Steel Prices Still Increasing

After average increases of 8% in 2007 that followed increases in 2006, steel prices are on the way up again. Baosteel Group, the largest steel producer in China, took a 65% increase in iron ore prices from their major supplier in Brazil. It's not clear yet how this will affect steel prices, but it can't be good. Although this is a global issue, it is magnified in China because of the growing demand for steel mainly in the domestic market.

Here are three articles on the situation:

http://www.redorbit.com/news/business/1200056/steel_prices_expected_to_increase_in_2008_consumers_could_see/index.html
http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSSHA35825820080220
http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-23210344.htm

We were hoping for less pricing pressure in 2008 for our customers. Unfortunately that doesn't look like it will be the case.

US Port Capacity

Capacity at US ports is a looming problem. Already the west coast ports are close to current capacity, when the rail and truck infrastructure is also considered. Many organizations are working on this and the market is also finding new options in Mexico and Canada. The next few years will be very interesting as this issue unfolds.

The picture is from Long Beach port which currently accounts for about 65% of the import container volume in the US. This year the longshoreman's union is again negotiating its labor contract. In 2002, when the current six-year agreement was signed, the negotiation included a 10-day lockout that was a huge issue for importers. Late in 2008 we could see a similar situation.

I'll be posting more about the US port capacity issue throughout the year.

China Makes, The World Takes

There was an excellent article in The Atlantic last year about manufacturing in China:

http://www.theatlantic.com/doc/200707/shenzhen

It's a great article and I strongly recommend it. It correctly identifies the big issues like Chinese monetary reserves and what will happen when the government decides not to hold their reserves in USD. The article also touches on the human side of Chinese manufacturing and on the implications for our country, both short-term and long-term. I'll post other comments related to this article soon.

Quality Assuarance in China

In the wake of tainted pet food and lead in toys scandals, how does a company assure quality from Chinese suppliers? With the cost of freight, and most payment terms with Chinese factories requiring significant payment before shipments are received by customers in the US, you sure can't count on opening the container and auditing product quality then.

At OPS America we take the following approach:
1. Make sure we have the customer's specifications and any additional quality testing requirements correct and complete.
2. Audit the factory's ability to meet specification requirements and perform quality testing.
3. Perform our own quality testing. The majority of our employess in China are quality inspectors.
4. Follow-up on shipments with customers to determine if any changes are needed for the next production run.
5. Most importantly - be present in the factories and build relationships with multiple personnel so we can find out when things aren't right.

Point #5 is probably where some of the large toy companies failed in working with their Chinese suppliers. These suppliers had purchased low quality paint that contained lead. Being in the factories often and building relaitonships with multiple personnel is the best way catch things like this and to really know what's going on.

Pollution and the Olympics

This headline is from an article in today's businessweek.com:

China's Commuter Olympics -
Many countries will train their athletes in Japan and Korea before the Games, due to concerns about pollution and food quality in Beijing

The picture is from Hong Kong which is better than most other Chinese cities I've visited. While the pollution situation is bad, I'm optimistic that it's getting better and will continue to do so. The olympics will help quite a bit by bringing even more attention to the issue. For our part, OPS can help by selecting companies that are environmentally responsible, and that is our intention.

Chinese New Year Week

This is a strange time of the year for us. Most of the year I get many e-mails every night from our offices in China. This week I get none overnight. It's a good time to take stock of where we are with our customers and how we can improve our work for them. This week I am summarizing the status of current projects and issues so we can start off focused after CNY. I'm also taking care of several projects I've put off and planning to post more to the blog. Stay tuned.

Another View on Going North and West

Here's the view of others within OPS about investing in offices to the North and West in China. They argue that we already have relationships with primary goods producers there, but assembly factories are still concentrated in the South. The real limiting factor in factories locating in the North and West (either existing factories moving or new factories being started) is management talent.

There is a great shortage of management talent in China. Factories that do assembly have a high need for good management to juggle purchasing, inventory, labor, production, etc. Because management talent is concentrated in the South, that's where the assembly factories are. For this reason they believe a positive ROI on new offices in the North and West (we already have one in Hangzhou near Shanghai) is still in the future.

This is a key strategic issue for our company and we will continue to discuss and review our current position.

Appreciation of the Chinese Currency (RMB)

Here's an article on the accelerating appreciation of the Chinese currency (Yuan or RMB) versus the US dollar and a historical chart of the last two years.

RMB appreciation speeds up in 2008

Macroeconomics15 January 2008

The yuan has risen 0.7% against the US dollar since January 1, China Business Net reported (in Chinese). The intermediate rate has hit 7.2566 on Monday, breaking the 7.26 benchmark, the fifth time the Chinese currency has hit a record high against the dollar in 2008. A spokesperson from the central bank said that the yuan's appreciation will help ease inflationary pressure. The remarks have been intepreted as government support for a more rapid rise of the exchange rate. Analysts project that appreciation against the dollar for the full year could reach 7-10% amid expectations of an interest rate cut by the US Federal Reserve and the continued weakening of the US currency.

The RMB has appreciated 13% from it's historical peg of 8.3 per USD to its current rate of about 7.2 per USD since the middle of 2005. There are many reasons for the apprectiation. I'm not an economist and am not sure yet whether this is good for the Chinese or US economies. I do know its been an issue for many of our customers and is forcing them to try increasing their prices.