The risks and rewards of tariffs and pricing instability

When the Trump Administration imposed steel and aluminum tariffs on our North American neighbors and the European Union last week, you’d be hard pressed to find anyone in favor of it.

Over the weekend, even the Aluminum Association’s CEO told NPR that, while the association and Trump agree that the U.S. needs a healthy metals industry, “Tariffs and quotas on market economies really, in our concern, would be ultimately alienating allies that we need to help us on that problem.”

Doug Olds, president of Washington Metal Fabricators, a custom fabricator in Washington, Mo., pointed to one silver lining when it comes to the price of materials. “If people are coming to us for any reason, it’s an opportunity.”

With material prices behaving as they are, the phone is ringing at Washington Metal. Facing rising costs with their existing suppliers, prospects are calling Washington Metal to explore options.

Pricing instability means that if a fabricator can up its materials purchasing game, spot buy when it finds a good deal, it may be able to eke out an advantage over competitors—if, of course, it can afford to hold more inventory.

“Whenever you get a fundamental shift in pricing and supply, it throws competition into the mix,” said Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association Intl., and president of Kansas City, Mo.-based Armada Corporate Intelligence.

Still, higher material prices mean that holding excess inventory becomes even more of a cash drain. This may push fabricators more toward continuous improvement, to shorten that order-to-cash cycle as much as they can. And if price instability becomes the new normal, holding more raw stock inventory might spur different purchasing strategies, like fabricators spot buying when the price is right, and renting warehouse space from their suppliers.

We also might see more “live inventory” investments, including machinery that helps streamline raw material management. This includes tower systems that feed one more punching or laser cutting machines. The material supplier delivers material to the tower, which in turn makes the inventory live and ready to be processed. Sure, the ability to run lights-out is a key selling point. But automating the management and transportation of a growing raw stock inventory isn’t bad either, especially with material prices as they are.

Thing is, such investment requires long-term forecasting and some level of certainty, which is now sorely lacking. Fabricators can adjust to a “new normal,” but they need to know what exactly that new normal is. Larry Kudlow, Trump’s top economic adviser, said on Sunday that “these tariffs may go on for a while, or they may not.”

For those in metal fabrication, a business where the largest cost on the financial statements is usually material, the uncertainty may have a profoundly negative effect. The problem really lies in uncertainty,” Kuehl said. “If your strategy is based around a shortage of imported steel, and then all of a sudden the steel starts flowing in again, well, so much for that strategy. Everything just changed again.”

Indeed, by the time you read this blog—today, tomorrow, this week or next, this month or next—the talk of tariffs may be a thing of the past. Or it may still be centerstage. Therein lies the heart of the problem.