HVAC and sheet metal industry deals with post-steel tariffs marketplace
Dustin Denison has resigned himself to paying more for ductwork, registers, fittings and just about everything else containing steel that Applied Energy Innovations uses daily.
On April 3, he took the step of emailing customers copies of the price increase notices the mechanical services company was getting from its suppliers: “8 percent across the board”; 3 percent from one company; up to 7 percent from another.
He wouldn’t be surprised if prices go up further.
“I’ve never seen prices revert backwards,” said Denison, who runs the HVAC division of the Minneapolis-based contracting firm.
And 1,100 miles away in Atlanta, officials at a 144-year-old steel distributor that specializes in HVAC and ductwork fabrication products were preparing for some potentially difficult conversations with customers.
“We can’t always provide all the steel our customers need at the price they’re expecting,” said Robbie Thompson, the president and CEO at Conklin Metal Industries.
From residential contractors to machinery makers, the sheet metal and HVAC industry is girding for the effects of the Trump administration’s decision to levy a 25 percent tariff on imported steel and a 10 percent tax on aluminum.
The decision was announced by President Donald Trump March 1. Citing his authority under a little-known law that gives the administration wide latitude on trade matters it says impact national security, the White House initially said the tariffs would apply to all imported steel. After strong pushback from allies such as Canada and the European Union, Trump granted a handful of countries temporary exemptions.
China has threatened to retaliate with new tariffs on billions of dollars U.S. goods, with the Trump administration saying it was ready to extend the tariffs to 1,300 more Chinese products.
Officials with Denver-based Hercules Industries say they’re working hard to minimize the effect of the tariffs on customers. Picture courtesy of Hercules Industries.
Many steelmakers have applauded the U.S. tariffs, with several announcing that they would be restarting shuttered plants and calling laid-off employees back to work because of the expected boost in business.
However, the reaction from business groups and some Republican lawmakers typically aligned with the president was swift and strong in its condemnation.
Chris Kuehl, Ph.D., an economic analyst with the Fabricators and Manufacturers Association, said he was shocked.
“Frankly, most analysts and observers never thought it would come to this,” Kuehl said. “There were so many reasons that imposing tariffs on imported steel was a bad idea. It instantly makes everything made of steel more expensive in the U.S. — cars, buildings, equipment, etc.”
Hercules product manager Don Modesitt says the tariffs have made steel supplies tighter.
The Associated General Contractors of America, which has supported the president’s calls to boost infrastructure spending, said the tariffs would be damaging to its members. It estimated that 30,000 jobs could be lost if the tariffs lead to a protracted trade war.
“These new tariffs will cause significant harm to the nation’s construction industry, put tens of thousands of high-paying construction jobs at risk, undermine the president’s proposed infrastructure initiative and potentially dampen demand for new construction projects for years to come,” said Stephen E. Sandherr, the association’s CEO. “The bottom line is that any short-term gains for the domestic steel and aluminum industries will likely be offset by the lower demand that will come for their products as our economy suffers the impacts of these new tariffs and the trade war they encourage.”
Officials with the Air-Conditioning, Heating and Refrigeration Institute, which represents 320 manufacturers of HVAC equipment, said tariffs will not help its industry or the country overall.
“As major users of steel and aluminum, we have been proactive in explaining to the administration that the HVACR and water heating industry would be negatively impacted by an increase in tariffs, as would the consumers that rely on the products we manufacture,” said AHRI President and CEO Stephen Yurek. “While we have been pleased with the Trump administration’s enthusiastic support for manufacturing, and are happy that the president did include at least a temporary exemption for supplies from Canada and Mexico, we believe this step to be injurious, rather than helpful, to our efforts to increase American manufacturing and create jobs.”
In the days and weeks after the tariffs were announced, the president kept up his criticism of U.S. trading partners and international agreements, posting on Twitter and saying in speeches that such deals seldom benefit Americans.
The comments were unsettling to Denison, a member of the Air Conditioning Contractors of America with 25 years in the industry.
“Tariffs are not something I’m used to,” he said. “Even though tweets aren’t policy and voice snippets aren’t policy, it’s just the impetus of what scares the commodity markets.”
He doesn’t want to see the U.S. drawn into a trade war.
“I hope we can resolve these issues,” he said. For now, all he can do is pass along price increases to his customers.
Economist Alan Beaulieu of ITR Research says tariffs can have unintended consequences for consumers and businesses.
Trump’s decision to impose steel tariffs was a surprise to officials with ITR Economics, which boasts on its website that it has 94.7 percent accuracy rate in its forecasts. But a tariff-induced trade war could definitely cause some revisions, said Alan Beaulieu, the New Hampshire firm’s president.
