economies, tax systems and business cultures into one pot.

While Greece, Ireland, Portugal and increasingly Spain grapple with high unemployment, low growth/even contraction, high levels of debt and an inability to raise finance at competitive rates, at the other end of the EU stand Germany and, to a lesser extent, France and the Netherlands, whose interlinked economies are powering ahead after a strong rebound in 2010. The German economy grew by 3.6 percent last year according to an FT article and is conservatively expected to hit 2.5 percent growth this year, possibly nudge 3 percent.

Source: Financial Times

Even France is forecast to grow at 1.5 percent this year, in part dragged along by German growth as the two economies are so interlinked both countries’ largest export market is the other. It’s what Andreas Rees at UniCredit in Munich calls the revival “of the good old Franco-German economic axis. Germany’s Ifo Institute said its business climate index hit 110.3 points in January, up from 109.8 the previous month and its highest level since it started tracking sentiment 20 years ago.

Source: Financial Times

The French statistics agency Insee said its manufacturing sentiment index jumped 6 points to 108, the biggest monthly rise since mid-1999.

(Continued in part two tomorrow.)

–Stuart Burns

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event:

Register for the live simulcast today!

A thought-provoking and deliberately challenging article in my favorite daily read the World Socialist Web Site likens calls in Germany for a “raw materials corporation to the mood and actions taken in Europe prior to the First World War.

As the article explains, Ekkehard Schulz, the outgoing chairman of the steel group ThyssenKrupp, has called for the setting up of a “German raw materials corporation to counteract skyrocketing prices and the growing shortage of raw materials on the world market (MetalMiner initially covered this development when it was announced back in November, analyzing the risks and rewards of metal stockpiling here).

Steel mills across Europe have been severely impacted by rising iron ore, coal and other raw material prices as demand from China has driven costs higher all over the world. The aim of the corporation is to support the German steel industry in the global procurement of raw materials, particularly iron ore and coal. The umbrella company would be involved in mining projects or the auction of mining rights. At the same time, it would be open to other industries that need products such as aluminum, copper, lead or zinc. So far so good, you may say; why not have an industry body that represents its members’ interests and coordinates efforts to secure mining rights or access to major projects in the way the largest steel companies like ArcelorMittal, and Posco are able to do?

The author’s concern is that almost identical calls for access to raw material was a driving dynamic behind the start of previous major conflicts, that the approach is an imperialistic one and eventually results in military support to achieve its aims – bear in mind this is the World Socialist Web Site! – nevertheless hear them out.   In this case, to the steel mills’ credit, they are declining offers of federal or state involvement, but the language of major proponents still has the ring of imperialistic aggression (says the site). In an interview quoted in the article, Mr. Schulz demanded a pan-European strategy for raw materials procurement and argued that the EU had failed to challenge the “raw material imperialism of the Chinese and establish the necessary political relations with Africa. “We are simply leaving the field to the Chinese, he complained, and asked, “Why should Africa be left to the Chinese? Well why indeed.

The ThyssenKrupp works council and the engineering union IG Metall are staunch supporters of the project and went so far as to transport more than 6,000 steelworkers to rallies held in both Duisburg and Brussels addressed by German Chancellor Angela Merkel and European Commission President Jose Manuel Barroso.

Drawing on writings by Lenin on how the alignment of interests between capitalist corporations and bureaucratic workers’ organizations led to militaristic action to support what became national aims, the author warns that the development of a German or Pan-European raw material monopoly would almost inevitably end in the same situation – draw your own conclusions on that. While the analysis is interesting, we feel the risk of it leading to military conflict with China is slight. A European-wide project to support raw material projects in places like Africa would be horribly unwieldy — the EU is not renowned for being quick of action or resolute of purpose — but a German “council of interested parties (consumers, miners, financiers, etc.) may very well be able to act where smaller steel mills or metals consumers cannot. Certainly, the Chinese state actively supports Chinese raw material consumers in securing and accessing resources around the world, politically, logistically and financially. Why should German, or for that matter, American companies not form coalitions to do the same thing? In one way, Mr. Schulz is right. “Why should Africa be left to the Chinese? The answer isn’t military action, but coordinated action by firms with aligned commercial interests.

Join us for a free webinar on steel price trends and outlook for 2011 along with guest speaker Metalwest, where we’ll discuss how OEMs can improve profitability through lean metal supplier programs.

–Stuart Burns

Car production and the design that drives it has always been an immensely complicated processes. In an effort to tailor models to local market requirements, designers have traditionally started a new model with a clean sheet. But this has resulted in a plethora of platforms and few shared parts, making economies of scale for anything more than a few light fittings and door handles an impossibility. Over the last ten years, that has begun to change.   Arguably, Ford came first with their European Mondeo mid-size sedan that they also built in the US and sold as the Ford Contour and Mercury Mystique. The project, though not a resounding success, although with the right objective,   allowed Ford to amortize the cost of platforms across multiple markets and achieve economies of scale not possible when a manufacturer has its own ground up design for every market.

An FT article this week reviews in some detail how the world’s major auto manufacturers, those with major production facilities in more than one continent, have taken this concept of one platform as a basis for multiple models to a new level. Ford has promoted their One Ford policy for some years and has again pushed their “world car” concept with the Focus and Fiesta models. The new Focus that goes on sale in Europe and North America next year and then in Asia in 2012 will have about 80 percent of its total number of parts in common, whether built in Michigan, St. Petersburg or Chongqing.

