Steeling for tariff backlash

May 1, 2002
WHAT was President Bush thinking? That's what the truck/trailer manufacturing industry and even some economists and President Bush's own treasury secretary

WHAT was President Bush thinking? That's what the truck/trailer manufacturing industry — and even some economists and President Bush's own treasury secretary — are wondering.

When President Bush decided in March to impose tariffs of up to 30% on most imported steel — responding to the US International Trade Commission's December recommendation to impose import duties of 20% to 40% — it sent shock waves throughout the truck/trailer industry, creating ripples of ill will that will not easily be calmed.

“I fully intend to call the President's office,” says Lehman Pendley, president of Ox Bodies Inc in Fayette, Alabama. “Not the Congress, but the President's office. Something needs to be done — and it needs to be done now — for small manufacturers such as ourselves. I know the steel companies haven't tried to take advantage of the automobile manufacturers and their main customers the way they have us. If they did, then all hell would have broken loose by now. They (the auto industry) have more purchasing power and more power in Washington. They have more ears up there than small companies such as mine.”

Pendley says he expected President Bush to levy the tariff. What he didn't expect was a total breakdown in relationships with American steel companies and suppliers as a result of what he feels are unethical business practices, including broken contracts and blatant price gouging.

Pendley says that following Bush's tariff announcement, US Steel Corp and Nucor Corp raised their prices by 40%, and indicated they would be raising them even more.

“You give these people a half-inch and they want to take a darned yard,” he says. “They've always done it, so it doesn't surprise me that it's happening.”

He says he placed an order in mid-April for 81 wide material (3/16"), cut to length, and was quoted a price already $4 higher per hundred weight than it was before the tariff announcement. Pendley authorized an order for the third quarter. His supplier tried to order the material that same day, and the steel company “reneged,” saying it wanted an additional $1 per hundred weight. Pendley, saying to his supplier, “I haven't got too many choices,” once again authorized the purchase. His supplier called the next day and said the steel company wanted an additional 50 cents per hundred weight.

“I agree that the steel companies probably needed some help,” he says. “They needed to sell steel at a higher price than they did last year. But to go up 35% to 45% in one quarter on my cost … I can't absorb that. I'm going to have to pass that on to my customers.

“They (US steel manufacturers) know that the foreign steel is not ordered to come into this country right now because of the 30% tariff. They know they can go up more than 30%, because steel's not available. They're creating the shortage. They cut back on production intentionally.”

Some relationships are good

At Heil, purchasing manager Ray Anderson says the company has a “good working relationship” with its suppliers, and all tonnage that was booked for the third quarter will remain as contracted. But he says that because Heil buys only about one million pounds a month, it is classified as one of the “small guys” and doesn't have as much leverage as an automotive or appliance manufacturer.

At Pitts Trailers in Pittsview, Alabama, president Jeff Pitts says his suppliers are telling him to expect a price increase, but as of April 26, he still hadn't seen it. Pitts makes log and lowboy trailers out of T1 and mill-rolled steel that accounts for 80% of the trailer's weight and 35% of the cost.

“I know on our end, 90% of the total trailers are aluminum, so I don't see it impacting our business,” he says. “We've already increased the prices of our trailers this year, so that'd be pretty impossible to do again.”

Bob Miller, vice-president of sales and marketing for Crysteel Mfg Inc, says Crysteel had contracts with suppliers that supposedly guaranteed prices through January 2003, but those were broken when the steel manufacturers broke their contracts with the suppliers.

Miller believes Crysteel was ahead of its competitors in analyzing the impact of the tariff in terms of raising steel prices. He informed his distributors that they could expect a price increase, then sent a letter to them May 20 announcing an average increase of 7% to 8% in Crysteel's products, ranging from a low of 3% to a high of 15%.

“If we don't have sufficient steel inventory to cover our backlog, we stand to lose a lot of money just building our backlog,” he says. “This was absolutely a total surprise. We knew the price would go up because of the tariff, but we thought our contracts were still good. Nobody stocks six months or a year of steel inventory; you can't afford to. If they're not honoring contracts, that means your prices change immediately. The steel we're buying now costs more, and that means we're going to have to adjust for it in the cost of the product or else absorb the difference.

“I don't know exactly how it affects everybody individually, but certainly corporately as a group in this industry, it's going to have a pretty dramatic effect. It means end users are going to start spending much higher prices for their product. This could put some companies out of business.”

Miller says he doesn't know how his distributor network will respond. The initial response from those he personally talked to was one of understanding.

“A lot of them buy steel as well, and I think they're seeing the same thing and understand why we're doing what we're doing,” he says. “Their biggest concern is the products they have long-term contracts on — maybe potentially having to go back and re-negotiate those. I didn't want to be the messenger that was killed because they didn't like the message. We're not trying to profit from this. We're just trying to cover our butts. We're saying, ‘We'll work with you on the rough points.’ They're concerned about what it will do to their business. But they don't seem to be holding us accountable. Now, I may end up with nasty phone messages, because no matter what, some are going to think I'm going to buy a new Cadillac after this.”

The other side

The American Iron and Steel Institute has a different take on the controversy.

