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Metals & Manufacturing Outlook Newsletter

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Metals & Manufacturing Outlook – December 2014

I. Cover Story: US ECONOMY THE WORLD’S BRIGHT STAR
II. NORTH AMERICAN PERSPECTIVE
III. U.S. FORGING INDUSTRY
IV. MANUFACTURING TALK RADIO
V. EUROZONE
VI. ASIA OUTLOOK
VII. SOUTH AMERICA
VIII. THE MANUFACTURING SCENE – CHINA’S AUTO BUSINESS
IX. THE MANUFACTURING SCENE – WHERE’S THE AUTO INDUSTRY GOING?
X. A FINAL WORD

Publisher’s Statement

While the Chinese economy temporarily eclipsed the U.S. as the world’s largest economy by some measures, it appears that the U.S. economy is the only one with upward momentum. China is now bordering on recession, Europe is struggling with recession and deflation with some risk of a depression, and Russia, largely due to the downturn in crude oil prices and economic sanctions, is in a fiscal pickle and risks recession.

Next week, the Institute of Supply Management will issue its 2015 Annual Forecast for the U.S. on Manufacturing Talk Radio at 1:00 p.m. EST on Tuesday, December 9th (see our section below about Manufacturing Talk Radio for more details). The following week, the Fabricators and Manufacturer’s Association International economist, Dr. Chris Kuehl, will present the FMA’s annual forecast for 2015 on Tuesday, December 16th at 1:00 p.m. EST. Readers should go to www.mfgtalkradio.com and listen to both of these live hour-long shows to get a sense of 2015.

On a longer-range note, unless some sinkhole suddenly appears that swallow up part of the economy, 2016 appears to be another year with GDP growth forecasted in the 3-percent range by some and 4-percent range by others. Either percentage growth will be strong on top of 2014 and 2015.

However, looming close-by is the current slowdown at the West Coast ports where the ILWU is unloading less than a third of the normal daily container volume from ships and refuses to create a schedule for truckers to pick up containers. Here are the near-term consequences:

• More than 50 container ships loaded with imports are bobbing around on the Pacific ocean waiting to be unloaded, while the ILWU refused to conduct serious table negotiations for more than 10 days beginning just before the Thanksgiving holiday,

• It is entirely likely that imported goods meant for this holiday season will not be on store shelves in time for the holidays in the U.S. this year – a direct hit to retailers who make 40% or more of the profits during the holidays,

• Raw materials coming into the U.S. for manufacturing here will be delayed by several weeks and possibly up to two months while the ILWU stalls negotiations and the backlog at the ports and on the ocean continues to escalate,

• Exporters in other countries will continue to be unable to get their goods to the U.S. because the ships they need overseas for loading there are stuck here, waiting to be unloaded of imports and then reloaded with exports and moving back overseas, meaning the negative import-export impact could last through the entire first quarter, retarding 4th quarter 2014 and 1st quarter 2015 GDP just when the economy was beginning to get real legs,

• Exporters in the U.S., particularly in agriculture, are watching their goods dry out or rot in containers waiting since October in some cases to be loaded and shipped to South America or Asia, including apples, potatoes, other perishable crops and Christmas trees. It is now too late to salvage those goods or sales as overseas customers have been canceling orders and buying other goods elsewhere, which will result in the loss of hundreds of millions of dollars for U.S. farmers, and the waste of enough food to have feed the population of a small country for an entire year,

• Truckers, rather than wait 8-10 unscheduled hours for a single container pick up, are finding loads elsewhere to keep their tires turning with freight on board, which is the only time they are making money, and unloaded containers are now sitting idle at the ports because truckers cannot rely on getting a load at all on any dependable schedule,

• America’s railroads, that were in a period of recovery, have no container port cargo to load onto flatbed rail cars, and some rail lines are not even sending trains to pick up containers until the ‘slowdown’ is corrected, resorting to short-haul loads around the country, and exacerbating the backlog at the ports,

• Other U.S. exports that were scheduled to leave West Coast ports in November and December will now be delayed reaching overseas customers, risking lost orders or delaying payments from buyers that will adversely impact first quarter cash inflows,