That does not mean the cars will look exactly the same in all markets or come delivered with the same range of options and features. One platform will achieve the optimum in economies of scale while still retaining ultimate flexibility to tailor models to local markets. Sound impossible? Hence the complexity we mentioned at the outset. This serves as the holy grail for auto makers. None seems further down the line, or likely to reap the greatest rewards than Volkswagen of Germany. VW aims to slash the production cost of its cars by 20 percent and “engineered hours per vehicle the time each takes to manufacture by 30 percent. All of its plants will produce cars that share modules even though they may range in size from the subcompact Polo up to sport utility vehicles such as the Tiguan. The FT quotes Ulrich Hackenberg, the VW board member overseeing the effort, saying, “Theoretically, we can build every car in every plant, which makes it very flexible. In earlier times we had one plant for every model. VW seems serious about this approach —   retooling its entire worldwide operation to achieve what it hopes will become enormous economies of scale. Last month, the firm said it would invest US $67 billion, much of which will go into re-tooling. By 2018, VW aims to make 10 million cars per year, all sharing the same basic designs, by which time they intend to unseat Toyota as the world’s top producer.

Although VW has more skepticism than Ford that car buyers will want to buy the same shaped vehicle in different markets, they do have vehicles among their range, like the Polo and Golf, that follow the Ford “world car” philosophy. Unlike Ford though, they also have what they term a suite of products that cater to local tastes. An approach they will continue with in spite of plans to consolidate the bulk of the vehicles it makes from compacts to SUVs around just two basic modular platforms one with the engine mounted longitudinally and one in the transverse position.

The article identifies a few downside risks to this strategy, risks that VW itself acknowledges and has tried its best to avoid. As Toyota’s recalls over the last year have shown, when you use the same part from the same supplier in multiple applications and something goes wrong, the consequences can be enormous. In Toyota’s case, 12 million recalls don’t just have a financial impact, but an image impact too, tainting the whole brand rather than just one model.

Nevertheless, the benefits will likely accelerate this trend.   The question becomes: Can consumers tell the difference? Spare a thought for the minority producer, such as those in China, India and those outside the fold of the majors. The cost savings gap between the big and the small will grow ever larger and with it the ability of those smaller companies to compete.

–Stuart Burns

Or rather, the question everyone is asking: is the Euro the beginning of the end for Ireland? Not as a country of course. The Irish have suffered much worse and survived with both their sense of humor and Guinness production intact. But is this crisis the beginning of the end of an independent Irish sovereign state? That is the fear gripping many in Ireland and not a few elsewhere in Europe looking on.

Step back to the 1990’s and the lure of swapping what David Gardner in the FT calls the clammy embrace of a post-imperial Britain for the bright lights of the new European experiment was irresistible. The Irish opened their economy and the economy soared, earning itself the title of Celtic Tiger to denote rapid GDP growth and rising living standards. Ireland was a success and attracted huge amounts of inward investment, partly on the back of low corporate tax rates. The attraction for Europe was also a political one. Generations had struggled under or fought for independence from Britain and this was an opportunity to realize that independence like no other. However, political independence and economic independence are not the same thing. While Ireland (and the rest of Europe) enjoyed low interest rates by virtue of German responsible economic management the Euro and ECB came to be seen as German more than European its economy continued to operate in the same way as the mid-Atlantic anglophile economy that it was. Banks lent and developers borrowed on an unsustainable spending spree that has now left the country’s banks insolvent. Just as they would have done in the UK if that country had joined the Euro. Ireland’s sovereign debt, even today, is manageable, and although GDP is down a devastating 20% from its peak, the population is stoically bearing rising unemployment and taxes to manage the situation. The Irish state is sitting on a cash pile of   $26 billion and a sovereign wealth fund of over $30 billion, and borrowing costs this year were, at 4.7%, pretty much the same as last year. The mistake Ireland made was guaranteeing its banks’ debts and it’s the size of those debts that are getting bond markets worried and the ECB trying to force funds onto the Irish government.

Well, like the few US banks that took funds in the wake of the 2008 financial crisis and then promptly gave it back when it was clear they didn’t need it (as opposed to those that took funds to survive), the Irish could take what is offered and everyone would be happy, right? Well, here comes the politics bit. Germany and France don’t want debt contagion fears to spread, but they also see this as an opportunity to further what Simon Heffer, writing in the Telegraph, calls the creeping “sovietization” of Europe. Their price for forcing Ireland to take the support it does not want is central control of economies from Frankfurt, with tax rates, deficits and spending run by unelected ECB bureaucrats   – the first target is Ireland’s 12.5% corporation tax rate considered “unfair by France and Germany, poaching inwards investment from other EU countries.

So what options does Ireland have? Well, several is the expected answer, but all of them equally unpalatable. The country could leave the Euro, a prompt and massive devaluation would boost the economy and within a couple of years employment would be way down and growth strong except in the meantime, most of the banks would have gone bust and the country could end up like Iceland. A devalued currency but Euro denominated debts would make repayment prospects already wobbly near impossible. Our favorite British MEP Daniel Hannan rather tongue in cheek suggested on his blog that Ireland should adopt parity to the Pound Sterling tying itself into an economic model more suited to the realities of its structure and simultaneously announce its bank debts were being treated at parity to the Pound Sterling. The reality is, Ireland is no more likely to do that than leave the Euro, after centuries of British rule and dominance they would not elect to forge a dependence (or even co-dependence) on their old adversary whatever the economic merits. No, the most likely outcome is eventual submission to the power of Brussels and Frankfurt, acceptance of loan guarantees and the ousting of the Fianna Fail Republican party at the next elections.   Closely followed by Greece, Portugal and possibly, some think, even Spain.

–Stuart Burns

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