Editor's note: In my April column, I urged readers to send me suggestions for stories. Much to my surprise, I received several replies, including one from Arthur Franklin, who sent one of the most thorough and thoughtful story ideas I've seen during my tenure at this magazine.
Arthur, whom many of you know through his involvement with HARDI, raised the issue of the unrelenting and seemingly unpredictable rise in steel prices.
I called Arthur and said, ‘Why don't we have a Q&A (Question and Answer) for the magazine to draw attention to this important situation?’ In a moment of jest, Arthur suggested NOT reading this article slowly or there might be another price increase before you are done reading.
Tom: Arthur, give us some background on the issue of the price of galvanized sheets and coils.
Arthur: It has increased at an unprecedented rate this year. During the first six months of this year, our costs have increased 60 percent! The challenge we face as HARDI distributors is explaining this to our customer base who make and install ductwork, while (in most regions) construction is off and business is slow.
The price of galvanized steel was determined by our domestic economic conditions, and many steel mills were competing against each other wanting to sell steel. We now have been through several years of mill consolidation with only a few sources remaining, minimizing the competitive process. The economic conditions of the world have contributed to nearly nonexistent imports, rising raw material and scrap metal prices, and the reduction in value of the dollar. This allows the domestic mills to continually raise prices. If domestic customers don't want the domestically produced steel, no problem; it can be sold overseas. During the first six months of this year, the domestic mills have had monthly price increases. We are a service center customer and have been given seven increases during the first half of this year.
Tom: What is HARDI's involvement in all this?
Arthur: I am the moderator of the HARDI Steel Issues Group. Starting several years ago, we have HARDI-organized conference calls discussing galvanized steel pricing and availability issues. During “normal” times, we have a call every several months. Now we are having them monthly, and the not-so-funny joke on a call this spring was that we had better end our call so we could check our fax machines for the next price increase. Mills were announcing price increases with limited windows of time to book orders. Steel service centers would fax us our new prices effective immediately.
Tom: Can you give us a breakdown on some of the specific problems?
Arthur: The issues are numerous. Here are some of the challenges we face:
Problem 1: Ductwork fabricators and installers can't believe these outrageous increases when their business is “slow.”
Problem 2: Sixty percent higher steel means more dollars are needed for our purchases, more dollars are needed to support our inventory, and more dollars are needed for our receivables when we sell the steel. The credit lines of all partners in the supply chain need to be expanded just to transact the same tonnage as before.
Problem 3: Contractors quoted jobs months ago at their then-current price levels. Their material cost is now at unexpected levels.
Problem 4: From an historical perspective, we all expect the steel to level off and probably (hopefully) come down at some time, and no one wants an inventory of “high-priced” steel. But will it turn? If so, when?
Problem 5: Prefabricated ductwork (an important sector of the HVACR ductwork industry) is experiencing the same increases in cost of materials. In the middle of the first quarter, the manufacturers all announced price increases for April. When the price increases finally went into effect, they covered only a portion of their then-current cost increases. We knew even at that time to expect an early summer prefab increase, and when it happened, we were not surprised.
Problem 6: Many other items our industry uses are made with metal, so their costs are rising (air outlets, equipment casings, etc.).
Problem 7: New construction builders are leaning very hard on all subcontractors to reduce costs. Yet the HVACR contractor is forced to pay more for his items.
Tom: Can you offer some advice about what wholesalers can do?
Arthur: Wholesalers should consider these steps:
- Keep your eyes and ears on the marketplace. The steel environment is constantly changing.
- Use replacement cost when selling steel or you might soon find yourself buying steel for your inventory at prices that are higher than you are selling it to your customers.
- Be sure to take care of your regular customers and not let your salespeople sell “old” steel to nonloyal customers. Your loyal customers depend on you for supply.
Tom: I understand that your group also has concerns about some unscrupulous selling practices.
Arthur: There are some resellers of steel (to both wholesalers and large end-users) who have been caught both cheating and/or using deceptive sales practices. We have found problems such as improperly stenciled steel, misrepresentation of unstenciled steel, misrepresentation of billing methods and lack of knowledge of the subtleties of the steel “extras” within a given gauge. These items can make a dishonest quoted price appear to be a better deal than the honest prices when in reality it is not. We are working on ways to educate ALL buyers of steel (other wholesalers and our customers) on how to specify and verify their purchases BEFORE they are made into ductwork. For example, many of us already are showing our customers how to check zinc coating weight using portable coating testers when they receive steel to verify that it meets the specifications required for their jobs. Coils should be weighed, sheets counted and a micrometer used on all material to be sure it meets gauge tolerances. Watch for publications and publicity from HARDI.
Tom: If HARDI members want to become more involved, what can they do?
Arthur: They can keep up to date on current market conditions by participating on our free conference calls. Contact either Bud Healy at HARDI headquarters or me to be put on the meeting notice list. We are also meeting during the HARDI Annual Conference this month. It should be an interesting meeting, as we will continue to discuss these issues (including the “cheatin'” going on) face to face.
Arthur Franklin is the president of Fairfield, NJ-based S. Franklin & Son. Contact him at 973/227-2571 or Arthur@SFranklin.com.