The Current State of Materials in Manufacturing

How Transportation, Labor, and Economics Play a Role in the Supply Chain Predicament

 The increase in materials pricing and supply chain interruption continues to impact virtually every sector of the economy—from consumer goods, such as furniture and cars, to raw materials, such as lumber in construction and steel in manufacturing. The initial slowdown in manufacturing created a slump in sales and production, forcing stainless-steel suppliers to cut inventory (and one large steel mill exited the 300 series sector of the market entirely). But once the production lines whirred again, the demand far outpaced the supply, causing steel prices to skyrocket.Manufacturing supply chain domino effect

 The fallout of this has permeated entire supply chains and production cycles. It’s brought manufacturing partners, like Larson, to the position many of us are in today: price increases, extended lead times, and uncertainty in areas such as labor and transportation. We do have very strong relationships with the steel mills we work with and buy material in large volumes, which helps stabilize pricing and VMI programs with customers as much as possible. As a result, we have been able to navigate for much of this time with minimal interruption to our customers. Our workforce has been consistent, though the impact of the labor shortage nationally rears its head in some surprising ways that influence business conditions for manufacturers in general. Because we want customers and visitors to understand the forces at work in this present situation, we’re providing a more in-depth context of what got us here.

Domino Effect

As purchasing manager for Larson, I keep a close eye on pricing, as you might imagine. Carbon steel’s pricing is generally based on the Commodities Research Unit (CRU) index; that price in August 2020 was $437 a ton. It is now $2,166 a ton—a 5X increase in one year! Of course, the domino effect is in play, cascading changes throughout the markets and manufacturing.

One major factor has been the shortage of slabs, which rolling mills use to produce strip and plate products. The strip steel industry had to compete for supply with plate and structural producers, with the major producers of slabs selling to the highest bidder.

Another factor which hampered the steel mills was a shortage of coal. According to a recent NASDAQ article, coal supply hit a new 24-year low as electricity generators struggled to cope with the growing seasonal demand. Stockpiles have drawn down to the 84-million-ton level after starting the year at 125 million tons. Burning more coal has been the alternative during a time of surging oil and natural gas prices, but because producers have been cutting output for years, the global capacity isn’t what it used to be, which has added to the strain on steel mills, which require coking coal for the steelmaking process.

Steel mills are very expensive to operate, especially when there is no demand, but once shut down, start-up is a slow and expensive process. According to an article in the Wall Street Journal, two of the nation’s largest steelmakers are keeping older mills closed, passing up a chance to sell more metal at record prices, because of the high cost of restarting and the threats to their survival from rivals’ new plants. The closures have further contributed to a shortage of steel that is contributing to higher prices for cars, appliances, and machinery. United States Steel Corporation and Cleveland-Cliffs Inc. are keeping about seven million tons of production capacity out of service. That is roughly a tenth of domestic consumption in 2019, according to Metal Strategies Inc., an industry consulting firm. All the while, demand for steel is building up. This is all in addition to scheduled mill maintenance shutdowns, which happen twice a year on average (usually summer and fall), adding even more constraint to the marketplace.

The stainless steel (SS) market has had dramatic constraints on demand. One major supplier had strikes at its facilities, while (as mentioned above) another of the major mills exited the 300 series market entirely. That left the industry to purchase from the remaining three major domestic SS mills. One of those three, in the early spring, cancelled all their orders for the rest of the year, as they needed to cap any demand constraints that were crippling their operation. This left the industry scrambling for the remaining supply of stainless steel.

Another mill with force majeure issues implemented a “we cannot guarantee anything” stance, which means product deliveries are not guaranteed. On average, the mills are two to three months behind on deliveries to the service centers. Service centers are at all-time lows for inventory. It was common to see multiple coils in the warehouses, and stampers could rely on spot-buys to fulfill smaller orders. Currently, service centers are working hand-to-mouth, fulfilling orders on a when-available basis with very little inventory. This has resulted in lead times for material going from 6 to 8 weeks to 16 – 18 weeks, or more. And of course, the law of supply and demand has driven SS prices to an all-time high. In some of the latest projections, stainless-steel service centers are forecasting that they will not be back to normal operations until 2023.

