New Tariffs On Steel To Affect HVAC Products by 6 to 10 percent

The government has issued Tariffs on Imported Steel by 25% and Imported Aluminum by 10%

This will range from a 6 to 10 Percent Increase.

New U.S. tariffs on steel and aluminum imports are going to have major consequences for a multitude of manufacturing segments around the globe, but the HVAC industry looks to be particularly impacted.

The tariffs on imported metals officially took effect on March 23, with a 25 percent tariff on steel and a 10 percent tariff on aluminum. Mexico and Canada were exempted from the changes, at least in the short-term, and President Donald Trump said other countries around the globe could potentially negotiate with the White House for exemptions as well.

Still, there is a great deal of uncertainty surrounding such sweeping changes. What will countries need to do to secure an exemption? How will this affect U.S. manufacturing and job creation? How will countries counter these tariffs?

With so many questions left unanswered, leaders of the HVAC industry have voiced frustration with the current state of the marketplace but are reassuring contractors, distributors, and even OEM’s that the industry will persevere through whatever happens.

WHAT ABOUT PRICE?

ACCA’s director of industry and external relations, Todd Washam, said the organization is unsure how much prices will inflate across the board but is certain that contractors will see and increase on equipment prices.

“That increase is likely to be passed on to consumers, and we’re concerned because, when consumers see higher prices, our members tell us that they’re usually driven to the lowest bidder,” he said. “And our members are always concerned about that.”

Industrywide static price changes are unlikely, as Tom Craig, executive vice president of operations, Value Added Distributors, believes manufacturers may wait each other out to see who moves first.

“I think that there just seems to be a lot of uncertainty, and everybody is waiting to see who’s going to flinch first,” he said. “And it’s going to be unavoidable that there’s going to be some price increases, and the confusion is going to be when you get out of just the pure metal products. How much is it going to be, who’s going to go first, and what is the timing going to be?”

Craig gave an example of when a company buys product that is manufactured in Mexico.

“So, the question is, where are they getting their steel, and how much is it going to cost them?” he said. “What is going to happen to the product in that situation versus the producers domestically? It’s about trying to understand the nuances of it, how much it is going to affect the product, and how long it’s going to take everybody to react to each other.”

Those reactions are already starting to take place.

Hercules Industries, a manufacturer and distributor of HVAC sheet metal, released the following statement on March 20:

Since the announcement of a 25 percent tariff on all foreign steel imports, the market has been placed under significant constraints unlike which we have experienced in recent past. All steel manufactured products will inevitably be impacted by this announcement as it rolls into implementation. To navigate such volatile market conditions, we will be implementing a 6 percent increase on all nonmaterial-intensive products and a 12 percent increase on material-intensive products.

Fortunately, Hercules has maintained a close relationship with our domestic mills over the years, and we plan to leverage our relationship to ensure we can meet the demand of our loyal customers. In the event that steel prices reach levels that reach beyond the increases already announced, we will be forced to implement an additional increase in the near future.

POTENTIAL EXCLUSIONS AND EFFECTS

Francis Dietz, vice president of public affair, Air-Conditioning, Heating, and Refrigeration Institute (AHRI), noted that the Department of Commerce was tasked with creating the process and guidelines for potential exclusions to these tariffs. Mexico and Canada have at least a short-term window of exclusion while the North American Free Trade Agreement (NAFTA) is discussed, but the rest of the world will be taken on more of a case-by-case basis.

According to the Los Angeles Times, on March 19, Commerce Secretary Wilbur Ross announced procedures on how U.S.-based importers or users of foreign steel and aluminum could apply for tariff waivers on specific products that may not be available domestically. An online form was made available for companies to file for product exclusions, and the Commerce Department said it would take 90 days to review the detailed application — meaning that U.S.-based car producers, appliance makers, and other firms will have to pay the hefty tariffs and hope they will get reimbursed if they later receive exemptions.

Per CNN, the European Union, Argentina, Brazil, South Korea and Australia will not be subject to the trade penalties when they take effect, U.S. Trade Rep. Robert Lighthizer told a Senate committee.

China has already responded by threatening tariffs on $3 billion worth of U.S. goods, including steel.

Not knowing how other exemptions will play out in the coming months makes forecasting the full scope of these tariffs difficult, but job creation is one area that could be adversely affected.

“Well, we’ve seen some estimates that this could cause 30,000 jobs to be lost,” said Barton James, ACCA’s senior vice president of government relations. “We saw that from the Associated General Contractors Association. The concern, though, is that because this is mainly a tax on the raw materials and not the finished product, then we could see manufacturing move back overseas more, and then they bring the finished product back in here. This is where that 30,000 estimate comes from.”

Before the tariffs took effect, Sweden’s Electrolux put a hold on its planned $250 million plant expansion in Tennessee. According to a release from the Freedonia Group, although Electrolux utilizes U.S.-produced steel at its plant, the company anticipates the cost of appliances produced in the U.S. will increase and has postponed investment in U.S. operations as it evaluates the full impact of the tariff.

LOOKING AHEAD

“In my observations, because it’s such a competitive industry, there may be an initial kind of variance [in price] because this is kind of unprecedented in a lot of unknowns,” said Craig. “There may be some variance from what gets announced initially, but my guess is you know that a couple months down the road, everything is going to probably even back out. The question is going to be how much of an increase is it going to be and how long is it going to take to settle. And anybody can be adversely impacted in the short term. The real long-term concern is for folks who are in the new construction and family construction business because, in a lot of cases, they’ve already negotiated their deals with their builders for 2018. And so the timing is very unusual and the amount is significant, and I’m sure that the builders are probably being impacted, not just in HVAC but in a lot of other trades as well.”

Those trades include electric manufacturers. National Electrical Manufacturers Association (NEMA) President and CEO Kevin Cosgriff said the new import tariffs on steel and aluminum will create unwelcome challenges for many electrical manufacturers, particularly related to certain types of electrical steel not made in the U.S. and the overly broad restrictions on imported aluminum.

“Our industry uses steel and aluminum from domestic and overseas sources in their manufacturing processes,” he said. “The president’s decision to impose import taxes on fairly traded steel and aluminum will not help our manufacturers’ costs or aid them in being more competitive in the global economy. We believe the opposite to be the case.”

Still, not all organizations and manufacturers are against these reforms. Tim Timken, CEO of TimkenSteel, was in the room at the White House when Trump made the announcement, per CNN.

“We view it as a very positive thing,” said Timken, who went on to say that “given a level playing field, I can go toe to toe with anybody in the entire world. My problem is that I’m competing against governments right now.”

Craig said it’s important to caution contractors to be very careful about any additional commitments they make going forward until there’s a clear picture of what can happen.

“They also need to start thinking about the implications here and maybe having similar conversations with their builders about the ‘what ifs?’ because, again, unless something changes dramatically, there will be increases coming in our assessment, and they can certainly be significant enough to severely impact guys that have already got stuff under contract or got long-term amendments this year.”

Ken Baker, chairman, Value Added Distributors, said this action is certainly going to have a disruptive impact on the industry. And it’s the unintended consequences of this action that have him most worried.

“One concern is that if it doesn’t apply to finished product, which to the best of my knowledge it does not, then foreign manufacturers are going to have a distinct advantage over domestic manufacturers,” he said. “Secondly, domestic manufacturers are going to have to do something, and they may well go offshore, so this action potentially could shut manufacturers out of the United States.”

 

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