How will raw material prices and other factor cost drivers influence the overall of cost of goods sold for product being sourced out of China? This outlook gives our readers a clear understanding of the key factors that drive production costs in China for hardline manufacturers. We review global demand, currency markets, metals pricing and freight and consider how the outlook for each of these drivers will influence the cost of hardlines manufactured in China. This semi-annual publication is distributed to our clients and offers a summary of our in depth research. It is used by Sertus and our clients to extract savings from more effective purchasing management and deliveries given the specific outlook for each segment covered.

1. Materials Outlook 2013:
Factor Cost Implications for Chinese Hardlines
-
www.asiatradepro.com

2. Sertus Research Materials Outlook
1-877-6-SERTUS Factor Cost Implications for Chinese Imports
info@sertusllc.com December 2012
Copper (Cu): The global inventory pipeline for copper
2013 Global Outlook continues to be depleted and relief is not anticipated for
at least a few more years. Global copper production,
like last year, already faces several structural problems
The fallout of the 2008-2009 crisis still lingers and has (lower grades, increasingly complex new projects,
left a lasting impact on the global economy that will adverse weather conditions and enhanced geopolitical
continue into 2013. Global growth will have dropped risks). This is exacerbated by capex reductions from
to around 3 percent in 2012, which is reduction of about many large producers due to higher costs and low
half a percentage point off the long-term trend since the prices for the metal. On the demand side, there is much
crisis emerged. There is still a high level of uncertainty uncertainty given weak manufacturing, contraction in
aross key regions – from the ‘fiscal cliff’ concerns in balance sheets and limited credit availability. However,
the U.S. to the Chinese leadership transition and we believe that the major end-markets for Cu in China
reforms in the Euro Area. All of this uncertainty keeps (power, autos, white goods) are looking much better.
a lid on investment and ultimately hurts trade. As a This is especially true for power grid infrastructure
result, the risks continue to be skewed to the downside, (making up 47% of Cu demand), which is expected to
favoring a more cautious outlook for next year. From a grow 88% per Chinas Five Year Plan (2011-2015). We
factor cost standpoint, this should translated into a more can see Cu trading higher on the back of this
stable inflationary environment for Chinese goods. investment, pushing RMB70,000 levels in 2013.
Currency Markets
Through November, the RMB has appreciated against
the USD by roughly 1% in 2012, well below what most
analysts thought would happen at the end of last year.
Much of this has been due to the slowdown in China
and the continued reliance on the export sector to fuel
wealth creation. There are many who believe that
Beijing is going to speed up the opening of the
country's capital account and that the RMB will become
a convertible currency within the next five years.
Because most all commodities are priced in dollars, any
rise in the USD (while not having an impact in real
terms), will weigh on nominal prices. The continued
expected RMB appreciation vs. USD thus bodes well
Aluminium (Al): High global inventories and excessive
for raw material inputs for Chinese goods.
production capacity should keep Al prices down over
the next 12 months. Low LME prices, high costs, and
Base Metals low demand growth have already resulted in a number
of voluntary non-Chinese cutbacks in capacity.
Basic improvements in the Chinese macro data and However, these announcements have been modest
signs of strength in China's white goods, auto, and compared to total installed capacity and production.
infrastructure sectors has put upward pressure on base Infrastructure spending in China, which is expected to
metals pricing in recent months. However, the global increase next year, should put upward pressure on this
outlook, which continues to be precarious, could hold metal but the degree of influence is not yet known. Our
any material price appreciation in check. We look at best estimate is that Al prices will increase moderately
the implication of each of the key base metals that form in 2013 but around 6%.
an important role in raw material inputs for hardlines
manufacturers in China.
www.asiatradepro.com Page 1

3. Sertus Research Materials Outlook
1-877-6-SERTUS Factor Cost Implications for Chinese Imports
info@sertusllc.com December 2012
Steel
Freight
With the global economy continuing to cool and
construction reeling from soft demand, it is expected
that demand for steel will continue to show signs of
weakness. Today, China produces nearly half of the
world’s steel. As recently as 1999, China was
producing about 110 million metric tons per year,
slightly more than the U.S. By 2004, the number rose to
250 million. Today, China cranks out nearly 800
million metric tons of steel a year. The next biggest
producers are Europe (200 million), North America
(150 million), Japan and the former Soviet Union (each
about 120 million). China's apparent steel use in 2012 is After climbing from the lows at the end of last year, the
expected to increase by 4.0% to 648.8 Mt following China Containerized Freight Index (CCFI) peaked in
6.2% growth in 2011. In 2013, steel demand is expected April and has since been on a steady decline. We are
to grow by 4.0%. This projection brings China's now running close to the highs of 2010, although the
apparent steel use in 2013 to 674.8 Mt, 61% higher than trend continues downward. Most analysts believe
the 2007 level. Most analysts anticipate some price shipping costs will return to 2011 levels, except for
easing over the long run, although in the short term some possible spikes in the run-up to Chinese New
there may be some volatility. A benchmark product in Year due to possible container shortages. However,
China - hot-rolled carbon sheets – is already selling new orders for container ships are beginning to
around $520-$530/metric ton and should be selling for reappear on a larger scale following two years almost
at least $600 just to cover costs. China has already without contracting a single new vessel. The new orders
started to cut production just like it did in 2010 and are for ships due for delivery in 2013 and 2014. New
2011. With this tightening in supply we expect $100 to supply coming on-line, coupled with the weak global
$120 per metric ton increases. Look for higher prices at scenario and downside risks vis-a-vis Europe and US,
the beginning of 2013 and easing as we move from all bode well for importers' shipping costs in 2013.
2Q13 into the second half.
www.asiatradepro.com Page 2