• 20,000 ILWU employees are being allowed to hamper the growing economy for the rest of the 320 million Americans because the ILWU wants their employers to bear the full burden of individual health plans, at a cost of $80,000 per employee, as well as the Obamacare Cadillac Plan penalty on that health care plan which is upwards of $150 million dollars, all while many union members earn well into the six figures in salary, health care benefits, and pension contributions,

• The federal government has done little beyond using a federal negotiator in a weak attempt to reach an agreement since the ILWU contract expired July 1, 2014, and it is quite possible that the Taft-Hartley Act of 1947 will have to be applied immediately; albeit, even if it is, perishable agricultural exports and time-sensitive shipments are already a total or partial loss – if the government has sufficient reason, in their point of view, to implement the Taft-Hartley Act, which is highly debatable. Even if they do, a boulder has already be dropped into our economic pond and the impact waves are rippling toward us.

If you have been adversely impacted by the West Coast port slowdown, send a complaint to your elected representatives who appear to have their head stuck in the sand on this one, AND send an email to info@mfgtalkradio.com so we can read some of your horror stories on the air, since the main stream media appears to have their heads stuck in the sand alongside our elected representatives. What they are talking about under there – who knows!

All that being said, and now that you know, enjoy this month’s issue of Metals & MFG Outlook newsletter.

Respectfully,
Lewis A. Weiss
Publisher

Cover Story: US ECONOMY THE WORLD’S BRIGHT STAR

us-econIt seems that the US is going it alone these days. From all corners of the globe come tales of economic woe, falling interest rates and deflation. From the US we hear tales of a healthy, growing economy, but one crying out for hundreds of thousands of skilled personnel. There are those too who say that the global economy is weaker than we think. For the most part we just have to go by the figures.

The PMI figure from the Institute of Supply Management was at 58.7 percent in November, a reading just slightly below October’s 59.0 percent. This represents manufacturing expansion for the 18th consecutive month and growth in the overall economy for the 66th consecutive month.

The Bureau of Economic Analysis came out with its ‘second’ estimate for the annual rate of GDP growth in the third quarter of 2014, stating a figure of 3.9 percent. The third estimate for the third quarter will be released on December 23. Real GDP increased by 4.6 percent in the second quarter.

The Markit PMI for the US manufacturing sector was at 54.8 in November, down from October’s figure of 55.9 percent. The November figure is the lowest for ten months. According to Markit, new export orders fell at the most marked pace since June 2013.

Dun and Bradstreet’s US Business Health Index was up by 3.6 percent year-on-year in November, while the D and B Small Business Index was up 4.8 points. The great improvement in the Small Business Index is associated with a marked decline in payment delinquency. In fact small business owners are more optimistic than at any time since early 2008.

D and B’s US Jobs Health, with 236,000 non-farm jobs added in November, shows increases in jobs in all sectors; Manufacturing, Construction, Retail, Business Services, Trade, Transportation and Utilities and Real Estate were all up, with Business Services again taking the lead.

The D and B Delinquency Predictor rose slightly for the first time in over a year, suggesting that businesses are increasingly unable to pay their bills on time.

World crude steel production for the 65 reporting countries for the month of October 2014 was 137 Mt, the same figure as October 2013. The capacity utilization ratio in October 2014 is 74.7 percent, down 2.6 percent on October 2013, and down 1.4 percent on September 2014.

US crude steel production, for October 2014, at 7.3 Mt, is down 0.7 percent year-on-year. Primary Global Aluminum Production in October 2014 was 4.527 million tons. Of this total, 2.384 million tones, or almost 53 percent, was produced in China.

Here are the latest estimates for US light vehicle sales in November:

NOVEMBER 2014 NOVEMBER 2013 YTD % CHANGE

General Motors

225,818

212,060

6.5

Ford

186,334

189,705

-1.8

Chrysler

170,839

142,705

20.1

Toyota

183,346

178,044

3.0

Honda

121,814

1116,507

4.6

Nissan

103,188

106,528

-3.1

Hyundai/Kia

98,608

101,416

-2.8

VW

53,387

48,652

9.7

Auto sales for November, for the U.S. industry as a whole, are 4.6 percent up on last year’s figures. The year-to-date total for 2014, at 15,023,111 units, is 5.5 percent up on the YTD total for 2013 of 14,243,047 units.

