The “Everything Shortage” Meets Inflationary Sourcing: Hedge or Hold the Line For 2022?
If you’re in the manufacturing world, chances are you’ve faced a truly unique double whammy of parts and material delays on top of high prices. While producers and suppliers can dictate prices on everything from metals, finished parts, resin, electronic components and logistics, buyers receive all of that plus the distinct possibility that inbound shipments will also be delayed! Many suppliers have stopped taking orders from new customers and existing customers often face order cancellations!
It’s not just business owners and managers feeling the pinch. The Atlantic puts it in consumer terms in a recent essay:
“Is it just me, or does it feel like America is running out of everything … One-hour errands are now multi-hour odysseys. Next-day deliveries are becoming day-after-next deliveries. That car part you need? It’ll take an extra week, sorry. The book you were looking for? Come back in November. The baby crib you bought? Make it December. Eyeing a new home-improvement job that requires several construction workers? Haha, pray for 2022. The U.S. economy isn’t yet experiencing a downturn akin to the 1970s period of stagflation. This is something different, and quite strange … we’re also suffering from a dearth of a shocking array of things—test kits, car parts, semiconductors, ships, shipping containers, workers. This is the Everything Shortage.”
In this “Everything Shortage”, it would be reasonable for industrial suppliers to attempt to continue to push through price increases, especially for long-term contracts into 2022. But greed may end up getting the better of domestic suppliers, many of whom, such as US Steel and Cleveland-Cliffs, continue to tightly restrict steel capacity despite demand, idling production lines in favor of keeping limited capacity running around the clock.
We recently wrote in MetalMiner that “all of the steel mills have taken a very disciplined approach to adding (or rather, not adding) capacity to the market. The headline capacity utilization rate remains well above 80%. However, the numbers relate to the actual lines in operation, not
total U.S. steelmaking capacity.”
Limiting steel production has allowed “carbon steel producers [to] … not only [levy] 300%+ price increases on automakers for large volume SKUs, but … also ask for even greater price increases for the items that do not maximize mill profits.” In a related market, “stainless steel producers have shunned alternative alloys, grades and sizes in favor of standard 304 (where stainless producers generate their greatest profits).”
The question remains whether or not buyers will enter into long-term supply agreements based on these terms for 2022. Some OEMs are already forecasting material price increases, which they are likely to pass along to consumers, including Ford, which is forecasting a $2.5 billion increase in annual material costs.
Yet other automakers and large industrial buyers are not necessarily agreeing to these price increases for 2022. Some will “move tons” as a strategy to different vendors, including offshore suppliers.
But will supplier greed end up getting the better of the market? We observe that “the notion of simply passing on rising steel prices to consumers will eventually “bite the hand that feeds” as consumers balk at prices and eventually hold off on purchases. As we like to say, nothing kills high prices like high prices. Those organizations which can hold out on putting in place long-term contracts at the onerous contracted prices domestic suppliers are
offering may find themselves with a lower cost structure in 2022 than those that hedge capacity at all costs. Holding the line might be the right strategy for current supplier negotiations.