Among Beaulieu’s clients is the Heating, Air-conditioning and Refrigeration Distributors International. He worries that the tariffs could have an inflationary effect on the HVAC industry.
“There’s a law of unintended consequences,” he said. “You take this action, which may be perfectly justified, but you have to be willing to accept the consequences that come. And if you think that there aren’t any, it’s because you’ve ignored all of history. There’s always consequences.”
Beaulieu acknowledged that tariffs can be an effective strategy for countries to deal with trade issues, “but they have to be wielded more like a scalpel than a shotgun.”
So far, the White House’s decisions on the tariffs don’t seem to be as nuanced as the economist would like them to be. While the U.S. would certainly “win” a trade war with China, it could come at a steep cost. The U.S. is the world’s No. 2 exporter of goods — many of which go to China. If that trade drops off, it could cost a lot of American jobs.
A sheet metal worker makes ductwork. Some contractors are worried about the effects the new steel and aluminum tariffs could have on their businesses.
There are other ways China can fight, he added.
“If China wants to retaliate in a nontrade war way, they can,” Beaulieu said. “They hold trillions of dollars in U.S. treasuries. If they start dumping them, you can imagine what kind of effect that would have on our financial markets and that would mean to our economy. So we can win the battle and cause another war.”
Machinery makers worry
Companies that produce the machinery that HVAC contractors use to turn steel into ductwork are also concerned. Mestek Machinery, based in Cedar Rapids, Iowa, builds sheet metal forming equipment under the Engel Industries, Iowa Precision, Lockformer, ISM, Lion and Roto-Die names.
Jack Pennuto Jr., a senior vice president with Mestek, said the company is a “huge consumer of steel.”
“I couldn’t tell you how many millions of pounds of steel a year we buy, but it’s a lot,” Pennuto said.
Mestek Machinery Senior Vice President Jack Pennuto Jr. says he expects the Western U.S. to feel the effects of the tariffs because more of the region’s steel supply comes from overseas.
Mestek announced price increases April 1 on some products due to the sharp increase in raw materials. Pennuto said the company’s buyers are trying to find metal that may have been imported or produced domestically before tariffs went into effect.
“A lot of the material that’s out there wasn’t produced at the post-tariff cost,” he said.
But it’s not easy to find materials at pre-tariff prices. Many steel suppliers seem to be taking advantage of the uncertainty in the market, he said. Already up more than 40 percent in the past year, steel has now almost doubled in price since fall 2016. Even scrap metal’s price is spiking.
“A few years ago, nobody would have thought that $900 a ton for hot-rolled steel was on the radar, but here we are,” Pennuto said. “I wouldn’t be surprised if we see a regional recession on the West Coast because of construction being constrained there because there’s not enough steel for them.”
Cleveland-based Majestic Steel USA supports the president’s decision to enact tariffs — company CEO Todd Leebow appeared on CNBC to explain why the tariffs are needed — but officials acknowledge the uncertainty they can mean for customers.
“The No. 1 thing this has impacted has been availability,” said Alex Evans, market development director at the steel distributor and service center. “If you didn’t prepare, you’re facing some really steep price increases depending on how frequently you buy.”
Like Conklin, Majestic has a large number of HVAC industry customers. Rob Zito, Majestic’s HVAC market manager, is advising sheet metal contractors to plan for the unexpected.
“Even if you know that you will have a job in a month and it may not be time right this second to buy, I think it’s really important to get those orders in as soon as possible because lead times are so extended,” Zito said. “Transportation is a problem industrywide and nationwide and because of that rush of orders, processing times are being portioned out, too. Now is just a better time to get in front of things as soon as possible.”
And that’s what Norman Brothers, a general manager with Unique Metal Works LLC in Pawtucket, Rhode Island, did. As soon has the tariffs were announced, he had the commercial and industrial sheet metal contractor purchase a large amount of galvanized coil stock.
“We’re in good shape for my business,” he said, adding that he only buys American-made steel. “We have plenty of material to get us through and then some.”
While Brothers said he has seen steel prices spike about 26 percent since the tariffs went into effect, he supports them. It’s going to give the U.S. steel industry a chance to get healthier, he said.
At Conklin Metals, Thompson said he wasn’t caught off guard by the tariffs either, although he acknowledged he didn’t expect such a large tax.
“We had kind of raised our process steadily with the expectation that there could be (steel tariffs),” he said. “And once that was announced, prices were rising almost weekly.”