 

II. North American Perspective

na-flagA. The Institute of Supply Management PMI figure registered 58.7 percent in November, very slightly lower than October’s 59.0 figure, representing expansion in manufacturing for the 18th consecutive month. Annualizing the average PMI for January to November (55.8 percent) represents a 4.2 percent increase in the real GDP on an annualized basis. If the PMI for November is annualized, (58.7 percent) it represents a real GDP increase of 5.1 percent on an annualized basis.

Fourteen of the eighteen industries reported growth in November, including, in order, Food, Beverage and Tobacco Products, Fabricated Metal Products, Textile Mills, Paper Products, Plastics and Rubber Products, Machinery, Transportation Equipment, Petroleum and Coal Products and Primary Metals. Apparel, Leather and Allied Products was the only industry to show a contraction in November.

Comments on the month from the manufacturing sector are very positive regarding business conditions, with the only cloud on the horizon being the one on west coast ports that is hampering and hindering movement of goods. Representatives from all industries speak of healthy order backlogs.

The following 5 components of the ISM’s PMI, New Orders, Production, Employment, Supplier Deliveries and Inventories are equally weighted and used to calculate the PMI number. A monthly PMI over 50.0 indicates an expanding economy; a number over 60.0 indicates strong manufacturing output, although overheating may occur.

1. The ISM New Orders Index for November, at 66.0 percent, was up very slightly on October’s 65.8 percent, representing growth in new orders for the 18th consecutive month. Eleven industries reported growth in new orders in November, including, in order, Plastics and Rubber Products, Food, Beverage and Tobacco Products, Fabricated Metal Products, Paper Products, Machinery, Petroleum and Coal Products, Transportation Equipment and Chemical Products. The only industry showing a decrease was Apparel, Leather and Allied Products. Six industries showed no change from October.

2. The ISM Production Index was at 64.4 percent in November, down slightly from October’s 64.8 percent reading. This represents growth in production for the ninth consecutive month. Growth was noted in 14 industries, including, in order, Fabricated Metal Products, Textile Mills, Petroleum and Coal Products, Machinery, Food, Beverage and Tobacco Products, Plastics and Rubber Products, Transportation Equipment, Primary Metals and Paper Products. Chemical Products was the only industry reporting a decrease in November.

3. The ISM Employment Index for November, at 54.9 percent, is down 0.6 percent on October’s reading of 55.5 percent, representing an increase in employment for the 17th consecutive month. Growth in employment in November was reported in eleven industries, including, in order, Printing and Related Support Activities, Textile Mills, Furniture and Related Products, Plastics and Rubber Products, Petroleum and Coal Products, Food, Beverage and Tobacco Products, Machinery, Paper Products and Primary Metals. Three industries showed a decrease in employment in November, namely Apparel, Leather and Allied Products, Computer and Electronic Products and Transportation Equipment.

4. The ISM Supplier Deliveries Index – to manufacturing organizations – slowed in November at a faster rate relative to October as the Supplier Deliveries Index registered 56.8 percent, or 0.6 percentage points above October’s 56.2 percent reading. A reading below 50 percent represents faster deliveries, above 50 percent means slower deliveries. Slower supplier deliveries were noted in eight industries in November, including, in order, Food, Beverage and Tobacco Products, Primary Metals, Paper Products, Transportation Equipment, Miscellaneous Manufacturing and Fabricated Metal Products. Faster supplier deliveries in November were reported in Petroleum and Coal Products and Chemical Products, with eight industries showing no change in November compared to October.

• The ISM Inventories Index, at 51.5 percent for November, is 1.0 percentage points lower than the 52.5 percent reading for October, indicating growth in raw materials inventories for the fourth consecutive month. Eight industries reported higher inventories in November, including, in order, Electrical Equipment, Appliances and Components, Miscellaneous Manufacturing, Furniture and Related Products, Transportation Equipment, Paper Products and Primary Metals. Six industries reported lower inventories in November, including Apparel, Leather and Allied Products, Plastics and Rubber Products, Petroleum and Coal Products, Machinery and Chemical Products.

The following 5 components of the ISM’s PMI, Customer Inventories, Prices, Backlog of Orders, Exports and Imports are not used to calculate the PMI number but are tracked for trends in the marketplace.

