The China Syndrome

Everyone knows that China is a huge country and thus a huge market that’s been attracting all manner of western investment as it rumbles forward into modernity as we know it. As we assume modernity ought to be, anyway. Every capitalist on the planet has visions of coming up with a way to tap that monster economy somehow.

Most of us think of it as no more than an opportunity for western commerce, some far-away phenomenon, and we only actually see it in the “Made in China” line on a doll or a camera or any number of other things we consume routinely. End of story.

Nope. Not so. The truth is, all the road building and factory construction and general activity within that huge expansion of an already big economy is hitting you where it hurts. And it’s not letting up.

We look at its nearly 10 per-cent growth rate through the first quarter of this year and say good for them.
But if you’re looking for one reason why crude-oil prices are rising, look east. China consumes a bunch of it.
If you wonder why the cement you need for that new terminal building is so expensive, and maybe even hard to get, look east. China consumes 55 per cent of the world’s cement despite having nearly 5,000 cement plants of its own, which is more than the rest of the world combined. Those plants can’t keep up, what with huge projects like the 2008 Beijing Olympic Games.

Not only that, but in the course of consuming so much of the world’s cement, China also consumes so much ocean-going shipping capacity that the stuff couldn’t be shipped elsewhere even if it was actually available. You’re feeling this in delays to road-building projects all across North America. Really, if your trucks are dropping fasteners because they roll over rough roads that never seem to get fixed, blame China.

And our industry is definitely feeling China’s presence, or soon will be, as transmission suppliers and axle makers have trouble filling their orders for steel. And when they can get it, the darned stuff is 40 per cent more expensive – or worse – than it was just months ago. You’ll feel both of those sooner or later, if you haven’t already, when you hear from a salesman that the new tractors you want to order are going to take a while longer than expected. The manufacturing capacity is there at the truck plant, but maybe the supply of engines or some other component is a bit skinny and your demand just can’t be met. As well, that engine may cost a bit more than you expected.
Look east again. China presently swallows 40 per cent of the world’s steel supply and apparently outbids western and other world buyers on steel contracts all the time. The shortages of steel in the west are real. We recently read of a major container manufacturer needing 20,000 tons of steel to meet its monthly requirements, but having only 1,000 tons available. It’s a boon to container leasing outfits, at least.

The supply of raw materials in general, including aluminum, is the focus of continuing interest and even more concern amongst the companies you do business with.

“It’s the largest single problem that we have,” says Larry Yost, outgoing chairman of ArvinMeritor, who retired as of August 9. “Quite frankly, I don’t see an end in sight. It’s really hurting
our industry.”

I was speaking with Larry during a conference-call interview with him and Charles “Chip” McClure, the company’s incoming chairman, chief executive officer and president. He was previously president, and chief executive officer of Federal-Mogul Corporation, so he knows the nature and extent of the problem just as well.
“I share the same view,” he said.

And there’s nothing anyone can do about this situation, so be prepared to wait a little longer and pay a little more for those trucks you plan to order this fall or next spring or whenever. Ironically, unless China succeeds in ramping up its own steel-making capabilities very soon, and they’re working on it, this raw-materials shortage may have an effect on the dreaded pre-buy phenomenon that everyone expects to see leading up to the next round of Environmental Protection Agency diesel emissions standards in 2007. If the production of trucks is slowed because axle makers and engine builders and the like can’t meet the demand, then the effect of the pre-buy could be at least moderated.
Frustrating as this steel-supply problem may be, and it could presumably get worse, at least it isn’t one you folks in end-user land can influence. We’ve got many others that need your active attention. In this case you can only go with the flow.