THE forecast for trailer manufacturers and everyone else in the industry that relies on steel to build products: It's going to be a long, hot summer.
And we're not talking about what registers on a thermometer.
Tensions are high and blood is boiling as the industry reels from the repercussions of the worst steel-price crisis since 1973.
“Unfortunately, I was just a young lad then, so I can only read about that,” says Rob Jansky, purchasing agent for Great Dane. “But I can say that with the Section 201 tariff (imposed in March 2002 and lifted in December 2003) and the shortages we're seeing now, I'm told that I have seen probably the worst two cycles in the history of domestic steel.
“No one predicted this. No one projected this. And if you did, you still couldn't react fast enough to the increases that have been passed along to us.”
Bret Jones, director of purchasing for Trail King, snickered when contacted by Trailer/Body Builders and told of the subject matter. When it was suggested that he at least could laugh about it, he said, “That's all you can do right now. … It's been deadly.”
The factors
When President Bush removed the tariffs on imported steel last December, lower prices were expected. But that's not what has happened. Among the factors contributing to the steel-price crisis:
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There is an increased worldwide demand for steel, especially in China, where the economy has been superheated in order to improve the country's infrastructure leading up to the Beijing Olympics in 2008. Last year, China's demand for steel increased by 38 million tons — more than the total used by Mexico and Canada annually. Although some Chinese commercial banks temporarily suspended lending in April and the government said it would curb investment in roads and bridges, China's steel prices did not drop significantly and US prices continued to rise.
“A cool-down for China would be going from 9% growth to maybe 7%,” Jansky says. “I don't feel that cool-down is going to be enough to offset that demand over there and put that much more steel back into the US.”
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The weakened US dollar, which makes foreign steel more expensive.
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The consolidation of US steelmakers.
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An increase in the price of raw materials needed to manufacture steel.
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A coal mine fire in West Virginia in 2003, which had led to a reduction in US output of coke, which is made from coal and is used to make steel.
Cringing at the cost
Hutchens Industries, a Tier One supplier to trailer manufacturers of suspension products that processes over one million pounds of steel a week, cringed as the price of $400 a ton in January had become $550 by the second quarter. Mike White, vice president of sales, says the steep hikes have forced the company into a pricing policy that is similar to that of the steel companies — price in effect at the time of delivery.
“We have published prices, but as the raw-material pricing surges upward, we have no choice but to try to pass that on,” White says. “Since our customers are trailer builders and other vehicle builders, we recognize they may not have the same flexibility with their customers that we have with them. We can more or less insist that our customers pay a higher price based on some surcharge from us that recovers our cost of steel. But we know they've contracted with a lot of their customers and may have a hard time passing that additional cost on through.”
Lloyd Voeller, sales administrator for Rugby Mfg — whose primary products are truck hoists, dump bodies, and platform bodies — says the company had instituted three price increases through the first week of May: 6% on February 9, 10% on April 1, and 15% on April 22.
But 15% of Rugby's business comes through state bids, and the company has had to honor the quoted prices. Rugby's most popular dump body (9' long, 2-3-yard capacity) requires 1400 lb of steel, plus 140 lb for the cab shield and 500 lb for the hoist, so the implications have been enormous.
“We weren't making any money at all on a lot of that (state-bid) business,” he says.
Jansky says Great Dane's profits “definitely have been eaten into considerably” and there has been a pronounced “negative impact on the bottom line,” even though he says there is a demand for the trailers.
“We had a difficult time in the early stages of the increases passing that along to customers where we had backlogs to,” he says. “They have somewhat come around to the increases since it's been publicized in the mainstream with the current state of the steel industry. Some customers still have not accepted that increase and are telling us a contract is a contract. We have not taken their orders out of schedule and are honoring the contract.
“We have been able to go out and raise prices for all future quotes for the third quarter and beyond. There was a point in time where we actually stopped quoting in order to get our hands around what pricing was doing. We tried to project to the best of our ability the worst-case scenarios, and based our pricing on somewhere in between the worst-case and what we were currently paying for steel. Thus far, that number has been ever-elusive.”
When the tariff was lifted and foreign mills failed to offer to sell massive amounts of steel, US steel companies concluded that they had control and subsequently started to raise prices.
Jansky says another key factor was GM's decision to drop the lawsuit it had filed against US Steel for breaking their contracts.
“The benchmark for domestic manufacturing — trailer or automotive — was set when GM dropped its lawsuit,” he says. “That was the shot over the bow, as it were — letting the rest of us know, ‘There is no fighting. You either accept these increases or you will not get steel.’ I think that is the boat we're all in now.
