February 2020 Volume 2

ECONOMIC UPDATE

Australia and the Fires: Climate Change Brought to a Real Crossroads The crisis inAustralia has brought the issue of climate change to a real crossroads. The wildfires that have been devastating the country are the worst that have been seen in the history of the country and may have caused the extinction of several animal species. The estimate is that one billion animals have died, billions of dollars of damage has been done. The economy of the country will take decades to recover and there is no reason to assume that these droughts will end. The country is demanding that there be a change in the climate policy pursued by the current government but what would it really matter? Analysis: Australia accounts for less than 1.3%of all the greenhouse gas in the world. A 100% end to carbon emissions from Australia would have next to no impact on the problem.The issue is that much of what Australia sells is resource based – everything from coal to iron ore and lots of farm output. If one adds the coal exports to the equation Australia accounts for over 4.0% of carbon emissions. It is this export business that many in the country want to halt. The question is what difference this would really make. The nation that buys that coal and burns it is China. The Chinese account for the largest share of carbon emissions, methane and every other greenhouse gas. If the Australians do not sell to China it is not as if China will stop buying coal and burning it. The economy of Australia will be crushed and nothing changes as far as greenhouse gas. In fact, the pollution would likely worsen. China has coal of its own but it is low grade, high Sulphur brown coal and part of its effort to reduce carbon emissions has been to buy higher grade and cleaner burning coal from Australia and the US. The bottom line is that addressing climate change is by definition GLOBAL. It has to be a joint effort by every nation and thus far that approach has been foiled by nationalism and collective refusal to tackle the issue. ■

has been very little money allocated to new roadways, bridge repair, construction of airports and seaports and the like. This has been the main reason that consumption numbers have been uneven and in decline most months. Industrial CapacityUtilization -The capacity utilization numbers have been remarkably consistent over the last several months as they have moved in a very narrow range between 76 and 79. This is not bad but the preferred level of utilization is between 80% and 85%. This is not something set in stone but the sense is that when capacity usage is under 80% there is too much slack in the economy and that will inhibit acquisition of new machinery and technology as well as hiring and other expansion. When usage is over 85% there will be shortages and potential bottlenecks. There has been no threat of shortage for the last few years but there has been stubborn resistance as far as the rate moving towards normal.The sellers of machines and machine tools report that there is still demand for their output but that buyers are delaying delivery and that has started to create a cash flow issue for these companies. The good news is that companies are still planning to buy, but the bad news is that they are pushing delivery off by as much as two to three quarters as they wait to see what the year looks like. Metal Pricing - The big mover as far as the metal markets are concerned has been gold and for the most traditional of reasons. The threats of a major Middle East confrontation have propelled investors into a search for some kind of safe haven and that usually means gold. There has also been a jump in demand for currencies such as the Swiss France and the Japanese Yen. The other metals have seen demand shrink a little and that has affected their price levels. There have been no big declines but nothing suggesting prices are headed up dramatically either. Generally pricing is lower than it was a year ago and that seems to reflect the global slowdown in many manufacturing sectors. The producers have been reducing output in response to the reduced demand, but thus far this decline in output has not triggered higher prices. The expectation is that when demand recovers there might be a period of price hikes until producers elect to step up activity to meet that additional demand. PMINewOrders -The five-month decline in the overall Purchasing Managers’ Index has been of some real concern and has been taken by some as a signal of a potential recession. It is evenmore disturbing that the New Orders Index has been below the 50 line since July. The diffusion index used in the PMI holds that any number below 50 is an indicator of contraction (and numbers above 50 suggest expansion). The reason the PMI is so closely watched is that the data is current and reliable. Much of the economic data is old before it can be judged accurate (it takes three or four revisions before GDP numbers or employment numbers are secure). Surveys are fast but often unreliable as people give inaccurate responses. The purchasing manager simply reports whether they are buying more or less or the same and the data is both timely and accurate – therefore a great barometer for the economy as a whole. The New Orders index is the more future oriented part of the index and having readings in the 40s causes concern regarding the pace of growth through the year.

Chris Kuehl, Ph.D., is FIA’s Economist and co-founder of Armada Corporate Intelligence. You can write to Chris at info@forging,org . Learn more about Armada at www.armadaci.com

FIA MAGAZINE | FEBRUARY 2020 39