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China’s Doldrums Put Pressure on US Exporters

Monty Rakusen | Getty Images

Cummins, the big Indiana engine maker, lowered its revenue forecast earlier this month and said it would eliminate 1,000 to 1,500 jobs by the end of the year, citing weak demand from China as a major reason. Schnitzer Steel Industries, a Portland, Ore., firm that is one of the nation's biggest metal recyclers, is cutting 300 jobs, or 7 percent of its work force, as scrap exports to China plunge. And on Monday, Caterpillar reported lower sales in China and cut its global outlook for 2012.

Job reductions are hitting industries like mining, heavy machinery and scrap metal that prospered as China boomed, illustrating some of the risks to the broader American economy if growth continues to slow in what is now the world's second-largest economy. Last week the Chinese government announced that gross domestic product grew at an annual rate of 7.4 percent in the third quarter, the slowest pace in more than three years.

Even as the presidential candidates try to outdo each other in promising to get tough on Chinese exports to protect American jobs, experts say the more immediate threat to American workers may actually be the slowing of sales to China, which has bid up the price of much of what the United States sent overseas in recent years.

Over all, China's growth is expected to decelerate to 7.7 percent this year from last year's breakneck 9.3 percent pace, adding to fears of a global slowdown, especially with much of Europe in recession and the economic recovery in the United States stubbornly anemic.

Already, softening demand has clipped American exports.

"There's definitely been an effect from slowing exports to China on U.S. exports," said Dean Maki, chief United States economist at Barclays. According to his analysis, the drop in exports to China alone is responsible for shaving 0.1 to 0.2 percentage points off the growth rate for the American economy, which expanded at an annualized rate of 1.3 percent in the second quarter.

The recent slowdown in export growth has probably contributed to the loss of 38,000 jobs in the American manufacturing sector since July, while the overall job market has improved and the unemployment rate has fallen. The decline has been striking because exports, along with manufacturing, have been relative bright spots since the end of the recession.

Wall Street will be looking for further signals about Chinese demand Tuesday, as export-dependent giants like 3M and DuPont report their latest results and discuss their business outlook. Earlier, Alcoa, the first such major company to report third-quarter earnings, slightly lowered its estimate for global growth in aluminum demand because of slowing sales in China for products like trucks, trailers and aluminum cans earlier this month.

On Monday, Caterpillar became the latest company to confirm that after a long boom, business in China is down. "I don't think there's any doubt that things got overheated in China," said Ed Rapp, Caterpillar's chief financial officer. "Our long-term view is still positive but things have slowed considerably in China in 2012."

The American outlook for growth and jobswill depend on many factors. A pickup in economic activity in Europe or the United States, for example, could help compensate for any weakness in China, the source of roughly 10 percent of the world's economic output in 2012. And the United States still brings in far more than it sends to China, importing nearly $4 in goods for every $1 it exports.

Nevertheless, the rapid growth rate there benefited many large American exporters and made China the third-largest buyer of American goods after Canada and Mexico. In 2011, China imported $103.9 billion in products from the United States, or 7 percent of worldwide American exports.

What's more, Chinese demand has obviously been cooling. In the first half of 2012, exports to China rose 7 percent from the comparable period a year earlier, according to Commerce Department data, down from a 20 percent annual increase in 2011 and a 36 percent jump in 2010.

Five industries — machinery, computers and electronics, chemicals, transportation equipment, and waste and scrap — accounted for 62 percent of exports to China in August, according to Census Bureau data. But the impact is felt beyond those categories. That's because Chinese demand pumped up prices globally for commodities like coal, paper and many kinds of metal.

For example, Thompson Creek Metals does not sell directly to China, but the company was forced to lay off more than 100 miners at its molybdenum mine in central Idaho earlier this month. Weaker demand from China for the specialty metal has helped drive down prices by 30 percent from where they were a year ago, crimping profit margins at the mine.

China is the world's leading consumer of molybdenum, which is used to strengthen steel and prevent corrosion, said Kevin Loughrey, Thompson Creek's chief executive. "China has fueled a lot of the growth in demand for natural resources over the last several years," he said. "And it's a fungible market. It's like a balloon that you push in one place and it comes out somewhere else."

ForCummins, the impact is more direct. China is its fifth-largest market, accounting for 8 percent of the company's $18 billion in revenues last year. And sales there have fallen significantly, dropping 29 percent in the first half of the year from the same period in 2011, on sinking demand for excavators and trucks. The job cuts will trim about 3 percent of Cummins's global work force of 45,000 but the company hasn't said how many of those will fall in the United States.

With $3.5 billion in revenues last year, Schnitzer Steel Industries is far smaller than Cummins, but it too considers China an important market. Scrap metal gathered in the junkyards of Schnitzer and other recyclers across the United States provides the raw material for stainless steel consumer goods made in China, as well as for the iron and steel bars undergirding construction there.

Now, with local construction stalling, and demand for its consumer products weakening in Europe, China needs far less scrap. Exports of steel and iron scrap — among the top products exported to China from the United States — are down 53 percent this year from the comparable period in 2011, according to the Institute of Scrap Recycling Industries, a trade group.

Prices are down roughly 30 percent as a result, said Joel Denbo, chief executive at Tennessee Valley Recycling in Decatur, Ala. Mr. Denbo's family founded the company 105 years ago, and he's struggling to avoid layoffs among his work force of 175. He has already let 15 contractors go and eliminated overtime in a bid to keep the company profitable. "People are asking me, 'Boss, what do we do?' " he said. "We don't want to lose a single man or woman."

Exports of recycled paper from the United States — which comes back from Asia in the form of cardboard boxes — are also off sharply, putting pressure on local recycling and waste pick-up companies, as prices for their products slip.

"China is such a large market for paper, particularly in North America, that you can't hide from that," said Joe Fusco, vice president of Casella Waste Systems in Rutland, Vt., which serves rural New England, upstate New York and part of Pennsylvania.

In August, Casella announced it would eliminate several dozen jobs as part of a broader cost-cutting effort. "You're constantly looking for pennies, hoping it adds up to millions," he said. "It's a lot different when you get $50 a ton than $100 a ton."