Perhaps more than most sectors, fabricated metal product manufacturers are caught up in the tariffs and trade wars that are affecting the North American economy.
Companies in this industry transform metals into components or final products through various processes such as forging, stamping, bending and welding. These companies are often suppliers to manufacturers for construction and agricultural equipment, automotive, aerospace, consumer goods and other end uses. Strong order books in these OEM categories are pulling the fabricated metal sector along with it.
Overall the segment has been lifted by the economic strength that’s reflected in the manufacturing sector. In August business conditions hit a 14-year high, according to the Institute for Supply Chain Management (ISM) survey of industry executives. The ISM Manufacturing Purchasing Managers Index hit 61.3 percent, up from 58.1 percent in July. Results over 50 percent indicate companies are expanding rather than shrinking.
Overall manufacturing demand remains strong, with the ISM’s New Orders Index scoring 60 percent or more for the 16th straight month, while the Customers’ Inventories Index reflects a brisk economic pace. Also, the Backlog of Orders Index continued its expansion at higher levels compared to the previous month.
With import tariffs on steel and aluminum in place and retaliatory export tariffs levied on many U.S. products, fabricated metal product manufacturers face rising costs balanced by strong demand for their products.
Tariffs on imported steel has driven up prices, even on domestic production, as the market adjusts to the new cost structures. Prices for some steel products have increased by 80 percent since the tariffs were put in place. On the plus side, strong demand has compensated for higher prices. However, steel costs rose so rapidly it was challenging to capture the increase in price quotations.
A fabricated metal products executive told the ISM survey, “The toughest thing we deal with is the unknown. Dealing with tariffs on steel and aluminum sources and not knowing if or when they might end makes planning difficult. We are entering the period when we begin our pricing negotiations for next year and will likely treat the tariffs as if they will be here for the entire year. It’s challenging, but not insurmountable.”
The current tariff structure has gaps that allow cheaper foreign rates to compete on some metal products. For instance, while tariffs on raw steel are in place, there are no tariffs on some products made from the foreign steel. Offshore competitors can still undercut prices on products made with higher cost domestic steel.
As the shock of the tariffs has turned to acceptance, the market is absorbing the increases. However, there’s no reliable prediction of how long tariffs will remain in force. Uncertainty in pricing and availability leads to unpredictability in the supply chain as manufacturers struggle with knowing how much steel to purchase and when. No one wants to purchase at the peak and see prices for finished products fall.
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