A Quickie for Christmas

Xmas makes us all test our Capacity.

I know some of you have been pulling right little crackers while others have been enjoying spending time with a lovely game bird, but Finance-Reaper is always on the look out for interesting stories. Two that caught my eye last week provide fuel for my argument, regularly argued in this blog, that global over capacity in heavy industry will weigh on investment and growth for many years to come.

A Bloomberg story on the 21st…highlighted the growing problem in China of Digger Capacity. Companies involved from overseas include Caterpillar, Volvo and Komatsu.

1) Domestic and overseas players have built enough capacity (600,000) in China to supply nearly double the WORLDS annual demand (300,000). Whats more, inventories are enough to satisfy the entire 2013 domestic demand in China of 100,000 units. November saw the 19th straight decline in monthly sales. It is expected that incredible incentives currently being offered, together with the additional government spending on infrastructure, will halt this slide. Not, I expect, enough to alter the supply/demand dynamics that much. Most of this millennium has seen annual domestic sales growth of 25%. All that has changed this year and is unlikely to be seen again. Whilst it is a vast country and becoming a vast economy, I believe its dynamism is in the past. Wage growth, corruption and demographics, have put paid to that.

2) The Sec. General of the China Iron and Steel Association spoke at a conference last week and stated that the industry is facing an increasingly difficult time and capacity is increasing. No shit Sherlock! He went on the say that sales margins are -0.18% in 2012 and this is not helped by a further $65bn of fresh capital (+3.9% yoy) injected into the mainly state controlled sector this year. Whilst 2012 Steel output is expected to be 723million tonnes (+3% vs 2011) consumption will only be 679million tonnes (+1.8% vs 2012).

I cant help thinking that far from being the main driver of world demand and growth, it could actually become a festering sore. Throwing ever more capital into already over sized industries will only drive the need to export more. Recent statements from global steel companies bear this out. Jobs in the west are going to be cut still further. If China can produce twice the world demand for diggers, what will happen to other countries production facilities and profit margins. It is clear that Chinese investment is not based on return. It is driven by the need to get the peasants off the farms and into industrial production. This is not good in a world saddled with enormous state and private debt. Consumption cannot be driven fast enough to meet that supply. With interest rates at near zero and QE to the the left of me and QE to the right of me, well, here I am, stuck in the middle with you!

One other little indication of how China intends to deal with a glut of domestic production. 2013 will see the scrapping of the 40% export tax on Metallurgical coal (used in Steel making). This should allow them to regain their global dominance (in supply terms) which the tax, implemented in 2008 took away. Other main suppliers are Japan, Russia and the Ukraine.

Hope you are all enjoying the seasons festivities and that this little seasonal quickie has not given you indigestion. Remember, always look on the bright side of life. On that note I would remind you that the shortest daylight hour day is behind us and we are now on our way to a bright sunny spring. YYYEEEHHAAAA

 

 

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Wednesday, December 26th, 2012 BRICs, China, Predictions, QE, Shipping, Steel

1 Comment to A Quickie for Christmas

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  2. China is Ly`ing | Finance Reaper on January 23rd, 2013

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