1. The ISM Customers’ Inventories Index, registered 50.0 percent in November, 2.0 percentage points higher than October’s 48.0 reading, meaning that customers’ inventories are considered to be just about right. This is the first time that the customers’ inventories index has been at 50 or above since November 2011, when the index was also at 50.0 percent. Five manufacturing industries showed too high customers’ inventories in November, namely Computer and Electronic Products, Furniture and Related Products, Primary Metals, Chemical Products and Food, Beverage and Tobacco Products. Five industries reported too low customers’ inventories in November, namely Apparel, Leather and Allied Products, Paper Products, Machinery, Fabricated Metal Products and Transportation Equipment. Eight industries reported no change in customers’ inventories in November compared to October.

2. The ISM Prices Index registered 44.5 percent in November, a 9.0 percent decrease on the October reading of 53.5 percent. This represents the first decrease in raw material prices since July 2013. In November 14 percent of respondents reported paying higher prices, 25 percent lower prices and 61 percent the same prices as in October. Two industries reported paying higher prices in November, Furniture and Related Products and Paper Products. Twelve industries reported paying lower prices, including Petroleum and Coal Products, Food, Beverage and Tobacco Products, Transportation Equipment, Primary Metals, Machinery, Fabricated Metal Products and Chemical Products.

Up in price in October were Aluminum (10) and Stainless Steel (9).

Down in price in October were Copper (4), Crude Oil, Diesel (2), Nickel, Stainless Steel and Hot-Rolled Steel

Stainless Steel was noted as being both up and down in price.

Nothing was reported in short supply in November.

The figures in parentheses represent the number of months listed.

3. The ISM Backlog of Orders Index was at 55.0 percent in November, a 2.0 percentage points increase on October’s 53.0 percent reading. This represents the second consecutive month of growth in order backlogs. Of the 87 percent of respondents reporting, 27 percent reported greater backlogs, 17 percent reduced backlogs and 56 percent reported no change from October. Twelve industries reported increased order backlogs in November, including, in order, Textile Mills, Petroleum and Coal Products, Fabricated Metal Products, Paper Products, Primary Metals, Machinery, Transportation Equipment and Food, Beverage and Tobacco Products. Three industries reported a decrease in order backlogs, namely Wood Products, Apparel, Leather and Allied Products and Chemical Products.

4. The ISM New Export Orders Index at 55.0 percent for November is 3.5 percentage points higher than October’s 51.5 percent reading. The month’s reading represents growth in exports for the 24th consecutive month. Eleven industries reported an increase in New Export Orders in November, including, in order, Textile Mills, Wood Products, Fabricated Metal Products, Food, Beverage and Tobacco Products, Machinery, Transportation Equipment and Paper Products. Two industries, Apparel, Leather and Allied Products and Chemical Products, showed a decrease in New Export Orders in November.

5. The ISM Imports Index is at 56.0 percent in November, 1.5 percentage points higher than October’s 54.5 percent reading. This represents the 22nd consecutive month of growth in imports. Eleven industries reported an increase in imports in November, including, in order, Printing and Related Support Activities, Primary Metals, Machinery, Plastics and Rubber Products, Transportation Equipment, Furniture and Related Products, Fabricated Metal Products, Food, Beverage and Tobacco Products and Chemical Products. Two industries, Apparel, Leather and Allied Products and Miscellaneous Manufacturing reported a decrease in November.

B. U.S Trade Deficit

The U.S. trade deficit in manufactured products hit $71.2 billion in October, according to data released today by the U.S. Bureau of Economic Analysis (pdf). That is the highest ever, says Alan Tonelson, a blogger who compiles government data. The year-to-date deficit is running 12 percent ahead of what it was in 2013, putting it on track to set an annual record as well, Tonelson says.

The bad trade numbers don’t match up neatly with today’s jobs report from the Bureau of Labor Statistics, which said that manufacturing added 28,000 jobs in November after a 20,000 gain in October. The manufacturing workweek rose 0.2 hour, to 41.1 hours, and factory overtime edged up 0.1 hour, to 3.5 hours, the BLS said. It said the number of unemployed people in the manufacturing sector fell over the past year from 984,000 to 640,000.

One explanation for the discrepancy is that a stronger U.S. economy is putting people back to work in U.S. factories but simultaneously sucking in more imports, which raises the trade deficit. The numbers bear that out: According to Tonelson’s calculation from government data, manufacturing imports rose 5 percent in the year to date, vs. export growth of just over 1 percent.

