The Chinese Government has ordered more than 1,400 companies to cut production across 19 industries or to actually close their doors outright. These are draconian steps aimed at saving the Chinese economy from a major downturn. Having said that, these are not steps that have never been taken in the past. This has happened in specific industries in the country – and many of those are targeted once again.
Among the industries being targeted, they are primarily raw material input sectors. Steel, coking coal, aluminum, paper, alcohol, MSG, batteries, leather, printing and dyeing, zinc, lead, etc. are all among the 19 being targeted. For American businesses, this is important to understand. The reduction in raw material output will eventually raise producer prices – which will increase final prices on products procured in the country. One of two things will happen:
- Sourcing companies will see prices rising in China and with more robust Total Landed Cost Calculators, they will find alternative sourcing markets. This could ultimately reverse the impact that the Chinese Government had hoped to achieve.
- China imports a tremendous amount of the raw materials that it consumes through manufacturing production. Therefore, a reduction in demand (as industries are forced to cut outputs) will drop demand for raw materials from countries like the US, Australia, Canada, etc. That will make raw materials cheaper for NAFTA manufacturers – perhaps even making them more competitive in the process. But, if the curtailment in China is significant enough, it will have an impact longer term on commodities producers.
If you source in China, keep an eye on your sourcing costs and watch for changing pricing conditions as this forced increase in producer prices hits manufacturers.
Courtesy Armada Corporate Intelligence, To read the full analysis contact: www.armadaci.com