As 2015 winds down there is a consensus in them metalcasting
industry regarding market conditions:
If you are making parts for railroad or light vehicle production, you are in pretty good shape. If you are making parts for the agricultural equipment or mining equipment markets, you are struggling.
The first part of that statement could change wildly with the results of the 2016 elections. Also, the Ag business is cyclical and has had some good years lately. The point is that there are ups and downs, and your humble blogger thinks it will be late 2016 before things pick up, at least in Ag.
That could change if somehow the US dollar weakens … which
would help domestic manufacturers until the overall market picks up ... which brings
us to a neat
article in the Wall Street Journal.
I hate linking to something that has a paywall, but this is important. The article states:
Even as iron ore prices have collapsed, Brazilian giant Vale SA is building a $16 billion iron-ore operation that it touts as “the biggest project in our history and in international mining.”
How? Because its costs are collapsing as well.
From South America to Australia, plunging currencies in mineral-rich nations are helping some companies expand their mines—and contributing to a glut of production that has saturated markets and driven prices down.
The cost of producing many commodities is “dropping like a stone,” said Goldman Sachs’s head of commodities research, Jeff Currie, who describes it as a “negative feedback” loop. The dynamic helps explain why commodity busts can be so long-lived.
But for the world’s top miners, which operate mostly outside the U.S., currency declines have dulled the pain of lower commodity prices. Over the last year, the dollar has gained 58% against the Brazilian real, 22% against the South African rand, 21% against the Australian dollar and 16% against the Canadian dollar.
Companies receive U.S. dollars for the gold, iron ore and coal they dig up. But they pay wages, electricity and many other expenses in local currency.”
The numbers in that last paragraph are staggering. Domestic manufactuers need to pay people in
US dollars, and the dollar is very strong.
That makes it harder than normal to compete against offshore suppliers.
Let me explain … no, there is too much, let me sum up. If you are not economically inclined, let’s limit this comparison to two identical casting suppliers. One is domestic and the other is offshore. Let’s say they share the business at a US-based OEM. For the sake of the exercise, let’s remove all other differentiating characteristics (input costs, piece price, freight, delivery time, quality, etc.). The article states that “Over the last year, the (US) dollar has gained …” against many other currencies (let’s say 20%). That means the offshore supplier could slash price by 10% over a year before and still make an additional 10% profit on parts going to the US compared to a year before. That’s great for offshore suppliers, but no so great for the US casting supplier.
Yes, Americans as consumers benefit from low prices and a strong dollar. That said, there are consequences for this state of affairs.