A staggering jump in steel prices sparked in part by surging demand in China is squeezing the electrical industry, and some electrical distributors are concerned about potential steel product shortages in the coming months.
Mike Barker, president of Springfield Electric Supply Co., Springfield, Ill., said steel prices and availability were a topic of conversation at a recent distributor meeting. Barker said the distributors he talked with at the meeting were upbeat about the economy and were not yet having trouble getting steel products from manufacturers.
He said although first-quarter results are up for many of the nation's electrical distributors and they are forecasting a better year ahead, they have concerns about pricing and potential availability.
“I think it's availability that's on everybody's mind,” Barker said. “Certainly price is at the top of the list, but availability is of concern to make sure we are able to get enough product to handle the business increases that we see.”
According to Vince Liberto, purchasing manager for Shepherd Electric Supply Co., Baltimore, some electrical manufacturers are now taking orders to be delivered in July and are allocating steel to select customers.
“In the past few weeks, I am starting to see major problems with actually getting the material. It's getting really bad,” said Liberto. “For the most part, the manufacturers seem to be almost doing what I would call an allocation, where there's only so much they will let me have. Then it's when they're going to let me have it, and at what price they're going to let me have it. I deal with two of the three conduit manufacturers. Both of them are going about this in different ways, but they're very difficult to get anything out of.”
“It's just out of control,” said Ivan Misrach, Richards Electric Supply Co. Inc., Cincinnati. Misrach said he recently went to Louisville, Ky., on business, only to return two days later and find that steel prices were 10 percent higher than when he left.
“I don't know where the leveling off is for pipe, but I know one thing — you still can get it and people are willing to pay whatever the price is,” said Misrach.
Shepherd Electric Supply's Liberto agreed on the rapid price escalation, and said the price of half-inch EMT “tripled or almost quadrupled” from late last year to April. “It's really crazy,” he said.
According to the electrical manufacturers interviewed for a recent article in Electrical Marketing newsletter, factors for the price increase include strong foreign demand, most notably from China, for hot-rolled steel (a basic sheet product used by many industries); improved domestic demand for hot-rolled steel; high ocean freight rates for imported steel; a weak U.S. dollar that makes imports more costly; and the continuing consolidation of U.S. steel manufacturers.
Steel prices are expected to keep surging. Prices for hot-rolled steel hit $500 to $600 a ton this month, up from about $330 in January.
Of particular concern to electrical manufacturers is the uncertainty over availability and prices of the raw materials to produce their steel products. Several manufacturers said they had no choice but to pass the price increases to their reps and distributors. Manufacturers, who are unable to predict steel prices from week to week, have been forced to pass along the price increases of up to 30 percent to 50 percent to other companies along the supply chain.
“It's pretty insane right now and part of it is just because the manufacturer doesn't have an idea what his cost is going to be,” said Douglas Carlson, principal, C&O Electric Sales Co., a manufacturers' rep in Overland Park, Kan.
“You hear of steel companies quoting price in effect at time of shipment,” said one manufacturer. “One of our reps in a major metropolitan market said the price of pipe has doubled in his market in the last year.” There have also been reports of manufacturers placing some customers on allocation, a practice that has not occurred for some time.
Distributors said customers now accept the price increases as a reality, but that wasn't the case at first. “Customers were very slow to pick it up,” said Shepherd Electric Supply's Liberto. “Then it got to the point where customers were hesitant to buy because the price was so high. But they have all caught on now. It's gotten to the point now where we're almost on an allocation to our customers because we're only allowing so much to be sold, certain customers per day and certain sizes. We have a certain profit margin we're not going to dip it down below. It's pretty real now and I think all parties are aware of it.”
Jim Amey, principal, Robert A. Amey Co. in Portland, Ore., an independent rep, urges distributors to stay calm. “People are panicking,” he said. “It's a problem for the people who buy short and buy for today's needs. You just need to expand your transit time or should we say ‘order cycle time.’ Or you look at it longer term.” Amey cautions distributors not to hoard steel.
Republic Conduit recently implemented a three-tier pricing system where customers are charged by the size of the order. Bill Curley, vice president, sales and marketing, electrical conduit for Republic Conduit, Chesterfield, Mo., said the company developed the system because in addition to increased steel prices, the cost of transportation and energy have also increased product cost.
“The implementation of new work rules by the Department of Transportation (DOT) increased the cost of transportation in many areas (driving time, loading time, extra charges per drop-off, etc.). We embraced this extra tier because it will help offset the extra cost of handling multiple orders per truckload as well as higher transaction cost for pulling together multiple releases,” he said.
Some manufacturers have had to cut back on production. “We are doing our best to continue to operate our facilities and balance our inventories to provide some levels of customer service to our customers,” said Mark Magno, vice president of marketing, Wheatland Tube Co., Collingswood, N.J. “Sometimes that means instead of running our factories five and six days a week, we've had to pull them back to four days a week to try to conserve steel. It doesn't do us as a manufacturer any good to run seven days a week and then have steel shipments not arrive and then not be able to support the business because our steel didn't come in.”
In almost all cases, electrical manufacturers said they are not selling to new customers at this time and they are evaluating orders first to see whether they have enough steel to cover the orders. “We are, similar to other people, not accepting new customers,” said Magno. “When we are evaluating an order, it's just as important to know what sizes and type of product are on that order and see how that matches up with our inventory or incoming steel. And clearly we're looking at past purchasing practices from our customers and making sure that is in line to what they are asking for.”
Other manufacturers, like Hubbell Electrical Products' Raco division, are filling all distributor orders, but evaluating them carefully to ensure an equitable distribution of product, said Don Brody, vice president of sales, Hubbell Electrical Products, South Bend, Ind.
While customers don't like the increased steel costs, most seem to understand the reasons and the need for them, said several electrical manufacturers. “I think unlike some past steel-related issues, this one has been reasonably publicized in the national press,” said Wheatland Tube's Magno. “We have seen articles in the Wall Street Journal, USA Today and a radio report on National Public Radio. It doesn't get much more national than that.”