C. CANADA PMI

CANADA’S RBC (Royal Bank of Canada) Manufacturingstayed unchanged in November from October’s 55.3 percent reading, itself an eleven-month high. November saw the fastest rise in export sales since September 2013.

Crude steel production in October 2014 in Canada was at 1.16 Mt.

Canadians bought 138,886 new vehicles in November, up 3.6 percent on the same period last year. This is the highest-volume November in the Canadian Auto Industry’s history. To date in 2014, 1.72 million vehicles have been sold in Canada, compared to 1.745 million during the whole of 2013. The year looks set to be a record for Canadian car and light truck sales.

Mexico, the other member of NAFTA alongside the U.S. and Canada, saw its manufacturing PMI go from October’s 53.3 percent to 54.3 percent in November, a 22-month high. There were strong production increases in November and export sales were up for the first time in three months.

Mexico produced 1.63 Mt of crude steel in October 2014.

III. U.S. Forging Industry

forgingThe following articles are courtesy of Forge Magazine.

Allegheny Technologies Inc. (ATI) has furthered its long-term supply agreements (LTA) for closed-die forgings and mill products with a major jet-engine manufacturer. One LTA covers closed-die forgings, including parts made using advanced isothermal and hot-die forging processes, whereas the other covers a wide range of premium-quality titanium-based alloy and nickel-based superalloy mill products. The agreements take effect in 2015 and continue into the next decade. ATI says the forged-parts agreement significantly increases both the content and growth of its forgings on leading single-aisle and business jet-engine programs.

TimkenSteel recently started up a $200 million vertical bloom caster at its Faircrest Plant in Canton, Ohio. The caster rises 180 feet above ground and 90 feet below it, making it the world’s largest bloom caster and the only one of its kind in North America. Clean steelmaking technology is an important part of the whole process here.

 

IV. Manufacturing Talk Radio

Manufacturing Talk RadioListenership of Manufacturing Talk Radio, broadcast each Tuesday from 1:00 p.m. to 2:00 p.m. EST at www.mfgtalkradio.com, continues to climb as people from the shop floor to the C-suites in both manufacturing and non-manufacturing industries hear important and insightful information and breaking news stories. The most recent show on December 2nd covered the Institute of Supply Management’s November Report on Business®, delving into the report with the Manufacturing Survey Committee Chair, Mr. Brad Holcomb.

Mr. Holcomb will be joined on Tuesday, December 9th by Mr. Tony Nieves, Chair of the Institute’s Non-Manufacturing Report on Business®, to present the ISM’s 2015 Annual Economic Forecast. Co-hosts Lew Weiss and Tim Grady will discuss the forecast in-depth with Brad and Tony on this must-hear show.

The following week, Tim and Lew will be interviewing an economist, analyst and humorist, Dr. Chris Kuehl, Fabricators and Manufacturer’s Association International’s economist, who will present the FMA’s 2015 annual economic forecast. Another must-listen show broadcast at www.mfgtalkradio.com will give listeners another industry’s point of view of 2015.

Stay tuned for the December 23rd show, which is in the planning stages. Even if the ILWU reaches an agreement, the import and export impacts of the current West Coast port slowdown will still be rippling through the economy and the show will go into additional depth on the impact of this union action against the U.S. economy, not just its employers. Given the six-figure compensation for many union members, it is hard to see this work action as anything but a grab at more greed at the expense of the rest of the nation.

According to the Pacific Maritime Association, some 13,600 ILWU workers are employed at West Coast ports and their annual payroll approached $1.4 billion. ILWU members pay no health care premiums, and full-time workers earn an average of $147,000 annually in wages, plus a non-wage benefits package costing more than $82,000 per active worker per year, including fully paid health care for workers, retirees and their families with no premiums, no in-network deductibles and 100 percent coverage of basic hospital, medical and surgical benefits. Prescription drugs are covered for $1.00 per prescription with the balance of the prescription cost being paid for by the policy premiums paid by the employer, with dental and vision care provided to workers, retirees and their families at little or no cost. Workers are also eligible for a pension of up to $80,000 per year, plus a 401(k) plan with an employer contribution, plus 13 paid holidays, plus up to 6 weeks of paid vacation.

