Did You Know?
As you have read and heard, the steel industry is in a state of price confusion."
"It is our intentions to keep our customers informed and to mitigate all cost increases as much as possible."
"Steel producers continue to face pressures from raw materials..."
"We reluctantly are compelled to increase our price..."
"We value your business and appreciate your understanding during this difficult business climate..."
"It is uncertain how long the current conditions will last."
Steel Shortage Creates Pricing Uncertainties
By Chris Long, Editor
International Door & Operator Industry
Most everyone in the door and access industry has recently received a letter from the providers of steel products responding to the steel crisis. The quotes highlighted throughout this commentary are common throughout our industry. The steel shortage is for real, and it is not going away soon. Some authorities are predicting steel allocations.
According to The Kiplinger Letter, Vol. 81, No. 9, the steel crisis will slow the economy, go higher before falling, and has caused panic buying.
In the March 2004 issue of Metal Construction News, Shawn Zuver, Editor-in-Chief calls attention to the coke shortage caused by a fire at a West Virginia mining location. He noted that this key steel-making component is one part of the Raw Material Surcharge portion of the price increase equation. Mr. Zuver stated, "Now, more than ever, it's crucially important for contractors to stay in communication with your metal product suppliers. They're just as concerned about price fluctuations as you are and want to keep you informed about what's happening." I agree with him, and recommend that door dealers be as patient as possible and maintain a close liaison with their product providers.
USA Today (February 20, 2004) reported that steel prices have soared 66%.
The Wall Street Journal (February 23, 2004) simply stated, "Steel prices surge causing problems for manufacturers.""
Four reasons for the shortage include:
• Coke shortage
• Demand for steel in China (It has been reported that China is now consuming more steel in one month than both Canada and Australia in one year!)
• U.S. Dollar shrinkage makes imports costlier
• U.S. Steel industry has less capacity
It is interesting to note that despite the price increases, the American Institute of Steel Construction, Inc. (AISC) reports that, after adjusting for inflation, the mill price of structural steel today is still less than it was two decades ago.
Recognizing that predicting future costs, and being able to quote long-term projects is difficult at best, what should a door dealer do? According to John Zoller, industry consultant, there are several actions a dealer should consider taking.
Realize that manufacturers have little or no control over the problem. If steel prices soar 20% to 30%, they must pass these costs on to their customers. The days of polite and proper annual price increases, coupled with adequate notice to the dealer are over for now or until this crisis retreats.
This problem is serious enough that dealers must keep up with news that affects their suppliers. This is one way dealers can anticipate future increases. Read the Wall Street Journal, and /or USA Today to stay up on economic news that will affect your business.
Communicate with your customers. Let them know frequently how these vendor price increases are affecting your prices to them. This crisis is similar to the inflationary times in the mid '70s. Dealers survived the crisis then, and will now, but dealers cannot act as though these times are business as usual. Dealers will be presented with numerous price increases during the year, and these increases will have to be passed on to the dealer's customer. For example, one dealer we know makes a copy of all vendor price increase letters and immediately passes them to all of his builders as justification of his current immediate price increase. The important issue is that the dealer must communicate frequently, and in a timely fashion with their customers.
Procrastination in raising prices or providing timely communication with customers will exasperate a tough situation in that dealers will lose money through not raising prices immediately. As a result, the dealer's customers will feel blindsided when the increases are finally instituted.
One suggestion, knowing that the crisis will eventually abate, is for the dealer to advise their customer that these fluctuating prices will be reflected in the dealer's pricing as they are received from the vendors. As the current crisis abates, costs and prices will stabilize. This system allows the dealer to show their customer that the dealer, the customer and the vendor are all working through this steel crisis together, as a team.
Building inventory during this steel crisis might make sense. Space constraints and the chance of damage would be negatives to this strategy. Tying up money in excess inventory frankly goes against the grain of the prudent business owner, but with low interest rates, and careful analysis of inventory needs, this is one way to mitigate the price increases that appear to be on the horizon. In other words, stock up on garage doors and operators and advise your customers of this strategy. Let them know you are doing your part to hold their prices.
Another way to look at inventory is to use old inventory previously not utilized because of scratches, dents, or color mismatches. Old inventory is now potentially valuable, and might warrant utilizing labor to repair dents and scratches, or even the cost of repainting doors previously deemed unusable.
Passing on price increases must be done with some care. Assume the garage door and the dealer added materials such as hang angle total 60% of the selling price, and the manufacturer passes on a 6% price increase. The net change to the selling price is 3.6%. Builders and contractors will not accept a 6% increase in selling price if the dealer's material cost increased 6%.
On the other hand, times of great pricing volatility does present the dealer an opportunity to recover some of the owner expenses that have driven down profitability in the past several years. Worker's compensation expenses, liability insurance, and gasoline costs quickly come to mind. The point is, builders, subcontractors, and other customers are going to be aware of the steel price crisis in the next several months, and will expect price increases from the dealer. The dealer must carefully craft price increases absorbed during the last several years. Remember, any price increase must permit the dealer to be competitive in the market place. Using the steel crisis as an opportunity for the dealer to unreasonably raise prices will simply permit competitors to increase market share at the dealer's expense.
Many businesses provide building materials to the market place that are not competitors to the dealer. Window suppliers, steel stud vendors, metal building contractors, and fireplace dealers all will have steel price increases, and will have to develop a response. Talk to these non-competitor business owners and get ideas of how they are responding to necessary price increases. These business owners might have ideas that might work well in your community. Again, communication is the answer.
Make sure your invoices and quotes reference the volatility of steel prices. Quotations committing the dealer to more than 30 days are dangerous because the dealer's supplier might not be able to honor their quotes to the dealer. The dealer must protect their firm's financial viability. The same is true for the dealer's suppliers. While disclaimers and short term quotes to a contractor might sound crazy, the times are about to get crazy and self-preservation is the key.
Rapid increases in steel prices will affect the automotive and appliance industries dramatically. Clearly, as these industries rapidly raise prices, inflation will return, and with inflation interest rates will increase. We might very well be in for a rough ride during the next year.
Prices will ultimately stabilize. When is impossible to predict. In the interim, be cautious, and minimize your risks by working very closely with your product providers and customers. For you dealers who may read this and feel that I'm suggesting the crisis should give a "free pass" for manufacturers to raise prices, not so. The steel shortage crisis will be felt throughout the demand and supply chain...and it's not unique to our industry. It is absolutely for real.