Materials Outlook 2012

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How will raw material prices and other factor cost drivers influence the overall of cost of goods sold for product being sourced out of China? This outlook gives our readers a clear understanding of the key factors that drive production costs in China for hardline manufacturers. We review global demand, currency markets, metals pricing and freight and consider how the outlook for each of these drivers will influence the cost of hardlines manufactured in China. This semi-annual publication is distributed to our clients and offers a summary of our in depth research. It is used by Sertus and our clients to extract savings from more effective purchasing management and deliveries given the specific outlook for each segment covered.

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Materials Outlook 2012

  1. 1. Materials Outlook:   Factor Cost Implications for Chinese Hardlines December 2011   in t f
  2. 2. Sertus Research Materials Outlook1-877-6-SERTUS Factor Cost Implications for Chinese Importsinfo@sertusllc.com December 20112012 Global OutlookEconomists have been downgrading forecasts for 2012 large role in determining price. The combination ofalmost without exception. Risks continue to be skewed low Chinese domestic inventories and a 5-month trendto the downside (especially considering the crisis of higher imports suggests China will continue to re-unfolding in Europe), favoring a more cautious outlook stock copper in 1H12. Yet even if demand slows, thefor next year. Should the euro break up, the supply side restraints mentioned earlier should continueconsequences to the global economy will be far more to show price support. We would not be surprised tosignificant than any of the other crises of recent see Cu trading above RMB68,000 per MT in the run upmemory. All of this poses little upside for to Chinese New Year and possibly topping RMB70,000commodities, favoring from a factor cost standpoint, a as the restocking efforts continue.more stable inflationary environment for Chinesegoods.Currency MarketsThrough November, the RMB has appreciated againstthe USD by roughly 3.7% in 2011 and is expected tocontinue to appreciate through 2012 at an even briskerpace. Risk aversion, deleveraging and global liquidityalso bode well for USD performance (certainly as itrelates to 2011). Because most all commodities arepriced in dollars, any rise in the USD (while not havingan impact in real terms), will weigh on nominal prices.Together with expected RMB appreciation vs. USD,this bodes well for raw material inputs for Chinesegoods.Base Metals Aluminium (Al): About 85% of the Al inventoriesBase metals are highly cyclical and tend to sell off worldwide are tied up in inventory financing deals,sharply during global slowdowns. While we have seen making the supply conditions much tighter than theya modest correction already, history suggests plenty of would otherwise be. With longer dated deals offeringdownside risk remains. We look at the implication of more attractive yields, the impact on supply fromeach of the key base metals that form an important role inventory financing should last well into next year.in raw material inputs for hardlines manufacturers in Aluminum prices have also been below the marginalChina. cost of production since August of this year, which also is supportive for price as we move into 2012. On theCopper (Cu): The global inventory pipeline for copper demand side, China’s turnabout in 2009 to become acontinues to be depleted and relief is not anticipated for net importer of Al is still driving demand. While theat least a few more years. Global copper production auto and construction sectors have been traditionallygrowth already faces several structural problems (lower strong drivers of demand in China, use in the packaginggrades, increasingly complex new projects, adverse sector is set to increase. Growing demand, combinedweather conditions and enhanced geopolitical risks). with rising power costs, government restrictions onOn the demand side, there is much uncertainty given energy-wasting industries and reduced availability ofweak manufacturing, contraction in balance sheets and funding for energy-intensive projects all favor anlimited credit availability. As the world’s largest import driven Al supply that will be on the wholeconsumer, the demand scenario in China will play a supportive for price in 2012.www.asiatradepro.com Page 1 in t f
  3. 3. Sertus Research Materials Outlook1-877-6-SERTUS Factor Cost Implications for Chinese Importsinfo@sertusllc.com December 2011Steel While customs statistics show China exports in the firstWith the global economy cooling and construction three quarters of 2011 were up over 20% year on year,reeling from soft demand, it is expected that demand for the trend is clearly slowing. In October, exports rose atsteel will continue to show signs of weakness. the slowest pace in almost two years as Europe’sAlthough prices bounced in September of 2011, the deepening debt crisis has provided a strong headwindmarket has since corrected and it is anticipated that as on demand. The trend deteriorated even further inwe move into 2012, global supply will continue to November and analysts are now calling into questionoutweigh demand, keeping prices down. their already reduced GDP numbers for 2012. It is bound to be a very difficult year.FreightAfter climbing from lows in July not seen since 2010,the China Containerized Freight Index (CCFI) peakedin September and has since been on a steady decline,now at its lowest point since 2009. Many analystsbelieve shipping costs are bottoming out and that theanticipated increase in export volume over the nextseveral months in the run-up to Chinese New Year,could result in a repeat of last year’s container shortagepushing up costs.There is concern whether the projected growth in cargocapacity is going to be able to meet the anticipated risein exports. A shortage of containers is possible althoughnot as severe as last year.www.asiatradepro.com Page 2 in t f

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