A Cautious New Year

As a new year dawns, I think it useful to recognize several recent events that can be expected to significantly affect American manufacturing managers in 2016:

The Global Commodities Bust

China’s economic growth rate is now slowing, after two decades of torrid growth. This slow down manifests as sharply reduced global demand for industrial commodities, as prices indicate. As examples, copper prices dropped about 24% in 2015, iron ore about 40%, rubber about 22% and steel a whopping 57%.

National economies that have been focused on exporting these and similar commodities are, of course, hurting. Such sharp drops in export revenues reverberate through their economies, quenching demand for imports, especially manufactured goods. The reduction in demand affects the entire value chain. So, for many manufacturers around the world, lower sales volumes at lower price per unit sold.

The Perils of Petroleum

China’s growth rate slow down represents demand side imbalance. On the supply side, global availability of petroleum (crude oil + natural gas) has soared, spurred by “fracking”, and by intense on-shore and off-shore exploration and discovery financed by years of $100+ per barrel crude oil. Additionally, the recent nuclear weapons agreement with Iran has removed economic sanctions, allowing that oil-rich nation to substantially increase its petroleum exports.

As we all know personally, gasoline and related fuel prices dropped by over half in the last 18 months or so. Great for consumers in oil importing countries like the U.S. Disastrous for countries that rely on exporting petroleum – Venezuela and Russia, as examples.

The Paris Climate Change Agreement

In December 2015, 190+ nations reached an agreement on limiting carbon dioxide (CO2) emissions, hence Climate Change. As one might expect, an agreement acceptable to 190+ sovereign nations involves a lot of compromises.

In essence, most of the parties have made voluntary commitments on reductions in CO2 to the atmosphere. The totals of those commitments are not nearly sufficient to achieve the atmospheric CO2 concentration levels necessary to prevent global mayhem, according to the United Nations’ projections.

The nations (along with corporations, cities and others that have made voluntary commitments) are expected to honor those commitments. There is a program of reviews to be conducted every five years, where progress is to be discussed and, hopefully, commitments will be increased. There is no means of enforcement.

Take-Aways for Manufacturers

>> The global commodities bust is just part of the bad news in the global financial system. There are a lot of red flags waving. Don’t take that to mean that a global recession (or worse) is at hand (although that is certainly possible). Do take it to mean that the situation is dangerous and very well could deteriorate quickly. The recommendation here is that all managers find a way to follow the pulse of the global financial system. You cannot afford to get blind-sided.

>> The commodities bust and the petroleum glut both demonstrate that all manufacturers are global manufacturers, because your value chain, like it or not, is affected by events everywhere.

>> The U.S. economy has been experiencing a modest rate of recovery from the Great Recession. Modest as it is, it is about the best there is globally. That means those nations suffering from the commodities bust are going to try to increase their exports, and the U.S. is the obvious choice. Look for lots of competition, some of it close to desperate.

>> The Paris Agreement is aspirational, at best. It does set out generally recognized goals for CO2 emissions reductions, with little to suggest that those goals will be achieved. Experience with the earlier Kyoto Protocol – which the Paris Agreement replaces – suggests that making commitments is easier the fulfilling them. The fact is that the agreement is global and that politics are local. Sovereign nations act in accord to their own political and economic immediacies, good intentions notwithstanding.

>> Low petroleum prices are good for present, since personal and business costs are reduced. They are a problem going forward, since cheap fuel means less attention to energy efficiency and related issues. The petroleum glut will eventually disappear, or government fiat will override the markets in pricing petroleum, somehow or another. Enjoy it while you can, but don’t become addicted.

Chuck - Red RocksBest wishes for a prosperous New Year!

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about prospering in the globalized 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.