World events are happening so rapidly right now that anticipating even a few months down the road is becoming impossible. This post will attempt discuss how all these world events specifically pertain to the fireworks industry.
Just a few short days ago, the consensus thinking in the industry was that in general China’s economy was still growing very fast and this meant continued pressure on Yuan-RMB appreciation (making fireworks more expensive for buyers in USD).
Factories in Hunan and Jiangxi are still flush with orders. Economic uncertainty seems to have forced some USA importers to delay orders until the last moment with an unusual amount of orders being placed in March. Factories have continued to face difficulty in finding and keeping workers. The annual game of “musical chairs” is occurring again as opportunistic workers jump ship for just a few percent raise from a competitor, or even don’t bother to return to work after Chinese New Year with confidence that they can find a higher paying job in few weeks time.
This lack of loyalty cannot be blamed entirely on greed, as inflation in China continues to grow very rapidly, its workers must find a way to keep their wages growing at least as fast. Much of this inflation is driven from China’s need to purchase large amounts of oil and food from outside of China and denominated in USD. As the USA tries to inflate its way out of its own debt crisis, this drives the dollar denominated cost of imports into China up. A second factor for the Chinese worker is the inflated real estate market. As in the rest of the world, owning a home is the dream of all young couples. However, in China, real estate speculation has driven home prices way beyond the point that the average worker can easily purchase a home. Why? Several reasons. First, the Chinese are a saving culture. So there vast sums of money tucked away in banks from two generations of savings. Many of these older savers have chosen to take some of this money out of the bank and invest the money into a home. Typically, the home is not for themselves, but rather planned as a gift to their children or their grandchildren. Second, many wealthy over seas Chinese are investing in homes in China with the thought that some day they will return to China and retire and make their homeland their final resting place. Third, with QE in the USA and the consensus that the Yuan will appreciate, this drives “hot money” into China. Thus, investors from all over the world try to find a way to bring their money into China to benefit from the buoyant economy, the booming real estate market and the appreciating currency. All of this works to continue to overheat the economy and creates what is generally called a classic “bubble”.
All of this looked like it spelled rapidly raising costs for Fireworks in the 2nd half of 2011, the double effect of both inflation and yuan appreciation.
However, on March 14th China released it February 2011 growth statics and surprisingly, all major indicators were lower then predicted or expected. This means that China was in fact already slowing down before the huge events in Japan. Now, growth has not stopped. At best it has lowered from Very High to High. However, for the yuan appreciation at least, this slowing of growth seemed to be good news.
As of this morning, the situation in Japan has raised new questions of where the fireworks industry, and for that matter the global economy, is headed.
As of 6am March 15th, there have been a total of three explosions at the earthquake and tsunami damaged Fukushima Daiichi power station and the UN Atomic Watchdog is saying “The spent fuel storage pond of Number 4 plant in on fire and radioactivity is being released directly into the atmosphere.” Depending on the low level wind direction, this radiation could effect the 38 million residents of greater Tokyo.
The situation, by any standard is very serious. With this as the backdrop, the regions stock markets plunged Tuesday. With the consensus being that the situation in Japan is worse then anyone expected and is very likely to create a major slowdown on the Asia Pacific Region.
How does the earthquake, tsunami, and nuclear meltdown accident effect the Fireworks Industry? In today’s extremely complex and interconnected world, predicting that is extremely difficult and many conflicting forces will be at play. On the one hand, a cooling of China’s overheated economy is a good thing. However, the crisis is likely to cause Oil and Food prices to raise even further rather then reduce them, so the inflation pressure in China will not diminish. This creates a bad combination of slowed growth and increasing inflation. China’s political system is fragile and leaders biggest fear is social uprising. Unlike a more sophisticated west, China does not have the technology to police much of its billions of residents, so it relies on political industrial policy to keep people’s standard of living growing or at least not falling. So, China may step in with aggressive stimulus if the economy shows signs of slowing too much. This again, means higher cost for fireworks producers.
Then there is the complex interplay with the west. As Asia Pacific’s growth slows, this hampers the global economic recovery and the US Federal Reserve is likely to embark on QE3 as a means to try to keep the US economy from being impacted. More easing in the USA, means more hot money flows into China and we are back to the “bubble” that we talked of before.
So in the coming months, the situation will be very volatile. Its likely that Asia Pacific will see a significant slow down, that may be responded to with aggressive stimulation leading to increased appreciation risk and increased inflation.
One thing is certain, it is almost certain that China will continue to see inflation in energy and food, this will continue to keep pressure on wages and thus Chemical Production (user of a lot of energy) and labor costs are likely to continue to raise regardless what happens at the Fukushima Daiichi power station in the next 48 hours.