“I would say that most trailer manufacturers deal mostly with service centers and not mill-direct on most items we buy. So we really hire a middle man to go do the fighting for us. And service centers have little to no recourse against the mills. If they try fighting, they won't get steel and therefore will be out of business. They've done the best they can do to hold off price increases, but they've had to definitely pass them right along to us.”
What has made life especially difficult for trailer and truck equipment manufacturers is the surcharges that have been assessed. According to a survey by the Precision Metalforming Association, 85% of steel users said they were required to pay a surcharge; 90% said suppliers raised their base prices; and almost half said at least one supplier canceled an order in January.
US Steel, citing higher costs for natural gas and raw materials, started adding a surcharge of $30 per ton. Nucor, the largest steel producer in the US, took it even further, announcing on February 10 a surcharge of $93/ton on reinforcing, merchant, and structural products, and a surcharge of $100/ton for special bar products, effective March 1.
“Some are adding an increase and a surcharge, and we don't ever know what the surcharge will be until we get the bill,” Voeller says. “(In early May), some were doing away with the surcharge and just putting on a price increase, so at least you know what the load of steel is costing.”
Pay up
While Delphi Corp got some relief — a judge in Saginaw (Michigan) County Court issued a restraining order that forced steel suppliers to ship ordered materials throughout the month of March to Delphi at prices agreed upon in preexisting contracts — most companies just have to pay what whatever they're asked to pay.
That's assuming they can even find a supplier with the steel they need.
“Three-quarter-inch steel has been tough to get a hold of,” Voeller says. “With flat sheet, we've had to call around to all the steel companies in the US to see if they had it in hand. We bought it by the ream and they'd flatten it and cut it with their machines. You're pretty much at their mercy if you don't take it when you find it. If you don't, the next caller will.”
Jansky says Great Dane has had great difficulty in obtaining certain sizes of steel that are the bread and butter of the trailer industry: 1/4" and 5/16" high-strength.
“The other huge impact has come with crossmembers and the drastic increase in price in a short amount of time,” he says.
White says that in early May, Hutchens' steel suppliers starting backed away from surcharges and focusing on price increases.
“I'd conclude that steel companies want to be sure that at least some of their price increases stick when the cycle starts to go the other way,” he says.
Tips in short supply
Voeller says he has no significant tips for companies trying to deal with the crisis — mainly because there are none.
“There's really no way you can prepare for this,” he says. “You can read all you want about what's going to happen. But if they say you're going to see increases in the future, you have no idea what they're going to be and how quickly they're going to come upon you.
“Even with (steel) companies that were contracting out six months, those contracts weren't honored anyway. They said, ‘Well, if the price goes back down, we'll honor that price. But for now, you take the price or we'll sell to somebody else.’ You can't really prepare for that.”
He said that the only thing Rugby could have done to mitigate the damage would have been to more quickly react last December when there were rumblings of price increases.
“We thought it was going to blow over,” he says. “We didn't really get on the wagon until the beginning of February. And, of course, we had to honor orders that were in-house. We could have maybe imposed a surcharge a little sooner. But if you do that, you have to consider what your competition is doing. If they're not doing it and you're doing it, it's going to create some problems.”
Economist Scott Franklin, in an article for the National Association of Trailer Manufacturers' Tracks, wrote that steel prices probably would stabilize and perhaps drop “no later than the beginning of the fourth quarter.”
“Much of the upward price momentum has been caused by steel users purchasing as much steel as quickly as possible to insure supply and protect against future price increases,” he wrote. “This ‘forward buying’ by large users further exacerbates supply shortages and spikes prices. With at least their short-term needs satisfied, large users' temporary absence in the marketplace should take some pressure off prices.”
Lower prices are expected by the end of the year because of an expected rise in US interest rates and a stronger dollar could lead to a further increase in foreign imports, according to the Wall Street Journal.
“There are some hints that the price has nearly maxed out,” White says, “but we really haven't seen that expressed in changes in pricing. From a pricing and availability standpoint, it's still a pretty doggoned uncertain marketplace.”
Jansky says that the coking-mill issues probably will lead to continued price increases throughout the summer before relief is seen. But even when the increases stop, Jansky envisions an ominous future.
“I don't feel we'll ever see 20-cent hot roll again,” he says. “I feel right now what the steel industry is doing is re-benchmarking that new base cost and seeing exactly how far they can get it before people just stop buying steel.”