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Electrical Manufacturers Eye Costs Warily in Face of Shifting Tariffs

March 23, 2018
The prospect of another increase in already rising materials costs is putting manufacturers, as well as contractors, in a tight spot.

American electrical equipment manufacturers this week were bracing themselves for a substantial increase in their raw materials costs in the face of new tariffs on imported steel and aluminum. With 15 days’ notice, manufacturers of all kinds placed orders to lay in supplies ahead of the tariffs, but anything that passed through customs after midnight last night was subject to the tax.

President Donald Trump on March 8 signed an order imposing tariffs on imported steel at 25% and aluminum imports at 10% in a bid to slash U.S. trade deficits. Trump initially exempted Mexico and Canada from the tariffs as Washington seeks to renegotiate the North American Free Trade Agreement (NAFTA), then this week he announced the U.S. would also suspend the tariffs on the European Union, Australia, South Korea, Brazil and Argentina until May 1, 2018. Trump also said the U.S. would impose $50 billion in additional tariffs on imports from China. At press time new reports of retaliation from China surfaced, including tariffs on agricultural products it imports from U.S. growers, along with plans to pursue legal action against the U.S. at the World Trade Organization over the steel and aluminum tariffs. Additionally, demands from the European Union for permanent exemption show how the scenario continues to evolve.

The stock market took a 700 point dive on the day before the tariffs took effect as investors faced the prospect of a global trade war. Copper prices moved down on expectations of a slowdown in the global economy as a result.

U.S. electrical manufacturers told Electrical Marketing that steel prices were already going up before the tariffs were announced and now are expected to rise more. Meanwhile foreign producers of competing finished products made where the raw materials aren’t taxed gain a significant advantage.

Bridgeport Fittings, Bridgeport, CT, manufacturers some products that are primarily steel, including straps and hangers for conduit, and company CFO Bill Manthey is having to take a hard look at how to remain competitive against foreign producers of what are already low-margin goods.

“The way we stay in this business is we’re highly automated, but because we’re highly automated, our materials as a percent of what we’re selling them for is a very high number,” Manthey said. “When we get hit with this material increase, it puts us in a very difficult position. We’re competing with someone who had already driven price down because of their low cost-basis, and now they are not absorbing the 25% materials increase, but we are. It’s actually helping these foreign imports compete with us. It’s crazy.”

Meanwhile the channel is watching for price increases to be passed down and preparing to deal with them. Greg Lampert, president of wire master distributor Omni Cable, West Chester, PA, remains wary but said the 10% tariff won’t do much to change the economics of aluminum wire. Smelters are heavily dependent on the price of energy, which makes up a third of their costs, and finished wire imported from countries with cheap power won’t be affected by the tariff on raw materials.

“Aluminum wire manufacturers have already seen an onslaught of new competitors importing wire and the importers are ramping up their positions. Domestic suppliers would love to move the price up 4% or 5% but if the tariff isn’t going to be enforced on finished product from countries with cheaper sources of energy, it’s not going to affect the market at all,” he said.

John Mothersole, director of pricing and purchasing service for IHS Global Insight, and his team have had to issue a new version of their first-quarter metals market forecast after the one released a few weeks ago was nullified by the President’s tariff announcement two days later.

He said aluminum markets have seen a surge in imports since the tariffs were announced and the closely watched Midwest Delivery Premium, the price on top of the London Metals Exchange commodity price buyers must pay to get prompt delivery, has gone from 7 to 8 cents per pound in October to 20 cents earlier this week. “We thought the premium would peak at about 19 cents per pound but the market has overshot where prices were going to go,” he said.

Mothersole said steel market analysts in his firm have begun to see instances of companies warning about allocations or placing customers on allocation. “That’s a recipe for spiking prices,” he said.

He is also watching closely as trade officials in Washington work through negotiations with other countries. “The list of countries that are likely to be exempted from the tariffs has grown,” Mothersole said. “Now you’re driving a big hole in this tariff wall.” He still expects enough of a supply gap under the tariffs to allow domestic producers to charge customers near the full tariff amount.

The National Electrical Manufacturers Association (NEMA) responded to the tariff announcement with a statement from association president and CEO Kevin Cosgriff that the new import tariffs on steel and aluminum would create unwelcome challenges for many electrical manufacturers, particularly related to certain types of electrical steel not made in the U.S. and what he termed overly broad restrictions on imported aluminum.

“Our industry uses steel and aluminum from domestic and overseas sources in their manufacturing processes. The President’s decision to impose import taxes on fairly-traded steel and aluminum will not help our manufacturers’ costs or aid them in being more competitive in the global economy,” said Cosgriff. “We believe the opposite to be the case.”

The Associated General Contractors (AGC) said price increases were already accelerating for many construction materials over the past two years, and the imposition of tariffs put projects and the contractors who build them at risk. The group said in a release that the new tariffs will raise costs for firms, many of which are locked into fixed-price contracts with little ability to charge more for their services.

“Contractors will be forced to pass these cost increases along in bid prices, but that will mean fewer projects get built,” AGC chief economist Ken Simonson in a release. “And contractors that are already working on projects for which they have not bought some materials are at risk of absorbing large losses.”