John Lapides, president of United Aluminum Corp., spoke about the decline of manufacturing in the U.S. and its affect on the aluminum recycling industry. Lapides said that U.S. capacity utilization is currently too low, with domestic industrial production in March at 76.5 percent, far below the 81 percent average of the last three decades. Lapides said that the recent economic upturn, which he describes as “cyclical,” is masking continuing structural damage to U.S. manufacturing.
Lapides blamed outsourcing, productivity issues, U.S. costs and unfair trade for the problems the manufacturing sector is experiencing.
U.S. productivity is the main reason behind America’s global competitiveness, Lapides said, which calls into question the huge loss of factory order volumes to China.
More than labor costs are to blame, he said, citing China’s sovereign lending practices as the root cause. “The Chinese are building capacity far in excess of demand,” Lapides said, which further erodes capacity use in the U.S. This growth in capacity is being fueled by China’s lending practices. “It’s the borrowing for new capacity and not having to repay.”
While Beijing doesn’t control all lending in China, the government promotes local political leaders who show growth, Lapides said. With this incentive to over-invest, capacity growth is “rampant,” he said. And with a lack of credit ratings or lending standards, lending practices are without discipline.
In addition to these capacity and lending issues, Lapides says that unfair trade practices—currency manipulation, China’s technical import barriers, VAT subsidies for Chinese manufacturers and the condoning of intellectual property theft—also affect U.S. manufacturing.
The U.S. trade deficit with China is growing 20 percent yearly, Lapides said, adding that Congress is not doing enough to address the issues affecting U.S. manufacturers. He cited the need for tort reform, which drives health costs and product liability insurance costs, and problems with the supply and transmission of energy. To support U.S. manufacturing, Lapides suggested that WTO rules need to be enforced to blunt China’s “predatory unfair trade practices.”
H added, “Unfair competition could bury U.S. manufacturing and related defense capability.”
Lapides then addressed the affect that these manufacturing trends are having on the recycling industry as it relates to aluminum. He said Chinese demand has raised scrap prices and has tightened scrap spreads, creating what he called a “windfall” for the scrap industry. “Spreads on scrap may partly reflect shipping costs and low cost labor to sort, as well as a subsidy,” he said. And as manufacturing declines in the U.S., so will new scrap generation, Lapides said.
In Lapides view, the best case scenario for U.S. manufacturing would involve moderating Chinese growth; a tightening of Chinese banks lending standards to prevent the financing of uneconomic projects; a gradual floating of the Yuan, enabling the Chinese to afford imports; growth in domestic Chinese demand to afford excess manufacturing capacity; and higher incomes and profits to lessen non-performing debt.
In terms of negative scenarios, Lapides said that easy credit could cause the Chinese to overbuild, dramatically overshooting demand; empty factories will lead to lower prices and laid-off workers; growth in non-performing loans; savers abandoning Chinese banks; and possible political as well as financial unrest. In addition, Lapides said, “Underutilized commodity capacity, such as aluminum smelting, could result in plunging world prices.”
Lapides concluded by saying, “U.S. manufacturing is in a state of crisis. Perhaps I can compete, but I am out of luck if my customers cannot. If the value chain is broken, it undercuts customers and suppliers.” He added, “China needs to worry about access to our markets for manufactured goods—this provides U.S. negotiating leverage.”
Jim Southwood of CMMC used his presentation to look at historical aluminum cycles. According to CMMC’s forecasts, the bull cycle the commodity markets are currently in may end in December of 2005 if it runs true to historical averages. Southwood said that the bull market it strictly a U.S. phenomenon in light of the weakness of the U.S. dollar.
The weakness of the U.S. dollar and other non-fundamentals have a lot to do with the price of aluminum, Southwood said. He also cited the action of speculators and energy prices as contributing to these pricing premiums.
Southwood cited Aluminum Association figures when he said that aluminum sheet and plate orders are up 23 percent in the short term and extruded aluminum orders up 20 percent, with order growth ahead of shipments. Southwood expects aluminum consumption to increase 8.1 percent in 2004 compared to last year’s figures.
In the next six to nine months, Southwood expects the price of and demand for aluminum scrap to increase, while he expects the supply to decrease.
On a global scale, power is the biggest problem facing aluminum smelters, not the availability of alumina, Southwood said, citing that 4,000 to 5,000 tons of capacity are installed but cannot operate in light of energy-related issues.
Among the market unknowns that are affecting the outlook for aluminum scrap, Southwood cited the rate of industrial growth in the U.S., the rate of Chinese power generation growth and investors’ fear of loss or the availability of better alternatives.
Southwood said that China’s need for scrap has lead to aggressive behavior, which raises prices but threatens dealers. He said that the entire scrap supply/consumption chain is at risk, as manufacturing relocation trends are reducing yard longevity.
The ISRI Convention was April 26-29 at the Mirage in Las Vegas.