Striking a Balance with China


Is China, the growing industrial giant, a friend or enemy to U.S. manufacturers? Some outfits worry about competing for raw materials with China, which has a voracious appetite for commodities and scrap metal. But larger U.S. manufacturers and multinationals are likely to benefit from long-term growth there, says Lloyd O'Carroll, senior vice-president and equity analyst at BB&T Capital Markets.

O'Carroll is a former economist with Reynolds Metals, now owned by U.S. aluminum giant Alcoa (AA). After addressing a recent Platts Aluminum Symposium in Fort Lauderdale, he spoke with Platts Managing Editor Tina Petersen (Note: Platts, like BusinessWeek Online is a unit of The McGraw-Hill Companies). Edited excerpts of their conversation follow:

Q: Should U.S. manufacturers be concerned with "the sucking sound" coming out of China as it absorbs so much from the U.S. -- including scrap metal -- to make components and parts?

A: While a portion of U.S. manufacturing has relocated to China -- and the trend will likely continue -- I expect that it will slow significantly as the U.S. dollar declines and, similarly, the yuan is adjusted (see BW Online, 2/35/04, "Tumbling Dollar, Climbing Stocks"). Substantial increases in freight rates will also make a difference. I [also] hear talk that some companies may reverse their manufacturing moves as the quality of goods coming out of China isn't as high as goods made elsewhere.

Q: Will aluminum producers and manufacturers in the U.S. be put out of business because of China's growth?

A: China is experiencing very rapid growth -- it was more than 20% last year -- in both aluminum usage and production. It's important to note that they're net importers of aluminum and aluminum products, particularly of higher quality, more technically demanding products, such as those used to make cars or airplanes.

North American aluminum producers are investing, expanding, and growing in China to take advantage of the market's rapid growth. The capacity that's being added is aimed at local market growth, not export to the U.S. Alcoa is particularly upbeat on long-term growth prospects in China.

Q: What do you see as China's future?

A: I believe that China is on a Japan-style industrialization curve -- multi-decade high growth similar to what Japan experienced from the 1950s to the 1980s. That should give U.S. manufacturers a major opportunity for [producing] high-quality products with high technical content over the long term. I don't believe Chinese growth is coming predominantly at the expense of U.S. manufacturers. The global economy isn't a zero-sum game.

Q: Your outlook for U.S. gross domestic product growth for 2004 has improved since your November forecast. What has made you more bullish?

A: The data on industrial activity published since December has been vigorous and more robust than I expected. Additionally, housing is holding up a bit better than we expected, and nonresidential construction has stabilized and is showing signs of an early upturn. The falling dollar has already begun to help trade and boost industrial activity. Consumers likely have one more spending burst from [2003] tax refunds before going dormant for a while. Based on this, we anticipate our forecast to move a notch higher -- from 4.5% for 2004 to the 4.5% to 5% range.

Q: How will this year's Presidential campaign affect the economy?

A: The invective and rhetoric typically associated with an intense political campaign could spook either consumer confidence, especially if consumers [fear that] their tax cuts will disappear, or Wall Street, should investors believe that the investment-friendly tax cuts could be reversed or that rising protectionism threatens growth.

Q: And beyond 2004?

A: The cyclical rebound can continue in the 4.5% range for '05 and '06, spurred by capital-equipment spending, nonresidential construction, continued trade improvement from the falling dollar, and general strength in the industrial economy. However, these strengths will be partly offset by slow job growth and elevated debt levels for consumers. Thus, the cyclical recovery appears to be sustainable -- but a rates below [those of] past recoveries.


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