Stay tuned at www.mfgtalkradio.com for further updates. If you have been affected by the ILWU work slowdown, send us an email at info@mfgtalkradio.com. If we receive nasty-grams, as we might, we’ll even read a few of those on the air.

 

V. Euro-Zone

euro-zoneMarkit’s Eurozone Manufacturing Composite Purchasing Managers’ Index (PMI) for November saw just a slight downturn from October’s 50.6 reading, but sufficient to take the reading down to 50.1 percent. There was growth in Spain, Ireland and the Netherlands, but this was offset by poor performances in the three biggest economies. Some PMI figures by country are:

Ireland 56.2: A 2-month low

Greece 49.1: A 3-month high

Spain 54.7: A 89-month high

Italy 49.0: Unchanged

Netherlands 54.6: A 9-month high

France 48.4: A 3-month low

Germany 49.5: A 17-month low

Austria 47.4: A 2-month high

The performance of the Eurozone manufacturing sector is at its worst since mid-2013. We are now seeing the three largest economies all suffering manufacturing downturns. Germany’s recent export performance is causing the worst deterioration of new orders since December 2012, and new business is falling in both France and Italy.

Spain, Ireland and The Netherlands are presently doing well, but their continued expansion is doubtless contingent upon demand picking up in the region’s largest member states.

In the EU, Germany produced 3.5 Mt of crude steel, in October, down 5.9 percent y-o-y, Italy 2.1 Mt, down 5.4 percent y-o-y, France 1.5 Mt, up 15.0 percent y-o-y and Spain 1.3 Mt, down 0.4 percent y-o-y.

Western European car sales are none too encouraging for the month of November, with Germany’s sales down by 2 percent, France’s by the same margin, and Spain’s growth slowing to 17 percent (on the back of subsidies).

MON DIEU, when will we get some good economic news out of France?

The UK saw its Markit PMI increase to 53.5 percent in November, a slight increase from October’s 53.2 reading, to a 4-month high fuelled again by domestic demand. Exports were subdued.

The UK produced 1.06 MT of crude steel in October.

The JP Morgan Global Manufacturing PMI – a composite index produced by JP Morgan and Markit in association with ISM and IFPSM (International Federation of Purchasing and Supply Management) – went to a 14-month low of 51.8. Growth in new orders hit a 16-month low. Manufacturing production rose for the 25th successive month in November, but the rate of expansion eased to its lowest since August 2013.

 

VI. Asia Outlook

made-in-chinaCrude steel production for the month of October saw China producing 67.5 Mt, down 0.3 percent y-o-y, Japan 9.4 Mt, down 0.5 percent y-o-y, India 7.08 Mt, up 8.5 percent y-o-y and South Korea 6.2 Mt, up 4.5 percent y-o-y.

The HSBC China manufacturing PMI for November was down slightly at 50.0 percent from October’s 50.4 percent reading. Manufacturing production was down for the first time since May. Total new orders were up for the sixth consecutive month, albeit with modest growth. Manufacturing employment is down, and new export orders are expanding at their slowest rate in 5 months.

There is a moderate increase in total new business.

Chinese auto sales in October 2014 totaled 1.98 million units, a 2.8 percent y-o-y increase. Output was up 6.7 percent y-o-y to 2.04 million units. For the first ten months of 2014, output was 19.27 million units and sales 18.99 million units, increases of 7.92 and 6.58 percent respectively

Domestic brands account for about 40 percent of October sales, while German and Japanese cars continue to lead.

In Japan, the Markit manufacturing PMI is at 52.0 in November, down slightly from October’s 52.4 reading. There has been an improvement in operating conditions and both new orders and production are up. New export orders are up for the fifth consecutive month.

Total new vehicle registrations in Japan for the month of November 2014 were 9 percent down on the y-o-y figure, at 416,000 units. April’s tax hike is still being blamed for declining auto sales.

India’s manufacturing (HSBC) PMI increased in November to 53.3 from October’s 51.6 percent reading. This is a 21-month high. Business conditions are improving at the quickest rate since February 2013. Manufacturing operating conditions are up for the 13th consecutive month in November, as witnessed by strong output growth and new orders. The improvement is domestic-led with strong export business, particularly key export clients.

