Just as the commercial truck and transportation equipment industry is getting back on its feet after a three-year decline in truck sales, surging steel prices and possible shortages threaten to cut the rebound short -- or at least take a bite out of profits -- according to the National Truck Equipment Association (NTEA).
The NTEA says its members report price increases on top of price increases and diminishing allocations that could stymie the long-awaited recovery.
According to an article in the Feb. 23 edition of The Wall Street Journal, "...[steel prices] continue to rise with such frequency that suppliers can't predict them from week-to-week, causing buyers to stockpile supplies, scrounge for less-expensive alternatives and look for other ways to offset rising costs."
The article stated that the spot-market price on hot-rolled steel is running at about $500 with surcharges included, up 30% to 50% from a month ago.
As one member said, "We have gone from having steel readily available at reasonable prices to a panic situation."
In this frenzied atmosphere, truck body and equipment manufacturers have seen long-term steel supply contracts and guaranteed pricing eliminated. Many cannot find a supply of steel for pending orders.
"We've been struggling with this issue for several weeks. Pretty soon it will impact distributors both in their pricing and in their inventory costs," reported a manufacturer member.
A few manufacturers report that their steel suppliers are honoring supply contracts for the next three or four months. However, this comment from one Ohio manufacturer is more the norm: "We had blanket orders [with the mills] in place with guaranteed prices, but the mills canceled them. Now they are telling us there will be additional price increases of between 15% and 20% in the next month."
The manufacturer went on to say, "In addition to price increases, the mills are applying surcharges that are issued at the time of shipment. We are not sure how much they are until we receive the shipment." He said one mill has told them that the surcharges will likely double in the next three to four months.
Almost all NTEA Manufacturer members interviewed stated they are trying to hold off price increases for now, but the NTEA has learned that some companies have already initiated price hikes. One dump body manufacturer reported that they raised prices early this year and that another price increase was near at hand.
"We will increase prices to distributors by several percent in the month of March," said another manufacturer. "We will have to assess the surcharges we get and determine if those prices will go up even more."
Another Midwest manufacturer stated, "Buyers are still uneasy as to whether or not they want to commit to the purchase of trucks, so we're hesitating to pass our costs on to them." He also said, "Some customers told us flatly that they would not accept price increases on bids that have been won or on pending bids."
Managing the bottom line has become more difficult as the crisis quickens. One stated, "In a product that is 60% steel, a 20% steel price increase will result in having to increase our prices by 3.5% to maintain our margins. This does not include any other increase in operating costs; this is strictly the increase in steel prices."
Another manufacturer stated that steel accounts for 40% to 60% of its costs in manufacturing its products. "This will have a huge impact on our profitability if this [steel price hikes] continues," he stated.
Historically, snowplow manufacturers typically announce product prices once a year, usually at the time of the pre-season sales push, and usually do not increase prices again until the next year. However, with the unsettled steel picture, one snowplow manufacturer stated that his company may resort to using surcharges to increase prices after the initial summer product introductions. A service body manufacturer said that it was very unusual for them to increase prices on products more than once in a year, but it appears that further increases would be necessary if the steel hikes continue.
With manufacturers struggling to peg their product prices, it is only a matter of time before distributors feel the same pain. Responding to bids will be guesswork and distributors already working on razor-thin margins will have to proceed with caution.
A contributing problem will be the variation of inventory costs. Distributors who bought and stocked bodies in December will pay higher prices for bodies bought in March. And if steel prices continue their upward trend, bodies purchased later in the year may be significantly more expensive.
For members considering price increases, surcharges rather than flat, across-the-board price increases to their customers may be the preferred way to go. As one member pointed out, surcharges can be added or removed depending on what happens in the steel market and to the price of truck bodies. Surcharges provide a more flexible pricing option.
The steel price increases are unsettling, but availability may become an even bigger issue. Several manufacturers, particularly those of dump bodies, have reported that their steel allocations from the mills have been cut. Others are having great difficulty finding mills or service centers that will sell them the heavy cold-rolled sheet material necessary for dump body production.
Economists blame rising steel prices and shortages on a weakened dollar that makes foreign steel more expensive and keeps imports at bay. Other factors boosting prices in the U.S. and many global steel markets include the consolidation of U.S. steelmakers, a rise in the price of raw materials to manufacture steel, and increased demand for the metal, especially in China and other Asian countries.