In a normal environment, when domestic production is lacking, large steel consumers typically look to foreign suppliers to offset the supply shortage. However, given the pandemic is also – by definition – global, mills around the world are facing the same general challenges, which resulted in a global shortage, exacerbating the problem.

Transportation costs have gone through the roof as well. According to the United Nations Conference on Trade and Development (UNCTAD), there are complex factors behind the unprecedented shortage of containers that are hampering recovery in this sector, citing that about 80% of goods are carried by ships, generally first in the line of transport for many materials. Bloomberg also recently reported that container rates are up 25% to 50% and many companies are writing these rates into the contracts, which indicates they don’t expect them to decrease anytime soon, if at all. The current conditions have also added a fiercely competitive dimension to the truck driver workforce—many of whom work on a contract basis (even for some big shipping companies). Drivers are responsible for their own trucks, fuel, insurance, equipment, repair, and maintenance, as reported by an NPR article. Like any person or company doing business—they have to maintain their margins, which puts them in the position to take jobs that earn them the most money. Suppliers/service centers list jobs for drivers and specify a load to go to a destination. Drivers sign up, but in the current job climate, have not been showing up for the job because they got a better offer. As independent operators, it makes sense for them to take the work from the highest bidder, which has impacted deliveries to steel service centers and driven the cost of transportation up.

Economics All Around

As consumers, many people are seeing pricing go up on subscription services, home improvement products, construction, and renovation projects, pretty much everything across the board. We are experiencing that in the manufacturing sector. Again, the domino effect, but it isn’t just because of material costs. Many economic factors also contribute to price increases. 

One “consequence” notable and unique to the pandemic is that, recognizing the financial impact COVID had on many people, many companies halted price increases to help lighten the burden for people. Companies could only hold out for so long, and they are now trying to recoup their losses. In a manufacturing environment, we had a lull, and then demand shot up once people began full operation again. 

Ancillary Supply Chain Factors

 There are other ancillary supply chain factors that all add to the current price increases and production and delivery cycles. Paper mills supplying corrugated cardboard and other packing materials have levied three price increases since last fall, which all have either cut into profit margins or resulted in price increases.  

The chemical industry and its fluctuations have their effects as well. As with most metal working, stamping and deep drawing depend on lubricants for the metal forming process and to minimize wear and tear on tooling. The costs of lubricants have increased more than once in the past 12 months, further adding to manufacturing costs. Value-added services from outside vendors have also been affected. The plating, painting, and coatings industries, for example, have seen increases in the costs of chemicals since 2020, and have no choice but to pass them on to their customers.

The good news is that there are signs of recovery in the steel industry. The supply of slabs and alloys, and the energy required to operate mills all seem to be recovering, albeit at a snail’s pace. Prices are no longer skyrocketing, even though they continue to rise. Nonetheless, industry watchers still predict the effects of pandemic-caused inflation and supply shortages to be with us until sometime in 2023.

We’re In it With You

Although Larson’s production has increased in the last year, we have managed the increased workload, in part, through the efforts of our loyal and dedicated workforce. We have added capacity despite the labor shortage—by offering top wages, benefits, and training. We also have a forward-thinking team looking for ways to automate the manufacturing process and innovate new ways to help our customers get through this pinch through material-savings initiatives and aggressive supply chain management.

What you are feeling as a customer, we are experiencing as well—but we are striving to overcome the challenges and meet your needs with as little interruption to your supply chain as possible. We look forward to price and material stabilization and will pass that on to customers as soon as possible, though all the forecasts indicate that we may all be facing a new normal in terms of what the market will bear. As always, Larson continues to invest in the best future outcomes for our customers. We are steadfast in our commitment to providing you, our customer, with the reliability, quality, and exceptional service we have provided for 100 years. We’re happy to answer your questions—contact us at your convenience.