Matheny To SEFA: 10 Reasons Fastener Prices Are Rising

John Wolz

From rising iron ore prices from Brazil to steel supply, currency fluctuation, and a list of costs that include ocean freight, pollution and labor, as well as quality and labor issues, fastener veteran Mickey Matheny offered the Southeastern Fastener Association 10 reasons why fastener prices are rising rapidly.\
Matheny, director of mill sales for Heads & Threads International, started in the industry in 1974 with International Fasteners.
Matheny”s 10 Reasons Asian Fastener Prices Will Continue to Rise:
1. Rising iron ore/steel prices Brazil just increased iron ore prices 65%. Other resources, such as coke and gas, also are rising. Some experts predict steel prices will go up US$100 per ton yielding a 20% higher cost for finished steel.
2. Last September, the Chinese Yuan rose to its highest level since the dollar link ended two years ago. According to the “Big Mac Index,” which compares the cost of a Big Mac in various countries, the Yuan is undervalued by 58%. “The world financial community is applying pressure for the Chinese government to “float the Yuan” and allow it to settle at the correct level,” Matheny noted. Most economists are predicting an 8% to 10% increase per year until the Yuan strengthens to that level.
3. China”s financial system is dominated by state-owned banks that provide most of the capital. “Due to a lack of transparency, the public can”t evaluate the economic value of most companies and there are many non-performing and under-performing loans that can go years without being detected,” Matheny finds. Loan failures add to the cost of financing of equipment and capital expenditures. Overseas investors are sending speculative investment money into China in anticipation of currency re-evaluation, causing high inflation and lower purchasing power, Matheny added.
4. “When we think of China, we tend to think of their manufacturing and assembly operation, but half the population is still farming,” Matheny noted. Although the unemployment rate is very low, it is estimated 200 million people are underemployed. There is a “tremendous compensation difference” between the 40% of the people living in the cities and the 60% in the countryside,” Matheny explained. Wages have climbed more than 20% in the last 18 months.
A new employment law approved last year allows workers to work for an agency for two years and with the third year they become company employees with guarantees. One of the guarantees is that if a worker is laid off, they get a month severance pay for every year they worked. The law also stipulates that companies must contribute to retirement plans.
5. China is trying to reign-in steel production due to its energy intense, “dirty” manufacturing process. The European Union is suing China for dumping steel. “In the future industrial policy will favor high value added industries at the expense of low cost manufactured materials,” Matheny cautioned.

6. China has 16 of the world”s top 20 polluted cities. Chinese officials have recently acknowledged that prices of Chinese exports are artificially low because factories have not been paying for costs associated with pollution, Matheny pointed out. “The government finally recognizes the problem and is getting serious about fighting back.”
The vice-chairman of China”s State Environmental Protection Administration warned “export manufacturers violating China”s pollution laws will be forced to close for 1 to 3 years.” These measures are likely to increase the cost of manufactured products.

7. Serious quality problems, such as the recent tainted pet foods and toothpaste, tire failures and toy recalls, have caused the Chinese government to implement costly inspection measures. “This will add an extra layer of cost to basically all products exported from China,” Matheny pointed out.

8. The Chinese government dropped the export rebate to manufacturers from 13% to 5% in July and “we expect the other 5% to drop sometime this year,” Matheny projected. “This Vat rebate reduction was part of a government policy shift targeting specific low valued, polluting, and energy intense products,” Matheny explained.

9. Container traffic is expected to increase 7% to 9% this year. The TransPacific Stabilization Agreement, a consortium of shipping lines, is recommending increases of $400 to $800 per container in the next contract period, Matheny explained. “This alone equals a 3% to 4% increase in low carbon material,” he calculated.

10. The longshoremen”s contract is up for renewal during the summer of 2008. “The last time we had a strike it resulted in a several-month backlog of late containers,” Matheny recalled. E-mail: mickeymatheny@yahoo.com �2008 FastenerNews.com