AISI is a non-profit association of 35 North American companies engaged in the iron and steel industry, plus 145 associate and affiliate members who are suppliers to or customers of the steel industry. AISI's membership accounts for two-thirds of the raw steel produced in the United States and 60 percent of the raw steel produced in North America.

AISI says “steel contained in finished goods is normally only a small fraction of the final value, because steel is a very cost-effective component of finished goods.”

It describes the tariff's effect as a “modest, partial restoration of fair-market value for steel” and claims that it will have a “relatively insignificant impact on the final cost of finished goods.”

“The resulting US steel prices would be reasonable and non-disruptive — at most 10% — due to world steel overcapacity and intense global competition,” it says. “US steel producers are projecting price increases of 2% to 3% for finished long products, 2% to 8% for finished flat rolled and about 12% for slab.”

AISI says that for the 2001 model year, the average light motor vehicle (car, SUV, light pickup truck or mini-van) contains 1,782 lb of steel, or about 54% of the total curb weight. Before the tariff, the market value of that steel to the auto producer was $675. A 10% increase in the price of steel (enough to restore only about 20% of the hot-rolled and cold-rolled sheet price gap vs. average levels for 1980-2000) could raise the price of the typical vehicle by $70.

For a company such as Ox — whose primary product is dump bodies, and primary material is high-tensile hot-rolled steel, using 10 gauge through 1/4" — the increase obviously would be more severe, because steel accounts for 100% of the body's weight. A 10% increase in steel prices for a 4,500-lb dump body would result in a price increase of $171. But as Pendley noted, he already has been hit by a steel-price increase of 40%.

Miller says the biggest impact on the truck/trailer industry — and specifically on manufacturers of dump bodies, trailers, and containers — will be from the 30% tariff on plate, cold- and hot-rolled sheet, and coated sheet.

‘Amazing value’

AISI has tried to temper the outcry by stating that US steel prices were at an all-time low, and even with a 40% to 50% tariff, prices would “still remain below historical levels — even on a nominal basis.” It says that on flat-rolled products, pre-tariff prices were 50% to 68% below the 1980-2000 average, and 45% to 54% below the 1990-2000 average.

“The estimated increase in US steel prices due to a strong and effective steel tariff remedy would still leave US flat-rolled prices below or in line with 1997 levels,” the institute says. “In terms of cost, quality, and performance, steel remains an amazing value.”

Reciting US government data, AISI says that since 1982, steel prices went up less than 10%, compared with 70% on consumer prices in the aggregate, 40% on motor vehicles, 80% on lumber, and 50% on aluminum.

It says that “a strong tariff remedy … will generate the needed revenues to help the US steel industry recover.” Since 1998, 32 companies — which accounted for over 30% of US steel-making capacity — filed for bankruptcy protection, including National Steel (the No. 4 producer), which filed the day after Bush's tariff announcement.

“The US mills have never tried to cut costs,” Pendley counters. “They've never made the proper investments. They've sent better machinery to build steel to Japan and foreign countries than they put in their own mills. They've never tried to operate economically.”

Says Miller, “What we've done is protected domestic steel manufacturers, but I don't know what incentive there is for them to get rid of these old blast furnaces and put in new oxygen-fired furnaces and means that allow them to make steel more efficiently where they can be competitive on the international market, instead of getting protection from the government.

“They knew this was coming for four years and everybody ignored it until all these major steel companies started to go out of business. Now you've got to do something dramatic, and it's going to be interesting to see the trickle-down effects in the economy.”

US economy might suffer

According to economists Joseph Francois and Laura Baughman of the Consuming Industries Trade Action Coalition, the economy as a whole will suffer because there are far more businesses that use steel than produce it. They say that even a tariff of 20% would impose about $2 billion in additional costs on consumers and result in a net loss of 31,789 jobs — far more than the 4,375 that would be saved. Treasury Secretary Paul O'Neill has gone on record as agreeing with that theory, believing that the solution is to reduce global overcapacity in steel-making.

Since that hasn't happened, manufacturers in the truck/trailer industry have to deal with reality. And the reality is that the rules have changed.

When Ox's steel suppliers said the steel companies were reneging for the second time, Pendley told them “to keep their steel and I'd do something else.” And he says he will.

“After this, I'm going to look into importing some steel, because I don't feel obligated to domestic mills,” he says. “I think this is the wrong approach for them to take, when they could have gotten a 20% or 25% increase. And that's enough for anybody at one time, I would think. We wouldn't have said a word about it. But that's not what's happening.

“I've been in this business 30 years and it'll be a buyers' market again one of these days. How long it'll be until then, I can't tell you today.”

Miller says the irony is that Crysteel has a contract to supply bodies to the government.

“I'm thinking about hitting them with a steel tariff of my own,” he says. “When you think about it, they're the ones that created the problem. And yet they expect me to build bodies for them and eat this tariff? I don't think so.”

About the Author

Rick Weber | Associate Editor

Rick Weber has been an associate editor for Trailer/Body Builders since February 2000. A national award-winning sportswriter, he covered the Miami Dolphins for the Fort Myers News-Press following service with publications in California and Australia. He is a graduate of Penn State University.