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From Price Hikes to Price Spikes: U.S. Manufacturers and Consumers Will Pay Dearly for Unnecessary Tariffs

Tariffs

By Tim Grady, Executive Producer, Manufacturing Talk Radio

On the first of each month, Manufacturing Talk Radio show hosts Lew Weiss and Tim Grady interview the Institute for Supply Management Committee Chairs for the Manufacturing Report on Business®, Tim Fiore, and the Non-Manufacturing Report on Business®, Anthony Nieves. Both reports, which can be found at the radio website, www.mfgtalkradio.com, show a 24-month trend of price hikes across all sectors, although much of the increases in 2016 and into 2017 were not passed on by manufacturers. While passing on price increases began to change in the latter half of 2017, nowhere has it become more aggressive than in the steel industry, especially with the advent of the tariffs.

U.S. steel producers were increasing prices steadily in 2017, with as much as a 20% increase by some producers during the year. Even as they complained that foreign steel suppliers were dumping steel on the U.S. market at prices below U.S. steel producers manufacturing costs, domestic suppliers raised prices and nudged the Trump administration to impose tariffs on overseas suppliers, particularly on China, South Korea, Russia, Turkey and Vietnam.

One would think that the tariffs should level the playing field, bringing foreign steel prices closer to parity with U.S. domestic steel producers, but something else has happened. U.S. steel prices have spiked in 2018. Since January 1, prices on some commonly used steel forms, such as sheet and plate, have jumped 22%. For example, hot-rolled coiled steel prices are at $770 a ton, up 32% since October, with spot prices above $800 a ton.

Steel Prices

Please note that China is 10th in steel exports to the U.S., although much of the tariff justification has been based on China

More domestic price spikes are in the works, with some of the major producers quietly raising prices as the tariffs increase the cost of some foreign producers. Canada and Mexico have asked for exemptions, and if a favorable NAFTA agreement is hammered out, they may get the exemption. Japan has asked for an exemption, as well. But the target of the tariffs appears to be producers in Asia.

China is one name that is bandied around although steel imports from China dropped substantially in 2017 from previous years and now account for less than 3% of steel imports. And while South Korea, Turkey, Russia and Vietnam are countries in the news, Brazil is not, even though the U.S. imports 13.2% of its steel from Brazil.
But the larger question revolves around the recent price increases from domestic U.S. producers like Nucor, Timken, ArcelorMittal (the world’s leading integrated steel and mining company with substantial production facilities in the U.S.), and AK Steel, which will likely be followed by the second-tier producers. If steel dumping was so crippling to them, why are they now able to raise prices in excess of 25%, adding both 2017 and 2018 price increases together – so far? The answer lies in the past, and the future.

Back to the Future
“Those who cannot remember the past are condemned to repeat it.” – George Santayana, philosopher, essayist, poet and novelist, 1863 – 1952.
When President Bush put 30% tariffs on steel sheet and 15% on steel bars and rods, domestic manufacturers cancelled foreign steel orders and rushed to buy domestic steel. This caused a demand-side problem for U.S. producers, who immediately fell behind in production and within months were rationing deliveries. Prices spiked by 60% within 4 months simply because U.S. producers could get it. U.S. production capacity utilization jumped from 70% to nearly 100%. Cost increases were passed on to consumers and businesses, who had to balance their own cash inflows/outflows equation. Consumers cut back on spending, and manufacturers ended up slashing an estimated 200,000 jobs resulting in over $2 billion in lost wages to be able to absorb the steel price spikes. And GDP grew at a tepid 1.4%, an insufficient number for U.S. manufacturers to invest capital in plants or new equipment.

So, what is the likely outcome of these price hikes? Like Yogi Berra, famed catcher for the New York Yankees baseball club said, “It’s déjà vu all over again.” It appears likely that the tariffs, regardless of their intended merit, will cause prices to rise far more rapidly in the current economic cycle, may trigger inflation that will cause the Fed to more aggressively raise rates, tamp out borrowing for capital investment, cause job losses, and may not translate into the rebuilding of the U.S. steel industry for the national defense as Trump intends. In fact, today, as U.S. producers look forward to increased cash flow and profitability, some are firing up old blast furnaces rather than breaking ground for new modern mills. Tariffs may well choke off the current economic cycle much earlier than 2020 where it was expected to play itself out. And, yes, the tariffs might be the lynch pin that costs Trump his reelection if the economy is in the tank in 2019 – when people vote!

Politics aside, manufacturers will quickly see rising costs for steel and aluminum, and much higher than they may have thought. With 20% from 2017 and more than 20% so far this year on some steel, they will have no choice but to buy at higher prices and pass that cost on in the price of their own products. It didn’t have to be this bad, but it is now unavoidable. Steel and aluminum prices in 2018 may unsettle an economic cycle with unpredictable spikes in steel and aluminum prices that may not abate for a few years, and manufacturers will have to deal with those cost increases for the foreseeable future.

And what makes it all unnecessary is that U.S. steel producers should be investing in modern mills with new material handling technology, competing with the rest of the world on the global playing field while still protecting our national defense interests. Tariffs are not, and never have been, the solution.

