This morning, I'd like to welcome Aptium Global's Stuart Burns back to Spend Matters. With over twenty years of metals trading and arbitrage experience, Stuart is an expert in global direct materials sourcing, especially in metals categories. In full disclosure, I have an economic interest in his firm through my wife, Lisa Reisman, who is his business partner.
Beyond the Trading Stage: What's Really Going on in China
China's recent reduction in or elimination of vat rebates on the export of some 2831 classifications of products is the latest in a series of steps taken by the authorities ostensibly in the name of reducing the growing trade surplus and cooling the overheated export market. China has taken the opportunity to do this by targeting the industries they most want to constrain, those that are the most polluting, the most energy intensive and those that are seen as exporting the raw materials needed by China's expanding value add industries.
Earlier this year the Ministry of Finance also imposed additional tariffs on the export of certain basic commodities, notably steel products, where the government has been trying to get old excess inefficient capacity closed down. But given the strength of exports, this strategy did not work, and producers still kept plants open. Now, under the guise of redressing trade surpluses, China is using centralized control to focus development and the economy to its desired ends.
The cement market is a case in point. China is already the largest cement market in the world and is projected to grow to more than the next two largest consumers combined -- India and the USA. Restricting exports of a product so desperately needed for domestic growth should been seen less as an attempt to reduce the trade imbalance than a common sense attempt to contain domestic inflation in the construction industry.
This is the fifth change in rebates since 2005 and cumulatively they will have a profound impact on the global supply market for certain commodities. High energy consumers like cement, fertilizers and certain non-ferrous metals have had their support all but withdrawn. The effect will be a rapid shift to other producers in Central & South America and Asia, particularly India.
The supply market for many of the products affected is already tight so lead-times will become more extended and prices will be further strengthened just as consumers were expecting markets to begin to ease on the back of an expected slackening in the US market later this year. But the effects will be felt more extensively than just in these products. As exports are choked off the domestic China price for these raw or basic materials will become depressed. Steel prices are already lower in China than the world market which has the effect of making Chinese consumers of basic commodities more competitive on the world stage in selling their higher value add finished products.
This is where the Chinese have been very clever, they can rightly point to their widespread reduction and in some cases removal of export rebates and the imposition of some export tariffs as evidence that they are responding to western concerns (they would never admit to responding to western pressure!) about the ballooning trade surplus when in fact they are re-positioning themselves to support the higher value add, more sophisticated, products that historically western producers have been more successful at selling.
What's the net, net here? I expect rather than see a decline in China exports we will see a shift to higher value product areas next year. China is not so much reducing its presence as the supplier of first choice rather it is deliberately re-positioning itself towards the higher value add markets where the west had traditionally felt more secure.
Stuart Burns is Managing Director for Aptium Global, Inc. Stuart works with small and middle market manufacturers to reduce direct materials costs and risks. He can be reached at sburns (@) aptiumglobal (dot) com