A Manufacturing and Procurement Outlook: Aluminum, China, and Economic Growth

This post is a continuation of an interview with MetalMiner’s Lisa Reisman, conducted largely at a speed averaging 76 MPH while driving over 300 miles together (and avoiding giving the pleasure and revenue to Wisconsin’s finest of busting another “FIB” speeding through their state). Click here for the first installment of this series and the full details.

Jason (Spend Matters): What else concerns you about the economy, manufacturing, and procurement?

Lisa (MetalMiner): I think there are two other concerning indicators right now that we’ve not talked about already. Aluminum prices are first. Aluminum presents a difficult case because there is an excess of supply, in part because China built so much capacity (and so has the Middle East). The fundamental issue is we have too much aluminum and even changing up the rules of the LME warehousing situation is not going to make a difference – aside from letting the Invisible Hand play a more active role in market pricing based on greater transparency around availability.

Copper is a major concern as well. Copper is at its lowest since we started tracking it as part of the MetalMiner IndX and MMIs. And some even expect a material further drop – even a crash. Caterpillar called this when they laid off workers in October 2012.

For economic prognosticators, CAT is such a useful company to observe. If you watch CAT, you’ll be able to figure out where many markets are going. Their order books and backlog tell you everything you’ll need to know about the manufacturing economy and copper in particular. When order books start shrinking and it impacts jobs, it means we’re headed into a downturn.


Jason (Spend Matters): Go politics, philosophy, and economics (PPE) on us for a moment, and how the state of general affairs and legislation impact growth and ultimately procurement and supply chain.

Lisa (MetalMiner): Well, to start, if people are asking me if this is a sustainable economic growth cycle, I would say no. It’s the opposite. Thanks to the continued Fed pump, President Obama barely managed to hang on to a second term through showing marginal growth to the American voting public.

The glass is more than half empty, at least concerning 2014 GDP growth estimates (more on this later). Sure, some numbers might attempt to tell a different story. Take, unemployment, which might be getting better, but that’s because people dropped out of the workforce or they’re underemployed.

The continued manipulation of the economic cycle and delayed implementation of legislation grates me. For example, the delay in implementing employer healthcare mandates was a political move designed to make it easier on Democrats in the interim election cycle. It was kicking the can like deficit reduction has been for so many years.

Rather than own up the number one policy item on Obama’s first term agenda, the President and his party members in Congress are punting on the most important item they stood for a couple of years ago – just to keep their seats or potentially grow their sway in Congress. There was no reason to do it except political pandering and the moves shows the Obama administration’s underlying concern over economic growth prospects. They want to make sure the economy gets some lipstick.

From a procurement standpoint, I would urge companies to be more conservative in their growth assumptions for the domestic market and look to buy on the downturn, rather than pursuing more aggressive growth prospects.

Jason (Spend Matters): Where does China fit into all of this?

Lisa (MetalMiner): China’s big growth is over, which is a concern on its own. But they’re also making things difficult for everyone else in an attempt to drive up their own employment numbers and stimulate internal demand through priming the jobs pump. For example, they have been the culprit of overcapacity in the aluminum market (both primary and secondary) because they’ve produced so much. Yet despite the glut, the government is still investing in this industry because they think it will pay returns on the jobs front – at the expense of keeping global prices in check with true demand.

The bottom line: China has fewer economic tricks left to deploy than ever. Like President Obama, they’ll eventually run out of things to do aside from attempting to impact actual demand through sound policy decisions that focus on creating a sustainable economic house.

Stay tuned for the final installment of this series when we turn to three outlier predictions for 2014.

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