QUALITY – A WAY OF DOING BUSINESS

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QUALITY – A WAY OF DOING BUSINESS

Royce Lowe, Steel Marketplace

A few years after the end of WWII, an American named W. Edwards Deming tried to talk his fellow countrymen into putting quality into their products. He was met with an answer he neither liked nor understood. So he took his idea off to Japan where he was greeted with open arms and later came to be revered. He saw the seeds he planted bear fruit many times over. Mr. Deming had started what came to be known as “total-quality management,” and Japanese industry would never be the same again.

The quality revolution didn’t happen overnight: it took a decade, maybe more, before the results of dedication to quality showed through in the finished products. Many of us will remember the stigma that used to accompany “Made in Japan,” but how many of us remember just when it was that the Japanese arrived here on our doorsteps with quality goods at then bargain prices? This from a country that has to import just about all its raw materials.

The Japanese economic miracle is history that’s been told countless times, and anyone who’s driven a Japanese car or used Japanese steel knows that Japanese quality is no myth. Their goods are not cheap these days but quality is there. What’s the secret of total-quality management, and how can it apply to any company of any size selling any product?

Readers of this magazine are in the business of buying, processing, fabricating and selling steel and other metals, and of buying, using and selling metalworking equipment. In a perfect world we’d get exactly what we were looking for at a great price, delivered on time, and of irreproachable quality. All the time. Complaints are costly, and the worst way to find out about a quality problem is from a customer. So how do we keep our problems to a minimum and what do we do to ensure customer satisfaction?

The motivation to supply a quality product or service must be customer-driven, and this entails making sure we know exactly what the customer requires. If we’re supplying steel to an end-user, for example, we must ask all the right questions to find out what tolerances, surface finish, hardness etc. are required, and if a difficult forming operation is involved we must supply a product which we know will make the part. It’s also our customer’s responsibility to work with us and to give us all the information and samples we require so we can supply the necessary quality material. Armed with this information we can set about supplying a quality product on a continuing basis. But how?

There was a time when quality was the responsibility of the Quality Control Department, whose mandate was to ensure that sub-standard material didn’t reach the customer. Material that was rejected against order could either be scrapped or reapplied against less demanding orders. This always entailed dollar losses and the necessity for large areas of a plant to be set aside as rework areas. A true quality program requires the participation of every person who ‘touches’ the product, from the sales person who takes the order to the worker who loads the material on the truck. All processes within a company must be standardized according to each customer’s requirements and end use.

Much has been written about quality in the past few years. There is no doubt that great improvements have been made in North America, but much remains to be done. For a quality program to succeed, each employee must be empowered, and responsible for quality. This isn’t easy to do and it takes time to get a program started and constant diligence on everyone’s part to keep it working. Deming said that to achieve perfect quality companies must “drive out fear so that everyone may work effectively,” and this isn’t easy when downsizing might be in the air. The other side of the coin of course, at least for small and medium-size businesses, is that in most cases the risk of downsizing will decrease with improving quality. Most workers will surely react favourably to being told that the customer expects good quality, and that customer satisfaction and a reduction in in-house rejections are good for the company, hence for the employee.

Implementation of a quality program is not easy, rather it’s a lengthy operation and may in many instances best be left to consultants in the field. When aiming for ISO 9000 accreditation, outside assistance is mostly mandatory. Whichever path we choose to achieve improved quality, total commitment on the part of everyone in the company is absolutely essential. No program will succeed unless it has the backing of top management, and unless every employee takes responsibility for quality and follows the guidelines and standards laid down to the best of their ability. Once the program is underway, and all employees are aware of their responsibilities, it will take time and dedication to reach the goal of improved quality, hence customer satisfaction. It must be borne in mind that customer requirements change, hence continuing dialogue between customer and supplier is essential.

But why quality? Because it pays! It pays the supplier in lower rejects, hence increased yield and productivity. It pays the customer because he receives a material he can use with no rejects. In the final analysis, however, quality is what will do the required job, make the required part, efficiently and with an absolute minimum of reject material, ideally with no reject material at all. A fabricator making a large run of stamped parts from commercial quality, cold-rolled coil on a progressive die set up will profit greatly if the supplier ships him coils with the same surface finish, to the lower end of his hardness range, and within a tight thickness tolerance. If he receives such material the fabricator will profit both from a total lack of rejects and minimum tool wear. He’ll also be sure of shipping his own customers a quality product on time.

A supplier who knows he has shipped steel totally within his customer’s requirements may rest assured that any rejects that might occur during fabrication are not of his making, rather of the fabricator’s tooling. Here we have a win-win situation with both customer and supplier producing good material with a minimum of rejects. In contrast to this type of automated operation, we could cite parts produced on a brake press, with generous bend radii, for an unexposed application. Here a little more leeway will be allotted on thickness and hardness tolerances, but it must never be forgotten that most customers buy by the pound or the kilo, so will prefer the supplier who sticks to the lower end of the thickness and hardness ranges.

Lest suppliers feel that their customers are being a little too demanding in their requirements, let them not forget that their customers probably have customers who are even more critical.

Motorola claim that their fanatical devotion to quality resulted in savings in manufacturing costs of $6.5 billion between 1987 and 1994.

For quality to show through in a company’s products and in its balance sheet, the concept of quality must become a state of mind, quality must run through a company’s blood, responsibility for quality must reach from the boardroom to the shop floor, and, in effect, quality must become a way of doing business. And the customer must be King.

I’ll leave the last word to an American quality consultant whose first question to a prospective client is, “Do you have a director of the way we do business?” “If not,” he goes on, “You don’t need a director of quality.”