VII. South America

south-america

Brazil’s crude steel production in September, at 3.1Mt, was UP 2.7 percent year-on-year.

The seasonally adjusted HSBC and Markit Brazil PMI dropped slightly from 49.1 percent in October to 48.7 percent in November. Business conditions worsened at the joint-quickest rate since July 2013. November saw the third consecutive monthly drop in output.

Production, purchasing and employment are on the wane, with new business and foreign orders dropping at modest rates.

 

VIII. THE MANUFACTURING SCENE: CHINA’S AUTO BUSINESS

china-autoChina is the world’s largest market for the automobile. A good percentage of its approximately 1.3 billion people lust after an automobile so they may take their place on the country’s very busy roads.

China’s biggest carmaker, SAIC (Shanghai Automotive Industry Corporation), recently announced net profit for the third quarter of 2014 up 5 percent y-o-y to 6.8 billion yuan ($1.1 billion). But the company, like the other domestic car companies, is not living up to the expectations the government has for it.

SAIC makes about a quarter of the vehicles on China’s congested roads. In the third quarter it sold 1.3 million cars, up 9 percent y-o-y. The overall Chinese demand, in a cooling economy, grew by just 4 percent. SAIC’s success was mostly due not to cars bearing its own badges, but to Volkswagen and General Motors models made in factories operated as joint ventures with these two giants. Volkswagen has been ‘tied up’ in China since 1985, GM since 1998.

Collaboration with Chinese auto manufacturers was the price foreign auto manufacturers had to pay to get into the world’s largest market. The SAIC joint ventures are doing very well, as are those of other Chinese – foreign joint ventures. The government had hoped that by now domestic companies would have picked up from the foreigners what they needed to know about making world-class cars, and hence that they would be ready to go it alone.

The success of the joint ventures seems to have led to an unfortunate complacency on the part of the Chinese companies, and an inability to develop their own technology, styling or marketing capabilities. SAIC loses money on its own brand cars, Roewe and MG for example. MG, which came along with the purchase of the collapsed UK Rover Group, sells very badly. In the last quarter the losses on domestic cars were around 2 billion yuan.

The losses on Chinese brand production has taken away the incentive to invest in the Research and Development required to improve their performance. So patriotism among Chinese motorists went more or less out the window as they hungered for something called foreign.

Chinese brands represent about a third of domestic sales and their share continues to fade. Exports to poor countries, where price is more important than quality, were at 600,000 in 2013, a 10 percent drop on the previous year.

The search for improvement goes on. JD Power says the quality gap is narrowing. Chinese firms are hiring Western designers in efforts to spruce up their models, but they lack foreign marketing skills to market their cars abroad and to set up the service networks that all customers expect.

We have here a scenario that is becoming all too familiar, namely the demand for skilled people to take up positions in the manufacturing chain that will benefit both their company and themselves.

Or perhaps China needs another W. Edwards Deming, if such a rare human being still exists. He it was who engineered the Japanese economic and quality miracle of the fifties and sixties; he it was who pulled Ford out of a quality black hole in the early eighties. He it was who taught the Japanese that marketing is not sales. His is a name definitely worth GooGliNg.

 

IX. THE MANUFACTURING SCENE – WHERE’S THE AUTO INDUSTRY GOING?

us-car-factiryWhen we think of an automobile we normally think of how it looks, how safe and comfortable it is, and how many miles it will travel on a gallon of gasoline. If we live outside the U.S. we wonder how many kilometers it will travel on a liter. It’s estimated that in 2014 around 16.5 million new cars and light trucks will be sold in the U.S.

The auto industry wants to make sure it will meet all our demands, and to do this it has to choose materials that will make its products safer, stronger and lighter. In recent history many kinds of steel have been developed, from the original H.S.L.A. (High-Strength-Low-Alloy Steels) to the very recent A.H.S.S. (Advanced High Strength Steels) and U.H.S.S. (Ultra High Strength Steels.) These materials were developed to produce a lighter, more fuel-efficient vehicle, but in addition, almost surely, to compete with aluminum.

