Trump Tariffs – Suppliers Weigh in on Likely Impact

In March, President Donald Trump announced plans to impose tariffs of 25% and 10%, respectively, on imported steel and aluminum. Temporary exemptions were granted to several countries, including Canada, Mexico and China amid negotiations aimed at “leveling the playing field” between the U.S. various trading partners. Two proclamations issued on May 31 formalized these plans for tariffs. The U.S. government now is expected to begin imposing tariffs on these items shortly after a list of affected products is announced on June 15. On that same date, Trump announced 25% tariffs on another $50 billion in Chinese goods. The Chinese government has responded that in intends to retaliate against U.S. exports, thus fueling fears of a tit-for-tat trade war between the two countries.

To read more about the tariffs, click here for details.

Due to the impact that these tariffs could have on the cost of equipment available to commercial laundries, Textile Services Weekly recently asked machinery suppliers to give us their view of the situation and its likely effects. Several noted that the steel tariffs won’t affect imported finished goods, but rather, raw materials such as steel plates, rods, bars, etc. Nonetheless, the threat of tariffs has roiled the U.S. market for steel, spurring increased demand and driving up costs. Responses appear below the names of each supplier executive:

Bob Fesmire, president, Ellis Corp.

Since World War II, our steel industry has been in decline. Today there are only three plants in the U.S. that manufacture stainless steel, and two of those are foreign-owned. We met with our metal suppliers over two months ago, and even then they had increased their prices due to the tariffs. Their prices went up 25% … and they passed a large portion of that on to their customers.

Even the threat of the tariffs brought about rapid changes in prices. People were calling them from all around the country, offering to buy all of their carbon and stainless inventory – sight unseen. It has been difficult to price and cost things correctly. Ellis is a production factory, and we set production levels and lock in pricing with suppliers every year, but this year has been extremely volatile. Ludell, our other business, is more a project-to-project custom fabricator, so the pricing changes have a more rapid effect on customers.

The bottom line is that we cannot maintain our costs at either business and unfortunately the effort to apply tariffs greatly affects U.S. manufacturers and in the end is going to affect our customers.

Joe Gudenburr, president, G.A. Braun Inc.

The topic is one that many in our country don’t truly understand. The administration is trying to level the playing field so that U.S. companies can compete globally under fair market conditions. The reason they are doing this is twofold:

1. They believe, as most every business professional should believe, that if we are able to compete on a level playing field that we can win due to our superior work ethic, technology and operational practices. When the playing field is slanted, it is challenging to compete globally … a good example … if we sell a product to China there is a 27% duty applied to said product.  Pretty hard to ask an end user to absorb this, and the original equipment manufacturer (OEM) can’t absorb it either as the capital-equipment business is a low-margin business.
2. I attended an international trade meeting a few weeks ago where the guest speaker was from the State Department. He presented the facts behind why the administration is focused on China. The Chinese government is buying influence around the globe, so that they can try and control markets unfairly in their favor. The recent expansion of tariffs into the EU is directly targeted at steel mills and processing houses that have been bought by Chinese companies, and who are importing low-end raw material from China and other regions to be processed and shipped around the world to try and get around the tariffs. The administration is wise enough to know this and to act on it.

The actions taken have had an impact on raw material prices for all who are buying steel. The impact is due to two things:

1. The fear of tariffs has allowed mills and processing houses to inflate their pricing.
2. This fear has driven many buyers into panic mode. As this happened, they placed larger-volume orders for materials to hopefully avoid a further escalation in pricing. When this happens it upsets the supply and demand relationship and only further allows the steel suppliers to raise prices as they have a supply and demand situation that works in their favor.

As for our organization, we have seen a steady increase in steel pricing since November of 2017.  We buy all of our material direct, we track the pricing domestically and globally in real time over the course of the year, and we buy all of our material from U.S.-based suppliers as we have demanding quality specifications for the material.  These demanding specifications are tied to not only to equipment design, but if you buy cheap material, it will not afford companies like ours the ability to efficiently process said materials via our automated environments. The old adage “You can pay me now or you can pay me later” or “You get what you pay for” truly applies.

This situation is a ways from settling out.  It is interesting to watch the different countries soften their positions. Our thoughts are that once it settles, it will be at a place that is higher than where the market was in November of 2017.  It is quite a bit higher now, but how high it will be as it settles out is still to be determined.

Norbert Gittard, vice president, JENSEN USA Inc.

If the price of steel goes up it will have an impact on our U.S. manufacturing. Even if the steel is made in the U.S., the U.S. manufacturer will most likely increase their prices because they can. The impact on machine prices will most likely be small, except for washers that tend to have a higher percentage of its cost from steel.