Like Brothers at Unique Metal Works, Thompson said he’s seen price increases around 25 percent, reflecting the full tariff on imported steel. In general, he’s opposed to protectionist trade policies such as tariffs. But after a quarter-century in the steel industry, he’s not easily surprised.
“We just take what we’re dealt and deal with it the best way we can, protecting our customers and making sure we have steel for our customers when they need it,” Thompson said.
It’s the same at Hercules Industries, a Denver-based manufacturer and distributor of sheet metal, steel and HVAC products. Product manager Don Modesitt said the company is coping by taking care of longtime clients first. New customers may be disappointed.
“We do not have excessive amounts of material to sell,” he said. “Mills are not offering a lot of spot tons at the moment.”
“Spot” pricing refers to the cost of a commodity for immediate delivery versus the price for a future order.
As a major buyer of domestic steel, Modesitt said Hercules has good relationships with U.S. mills, which has helped it secure steel in a tight market.
But he’s not sure what the future holds. He wonders if the tariffs, combined with an already tight steel supply, will drive prices higher than the 25 percent spike the market is now seeing.
“If that happens, I guess the question is why put the tariffs on foreign steel if this whole thing was to support domestic steel,” Modesitt said. “Once you go beyond that 25 percent, then you open the door for foreign steel to come back into the market.”
Timeline of the steel and aluminum tariffs
March 1: President Donald Trump announces via Twitter that the U.S. will impose a 25 percent duty on steel and a 10 percent duty on aluminum in an effort to restore “balance” with foreign steel-producing countries such as China.
“Our steel and aluminum industries — and many others — have been decimated by decades of unfair trade and bad policy with countries from around the world,” Trump tweeted. “We must not let our country, companies and workers be taken advantage of any longer.”
The president uses his authority under section 232 of the Trade Expansion Act of 1962, a little-known law that gives the administration wide latitude on trade matters that it says impact national security.
The move is criticized by several manufacturing organizations, including the Air-Conditioning, Heating and Refrigeration Institute. It is applauded by U.S. steelmakers. Canada, Mexico and the European Union vow to retaliate if the tariffs stay.
March 5: Trump announces on Twitter that the tariffs might not apply to Mexico and Canada if the countries agree to renegotiate the North American Free Trade Agreement with terms more favorable to the U.S.
March 6:The Air Conditioning Contractors of America release a statement worrying that the taxes will adversely impact the association’s members.
March 7:United States Steel Corp. says it will restart a blast furnace at a Granite City, Illinois, plant and bring 500 laid-off employees back to work.
March 8:Trump signs the steel tariffs into law. Steel from Canada and Mexico is exempt. The European Union releases a list of U.S. products worth $3.5 billion in trade that the 28-nation bloc says it will slap with a 25 percent import tax unless the EU is exempted. The products include $3 million in HVAC products.
March 22:American allies the EU, Brazil, South Korea, Argentina and Australia are exempt from the tariffs, at least temporarily. Notably not given an exemption is Japan, a longtime American ally.
March 23:The tariffs go into effect. Many U.S. companies file requests for exemptions for the steel and aluminum they import.
March 26:South Korea agrees to limit steel exports and open its automotive market to secure a permanent exemption to the steel tariffs.
April 1:China puts out a list of 128 U.S. products it plans to impose import duties on ranging from 15 to 25 percent as payback for the steel tariffs.
April 3:Chinese-made parts for air conditioners, compressors, furnaces and ventilation equipment are among those on a list of 1,300 products that the White House is proposing to slap with a 25 percent tariff. Some economists fear a trade war is brewing.
April 4:China responds with its own plan to slap new taxes on $50 billion in U.S. goods, including corn, soybeans, beef, tobacco and automobiles. Chinese Foreign Ministry spokesman Lu Kang said China is ready to retaliate if the U.S. enacts more tariffs.
“We will take proportionate measures of the same intensity and scale on U.S. products,” he said. “These measures will be announced soon. We have the confidence and capability to counter any measure of trade protectionism taken by the United States.”
April 5:Trump orders the Office of the United States Trade Representative, which advises on international commerce policy, to compile a list of Chinese products the U.S. could hit with another $100 billion in taxes.
April 9:The Chinese government files a challenge to the steel and aluminum tariffs with the World Trade Organization.
April 17:Trump meets with Japanese Prime Minister Shinzo Abe to discuss trade issues, including exempting Japan from the steel and aluminum tariffs. No deal is reached.
April 30:Facing a midnight deadline on whether to extend the exemptions granted to the EU and a handful of U.S. allies, the president announces another 30-day reprieve for Canada, Mexico and the EU. An open-ended tariffs exemption is given to Australia, Argentina and Brazil.
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