It’s interesting to look at the relative costs versus mass required – for identical functionality – of the various materials used in vehicle manufacture. ‘Normal steel’ for example, which we could consider as carbon steel, at a base cost of 100, would require a mass of 100, whereas hot-formed steel, considered as a high-strength-low-alloy type, at a cost of 115 would require a mass of 75, so we already have a winner here. Aluminum, on the other hand, at a cost of 130 would require a mass of 60 – but it doesn’t have the strength of steel. Plastic, at a cost of 100, requires a mass of 75, but carbon-fiber reinforced plastics require a mass of 30, but at a cost of 570. Magnesium comes in at a mass of 50, but a cost of 360. We have quite an array of materials here, but our major objective has to be safety, which is where steel comes in. Steel has the strength, the toughness and the ductility to do the job required, and the use of high-strength grades allows for significant weight reductions. On the other hand, in applications where load bearing is not a real issue, aluminum will fit the bill.

Materials are used in a number of forms, with flat-rolled being by far the most significant, but forgings are widely spread around the vehicles, as are some extruded sections.

A significant change has been projected for light vehicle material composition up through 2035, as shown in the table below:

2010 2015 2035

Normal Steel 61.5% 54.5% 20%

A.H.S.S. 4% 8% 19%

Non-metallics 22% 23% 25%

Aluminum 8.5% 10.5% 14%

Others 4% 4% 22%

The CAFE standards (Corporate Average Fuel Economy) are the yardsticks against which all this progress will be measured.

Ford recently came out with a (mostly) aluminum-bodied F-150 pickup. The truck has a high-strength steel frame and claims a 700 pound weight reduction. The aluminum used for the body is a military-grade alloy.

It is estimated that in 2020 there will be 488 pounds of aluminum in the average North American light vehicle.

All this progress augers well for the customer in terms of safety and much improved fuel consumption. It is also likely to mean less normal steel per vehicle, but much more value-added high-strength steel. This will call for strict quality standards throughout the industry.

We can look forward to a safer vehicle, and hopefully to an industry less liable to recalls.

THE ECONOMIST magazine, in its latest weekly report on world economies, highlights changes in Gross Domestic Product (GDP), Industrial Production, Consumer Prices and Unemployment Rates for what it considers the world’s major economies. These data are not necessarily good to the present day, but are mostly applicable to at latest the past two months, and show definite trends in the world economy. The figures are qualified as being the latest available, and with reference to a given quarter or month. The figures for GDP represent change on the previous quarter, at an annual rate. The industrial production figures represent year-on-year changes, as do the consumer prices increases. The unemployment figures, %, are for the month as noted.

GDP Indl. Prod Cons.Prices Unemployment

United States + 3.9 (qtr) + 4.0 Oct + 1.7 Oct 5.80 Oct

Canada + 3.6 (qtr) + 3.2 Aug + 2.4 Oct 6.5 Oct

China + 7.8 (qtr) + 7.7 Oct + 1.6 Oct 4.1 Q2

Japan – 1.6 (qtr) + 0.8 Sept + 3.3 Sept 3.6 Sept

Britain +2.8 (qtr) + 1.4 Sept + 1.3 Oct 6.0 Aug

Euro area + 0.6 (qtr) -1.9 Aug + 0.4 Oct 11.5 Sept

France + 1.1 (qtr) – 0.3 Sept + 0.5 Oct 10.5 Sep

Germany + 0.3 (qtr) – 0.2 Sept + 0.8 Oct 6.7 Oct

Spain + 2.3 (qtr) + 3.7 Sept – 0.1 Oct 24.0 Sept

India + 3.1 (qtr) + 2.5 Sept + 5.5 Oct 8.8 2013

Brazil – 2.4 (qtr) – 2.1 Sept + 6.6 Oct 4.7 Oct

Argentina + 3.6 (qtr) -1.7 Sept 7.5 Q3

Mexico + 2.0 (qtr) + 3.0 Sept + 4.3 Oct 4.7 Oct

 

X. A FINAL WORD

final-word-ballThe U.S. economy is still doing very well, as is Canada’s. The UK continues to significantly outperform Europe. It is to hope that things (are made to) pick up elsewhere around the globe.

GALLUP’s recent U.S. Weekly Economic Confidence Index reached –6 in mid-November. Its Job Creation Index crept back up to +28 in November.

Optimism will be our watchword. It remains for us to wish you, our readers, the happiest of holidays and a peaceful and prosperous new year.

 

 

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