Dan Farnsworth, vice president of sales, Leonard Automatics Inc.

The vast majority of the steel we consume is produced domestically, but that doesn’t mean we haven’t been affected. At this point no one knows what level of any tariffs may be imposed. Commodity markets react almost immediately to any news that may impact them, so speculation abounds. The tariffs proposed in the news have added varying degrees of volatility to the market, making predictability even more challenging. We feel that the market will continue to shift more production to domestic manufacturers. This will continue to raise demand and extend lead times, which will result in higher prices. Since there is a limited amount of domestic capacity (because markets automatically level supply and demand) the added demand will continue to keep pressure on pricing until the market can find its new level. Lead times on coil have already jumped from 6-7 weeks to 8-12, depending on specifics. Right now stainless is probably the most stable of our three categories of steel purchases, as hard as that is to believe.

An interesting side note is 430 Stainless vs. 304 Stainless: the majority of the 430 is produced in Mexico whereas the majority of the 304 is produced domestically. If the 25% tariff goes through, imported 430 will be the same or more expensive than domestic 304. No one will buy imported 430, thus driving even more demand to an already limited supply of domestic 304 producers. The result will be even greater pressure on 304 pricing. Mills will have to choose what products they are going to focus on because of their limited capacity. They will produce less or eliminate slow-moving items and run more volume with fewer setups on the core product that markets demand.

Carbon has traditionally been the one stable product in the market. This year carbon (still domestic) has risen 30% to 40% or more in price, primarily due to a lack of supply. We feel this has peaked and should begin regressing soon, if not already. No one knows for certain, but we think once the volatility dies down it is likely to settle at about 10-15% higher than traditional pricing levels.

Aluminum pricing had already been on the upward swing several months before the initial tariff declaration in early March. The news of potential tariffs sent the market into a frenzy, which frankly hasn’t calmed much. It got better for a little while when it appeared that Canada would be exempted from the tariffs. Now they are supposedly included again so you can imagine how the markets have responded. I can’t find anyone willing to bet where aluminum will settle. The good news is we buy very little aluminum, so its overall impact is minimal.

Additionally, we use components made of metals in our equipment. Things like motors, fan housings, steam coils, burners, louvers, cylinders, etc. Some vendors have done their best to hold pricing, while a few have already sent out notices of price increases ranging from 3% to 10%. This is in addition to any annual increases we received at year end.

So the bottom line is:

1. Yes, tariffs are a concern. Frankly any market volatility keeps us unsettled.
2. The daily chatter, threats and games are causing the markets undue volatility.
3. If any pricing sticks long-term, we will have to consider price increases as well.

The market has to understand that the steel manufacturers have been trying to secure price increases for the last few years and simply have not been able to make anything stick until now, as the supply and demand relationship would not support such an increase.  As such, many have held pricing for the past year or two on their products, given that steel is a major component of said end items.  However, the increases are real now and the costs are not going to be something that any original equipment manufacturer (OEM) is going to absorb. Smart business partners exercise greater disciplines in forecasting, and in bundling demand in these situations, so that the raw material buyers have an opportunity to create some level of leverage to mitigate a portion of the increases that have been placed on said materials. Our approach is that whatever savings we can attain from strategic planning and sourcing with our end users, we will pass on to them in the spirit of partnership.

At the end of the day as the dust settles, these actions will be better for all as it will level the playing field and hopefully eliminate some of the gamesmanship that exists around the globe as countries and industries try to gain an upper hand in the markets they serve.

Rick Kelly, vice president sales & marketing, Pellerin Milnor Corp.

There are several facets of the tariffs that affect pricing.  First is the obvious: steel pricing.  The U.S. mills are being overwhelmed right now as companies that source steel from China, Canada, Mexico … etc. are shifting to U.S. suppliers. The result we are seeing is longer lead times. As of right now, there have been no changes in base prices and steel surcharges are generally steady.

The second aspect of the tariffs involve exchange rates. There has not been any direct shift in exchange rates due to tariffs.

As for retaliation, Canada has announced a list of proposed retaliatory tariffs. It includes HTS Codes 8450.11 (laundry washing machines not exceeding 10 kg capacity) and HTS Code 8450.20 (laundry washing machines exceeding 10 kg capacity). The key word is “proposed.” Currently, the Canadian government has asked Canadian companies that could be impacted by retaliatory tariffs to comment. The comment period closes June 15 and the final Canadian retaliatory tariffs HTS Codes would become effective on July 1. The dates and impacted HTS Codes could be changed by the Canadian government.

No other countries have announced retaliatory tariffs that directly impacting the laundry industry.