Manufacturing Monday: Steel looks chirpy, while China faces some woes
by johnny venom, Mon Jun 30, 2008 at 12:37:47 PM EDT
Some interesting stuff happening in the manufacturing sector. The US Dollar, despite the President's claim today that he wants a strong currency, continues to drop. Rising material costs, be it ore or petroleum, has had some unintended consequences. We noted here last week, that many businesses are starting to take a second look at the US given the rise in transportation costs.
Domestic steel looking not too shabby
The Financial Times is reporting how American steel producers are keeping their earnings estimates up beat. That given the rise in cost foreign-made (minus Canada) steel has convinced many of the metal's purchasers that looking at the US. I'm sure, given recent upbeat reports, that our good friends up North are seeing similar demand for their industrial metals products.
On the outskirts of Chicago, at the biggest steel complex in the US, a mood of optimism is in the air. Discussing the 5.5m tonnes of steel the site in Gary made last year, Fred Jauss, general manager at the plant, says he is going to do his best to beat the figure this year.
"We don't see any problem in finding buyers for the steel we are producing," says Mr Jauss, whose plant is owned by US Steel, the biggest steel company in the US. "We feel we are selling into a pretty receptive market place."
- excerpts from Outlook for US steel appears untarnished, Financial Times, 2008
Given this, we should still be weary, as production costs are rising. As has been mentioned elsewhere, the cost of transportation is rising. So while it may be getting more cost prohibitive to ship steel from China to the US, one could say the same thing about moving the stuff from America to Asia or Europe. Secondly, ore prices are rising, with companies like Rio Tinto demanding increases north of 90%, we could eventually see a slowdown. There is only so much a steel producer, be it one in Chicago or Shanghai can pass on to their clients before the client says no more. Its beginning to look like it all comes down to costs of fuel and materials, and with OPEC now openly saying that $170/barrel is coming, one can only hope we find a way to keep work going.
In China, things ain't looking any cheaper.
You knew this was going to happen sooner or later. Reading the Wall Street Journal this morning, I came across a China story that seemed eerily familiar. Why familiar? Because if you swapped the names and the time this took place, say the southern US and make it the 1970s, you'll see the resemblance. The WSJ has a video version of the story (author's note: I tried posting the video, but kept getting some kind of errors, sorry). Though, the Wall Street Journal being the Wall Street Journal, I wasn't surprised they added a positive spin (for China) at the end.
Basically, all the low-end stuff that were made by Chinese companies for decades, well they're hurting. How so? Same culprits, rising materials costs, fuel, and labor. Their clients, who had longed gotten used to those oh so low prices, were aghast at the mounting costs and fled. Though I'm not sure why the local plant owners were shocked, did they not see that multinationals have become the labor version of locusts?
Manufacturers say their profits have dwindled as they pay out more for raw materials and energy. China's strengthening currency has made Honghe's products more expensive for important markets such as the U.S., where the price of Chinese goods surged a record 4.6% in May from the previous year, according to the U.S. Commerce Department. Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.
- excerpt from "China's Export Machine Threatened by Rising Costs", Wall Street Journal, 2008
Their clients are now opening up new manufacturing relations with countries like Vietnam, which has become the region's new cheap labor site. As for the folks in this story? I'm pretty sure that another batch of multinationals, perhaps someone higher up in the value chain, will be taking advantage of their still-cheap labor. Any doubt on this was quickly squelched at the end of the video when it showed that Walmart was building a supper massive distribution center. I remembered when Sam Walton made a big deal about "Made In the USA". But then, they're just another locust multinational.
Take a look at the 5 Myths at the Post
When you get a chance, take a look at Gilbert Kaplan's piece in the Washington Post. Kaplan is a trade lawyer who has been in the international trade field for a long time, according to his bio. Now he may be a free trader and he may not, but his piece was centered on what he dubbed myths about manufacturing.
Specifically, 5 "myths" about the demise in American (and I guess Canandian) manufacturing. Now the tone of this article was that the government isn't doing enough. Or worse, it's actually hampering the growth of manufacturing jobs in the country! Now, no, he doesn't seem to be a libertarian who wants to remove all barriers to trade. Instead, he seems to compare and contrast, through each myth, what is being done in other countries and what is being done here. This reminded me of Professor Ha Joon Chang's book, Bad Samaritans, where he goes on to describe how the world of free trade ain't exactly "free" nor fair.
3. Trade laws and trade agreements level the playing field for U.S. manufacturers.
If only this were so. This should be the main goal of our trade negotiations. The manufacturing sector is hurting more than any other, but we're using our political capital -- in the Doha round, for example, the latest World Trade Organization negotiating round -- to help the service and agricultural sectors. Little is being done for basic manufacturing. There are international trade laws under which U.S. companies can file cases to offset unfair practices in China, Japan and other countries, but they're difficult to use, expensive and haven't solved the problem. In 2006, despite a manufacturing trade deficit of more than $600 billion, U.S. manufacturers filed only eight new trade cases. If these statutes were really working, we would see hundreds of new cases each year, instead of watching U.S. companies decide that it's better to give up and just move manufacturing plants abroad -- something I've recently heard executives in both the textile and electronics sectors say they're thinking about doing.
- excerpt from "5 Myths About the Death Of the American Factory", Washington Post, 2008
I'm dying to hear what you folks out there think of this. Is he way off base or spot on? Could you add to this, and what would that be. Please let me know. Anyways, that's about it folks. Happy Canada Day to our friends up North, and of course, Happy 4th of July for us here in the US of A!
Numbers to watch for the week:
Tomorrow: 10:00a.m. Jun ISM Manufacturing Business Index: Expected: 48.3. Previous: 49.6.
Wednesday: May Factory Orders: Expected: +0.6%. Previous: +1.1%
8:30a.m. Initial Jobless Claims For Jun 28 Week: Expected: +1K. Previous: 0.
8:30a.m. Jun Nonfarm Payrolls: Expected: - 58K. Previous: - 49K.