Triple-Digit Oil Prices Helping US Steel Industry
by Stacy Feldman - Aug 21st, 2008
in
CIBC World Markets Chief Economist Jeff Rubin recently analyzed the explosion in shipping costs in the steel sector from triple-digit oil prices and came away with some thoughts (pdf) about which nation will prosper the most:
Soaring transport costs, first on importing iron to China and then exporting finished steel overseas, have already more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the US market.
In other words: Chinese steel manufacturing production is coming to America, along with the sector’s long-lost wages. That's promising news for the US Steelworkers of America, says Rubin, and a telling sign of things to come. The numbers:
China’s steel exports to the US are now falling by more than 20% on a year-over year basis—the worst performance in almost a decade. While many might attribute this decline to the slowdown in the US economy, it is noteworthy that US domestic steel production has risen by almost 10% during the same period.
See page 6 of the report for a detailed chart. In sum: For the first time in ten years, US steel producers have a cost advantage over China, whose exports are dropping. As long as oil hovers above $100, that trend could ripple through the whole global economy, in industry after industry.
Remember: The cost of shipping a standard 40-foot container from Shanghai to the US has already tripled since 2000. Knowing that, it’s hard to disagree with Rubin’s macro-level take on the price surge:
In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.
Rubin's prediction:
Instead of finding cheap labor half-way around the world, the key will be to find the cheapest labor force within reasonable shipping distance to your market.
His grand thesis is that high oil prices are denting the globalization that has helped to wipe out US manufacturing.
Time will tell how true that claim is. In the meantime, the shocking and rapid effect of high oil prices on global trade has been confirmed in big steel and beyond. And it looks like this: production is moving closer to home. More evidence of that here, from the New York Times:
To avoid having to ship all its products from abroad, the Swedish furniture manufacturer Ikea opened its first factory in the United States in May. Some electronics companies that left Mexico in recent years for the lower wages in China are now returning to Mexico, because they can lower costs by trucking their output overland to American consumers.
In today’s oil- and climate-constrained world, that's just the beginning.
Bets are more and more fuel-heavy, emissions-intensive, trade-exposed industries will soon have their operations on fuel and carbon diets -- especially if Washington slaps a price on CO2 pollution, and if the top economies broker a post-Kyoto accord that forces the emerging market world to regulate emissions, too.
Both are likely. The implications of such policies for the world economy would be huge. And North America, it seems, may end up benefiting the most.
Bookmark/Search this post with:
Post new comment