Cross-posted from Credit Writedowns
Here’s an interesting note from UBS’ Andy Lees this past Friday:
Mexican steel maker Altos Hornos de Mexico (AHMSA) may return from a 12 year bankruptcy due to rising steel demand and prices. The 11 7/8% dollar notes jumped 21 cents in the last 5 months to 46.5 cents. "There’s an initial agreement, an initial understanding with creditors and they’re working this off". It made USD34.1m in Q1 by cutting costs and buying iron ore from its own mines. "There’s no question that this company has the ability to service debt. The question is when they’ll do it" according to Barclays. AHMSA defaulted on USD1.9bnof debt back in 1999 so how come after 12 years the company is possibly on the verge of coming out of receivership?
According to the attached economics note on Mexico "labour costs differentials have compressed sharply in recent years vis-à-vis key competitors: Mexican manufacturing wages in dollar terms were three-and-a half times those of China only 10 years ago; they are now only marginally higher."
So what’s happening in China that is creating this loss of competitiveness? Last April I postulated that it could be that China has reached an inflection point commonly known as the Lewis Turning Point:
Informed researchers are asking what happens to China based on the recent demographic shift from rural labour surplus to rural labour deficit. The answer may be slower growth and higher inflation, according to a paper released last month by China’s Center for Economic Research at Peking University. But other impacts may also be increased consumption and a deteriorating external balance.
It does seem likely that this is what is behind the increase in labour costs in China. But, no matter, the cost competitiveness – a major reason foreign manufacturers produce in China – is being eroded.
I’ve highlighted before that a US company was finding China no longer competitive and that it was looking at either shifting production to Vietnam or more likely bringing production back to the US, but this seems to be further evidence that China is losing its competitive position.
Back in January China said it will introduce collective wage negotiations in all enterprises over the next 3 years in a bid to reduce labour disputes after mediation organisations received about 406,000 labour dispute cases last year, an increase of 12.1% from 2009.
He says that economists are beginning to think about replacing labour with capital as a labour arbitrage, something we have already seen as a major factor in suppressing wage gains in developed economies. This is also in line with what economists say developing nations need to do to counteract the problem. More importantly, developing economies that reach this juncture must move up the industrial ladder to production of higher value-added goods or they will see their export competitiveness severely eroded. The problem with these strategies is that it they may be energy and resource-intensive, Andy says. So there are no easy fixes to the Lewis Turning Point conundrum.
He concludes on this troubling note, which is very much in line with what I wrote over a year ago:
China’s trade surplus had deteriorated steadily since 2008 and I think will continue to do so. We know that Japan has been running on and off a trade surplus with China over the last 12 months for the first time since China’s massive (66%) currency devaluation in 1993. I wouldn’t say that we should be dumping China, but I think that China’s factor mobilisation story has gone past its peak and is now going to increasingly struggle to compete in the outside world.