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Tariffs: Deal or No Deal?

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Tariffs: Deal or No Deal?

This March, in an effort to combat unfair trade practices by China (the world’s largest producer of steel and aluminum and a country which has long been known to flood global markets with inexpensive product), President Trump enacted 25% and 10% tariffs on imported steel and aluminum, respectively, an action he’d threatened for over a year. According to The Financial Times, “the tariffs are intended to restrict imports and allow the U.S. steel and aluminum industries to increase production, use idle capacity, and rehire workers.”  But will the tariffs — from which certain allied countries (including Mexico, Canada, the European Union, and South Korea) are exempted — help rebuild and strengthen America’s domestic steel market as hoped? Or will they threaten the livelihood of steel-consuming manufacturers now struggling to keep up with continuous price increases on these metals?

Following, several electrical product manufacturers whose operations rely on steel and aluminum to varying degrees share their often-opposing thoughts on the short and long-term implications of the recently-imposed steel tariffs and how they’re managing their operations through the changes.

Market Perspectives

Chicago-based Zekelman Industries, the largest pipe and tube manufacturer in North America and owner of Western Tube, Picoma, and Wheatland Tube, feels that the U.S. will benefit from the tariffs. “We expect the tariffs/quotas to stem the quantum of imports coming in, support price recovery throughout the industry, and encourage domestic manufacturing, which will result in the creation of high-paying jobs to revitalize our middle class,” shared Jelani Rucker, vice president of marketing & business development. “Good jobs improve consumer confidence, increase the tax base, reduce the social cost of healthcare, and are essential for the health and safety of our communities.” Overall, he said, “we’re in favor of the tariffs and believe that the domestic steel market is in need of immediate, significant action to ensure its long-term survival.”

While John Ferreira agreed with the need to support the domestic steel industry, the vice president of materials management for Stratford, CT-based Bridgeport Fittings, a 93-year-old manufacturer of largely zinc die cast electrical conduit fittings (in which steel accounts for an estimated 20% of their finished product), isn’t sure that the boon to America’s steel industry won’t come at the expense of many domestic customers like themselves. “We offer a commodity item that sells for pennies on the dollar, so price increases have a significant impact on our company,” explained Ferreira, who reports that manufacturers like Bridgeport Fittings have experienced no less than 9-10 price increases on steel in the past two years as American steel mills that had once been shut down ramped up again and, in some cases, haven’t been ready to meet the new demand. “Even with the tariffs, we can still purchase foreign steel cheaper than we can domestically,” he said. “With domestic steel mills continuing to increase their price per pound, I hope that we’re protecting our steel industry and not just creating an open checkbook for them.”

Tom Click, president & CEO of Louisa, Virginia-based Patriot Industries (www.patriotsas.com) – which manufactures a full line of steel, rigid aluminum, and stainless steel conduit, nipples, elbows, and couplings and is heavily reliant on steel and aluminum – agreed that while the immediate impact of the tariffs has been a difficult pill to swallow, a greater good will hopefully be served. “In the near-term, prices have risen rapidly, but I think that long-term market forces will take over and additional domestic capacity will bring the market back to a high-normal range,” said Click, who suspects that the tariffs may, in fact, be a negotiation tactic that will be eliminated down the line.

Lingering Concerns

Whether they’re for or against the tariffs, many companies touched by them have expressed confusion over the way they’re structured and/or will be implemented. For example, “we feel that there could be merit in a targeted approach that focuses the brunt of the tariffs/quotas on countries who are ‘bad actors’ – e.g., Brazil, China, Costa Rica, Egypt, India, Malaysia, The Republic of Korea, Russia, South Africa, Thailand, Turkey, and Vietnam — and includes quotas for the rest of the world,” Rucker said. “Currently, the administration appears to be moving in that direction and we’re patiently waiting to see what additional agreements are created. In addition, as a company with manufacturing facilities in Canada, we believe that the Canadian market faces the same challenges as the U.S., so the agreement that gets established with that country is very important to us,” Rucker said.

From Patriot Industries’ perspective, “dumping is a serious issue and I’ve had first-hand experience in the aluminum extrusion industry, with China creating market imbalances by offering rebates to their extrusion companies,” shared Click, who hopes to see more detail on the true imbalances the tariffs are trying to correct.

At Bridgeport Fittings, the exemption plan for allied countries has added a measure of uncertainty to the company’s steel-purchasing efforts. “The tariff is on hold for certain countries, but how do you plan around that?” Ferreira asked. “Over six months ago, we started buying in advance but were too late; we have 90-day agreements with distributors and can’t pass price increases on that quickly. Even when we do increase our selling price, our finished products can be purchased more cheaply overseas. We just have to try to be efficient and continue to find the least-cost alternative to keep our operations running.”

Click concurred. To keep his company ahead of the issue, “we’re managing our inventory and long-term price agreements more closely than ever,” he said.  “All conduit prices tend to float with the market price for the core component; we were at a low point just before the tariffs were imposed and since then we’ve had a historic run-up and are near all-time highs.”

A Fair, Balanced Approach

Companies agree that they can’t communicate to their customers enough during this volatile period.

“We track prices daily and provide ample warning when we see an increase coming,” said Click of Patriot’s approach to managing customer expectations.

At Zekelman Industries, “we’re trying to help our customers understand that the tariffs will result in steel being traded more fairly,” Rucker said.  “We’re confident that the price of steel and steel products, set in a fair market, will be very competitive and acceptable to our customer base. Each job in the domestic steel industry supports seven additional jobs in the economy. As the tariffs begin to take effect, demand for domestic steel will increase to fill the void vacated by imports. Therefore, steelmakers and steel product makers, like Zekelman, will need to hire more workers, which will help to create jobs and build stronger communities.”

Ferreira isn’t necessarily convinced. “Some people believe that tariffs are paid for by foreign nations, but they’re actually paid for by the importer and ultimately the channel and customers,” he contended. “The tariffs may create jobs in the steel manufacturing industry, but the downstream effect on manufacturers like us whose products can be purchased more cheaply overseas is that it could end up costing jobs in this country.”

Click is uncertain as to whether the tariffs will achieve their intended objective of creating American jobs and strengthening the domestic steel industry. “There are only a handful of companies that could potentially benefit from this type of tariff, whether on steel or aluminum,” he said. “While I don’t think the tariffs will necessarily cost us jobs, there’s a much bigger leverage opportunity at stake which would benefit tens of thousands of companies, if the administration would pivot from broad tariffs on prime materials and focus on individual components instead. It’s a much more granular approach, but one which could expose dumping activities on higher value-added components like conduit and fittings.”

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Susan Bloom  is a 25-year veteran of the lighting and electrical products industry. Reach her at susan.bloom.chester@gmail.com.

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