Talking tariffs

Politics aside, how are tariffs impacting construction costs in Dane County?

From the pages of In Business magazine.

Rebuilding after massive hurricanes, floods, tornados, or fires, depending on the scale of the disaster, can impact the supply and demand of construction materials nationwide and increase rebuilding costs.

But these days, there’s another influence on construction costs — tariffs. It’s certainly not a new idea. The United States has imposed tariffs as a revenue-generating border tax since the late 1700s to fund the federal government until they were primarily replaced by income taxes in 1913, when Congress passed the 16th Amendment.

Now, tariffs are making headlines thanks to President Donald Trump, who is embroiled in a tit-for-tat trade war with China and other countries around the world in an effort, he believes, to rebalance trade inequities allowed by past administrations.

Thousands of everyday items imported from select countries worldwide have been slapped with tariffs, from washing machines to electronics to solar panels, but in this construction and development feature, we’re focusing on materials and how increased costs are impacting the bottom line on local building projects.

Importers, such as U.S. companies that order materials, pay the tariffs, and the president believes tariffs on metals are a matter of national security. Increasing costs on foreign-made products, he reasons, will spark U.S. manufacturing and lead to domestic job growth. To some degree, that’s already happening.

A Washington Post article in July (“Trump’s trade war has started. Who’s been helped and who’s been hurt?”) cited a Trade Partnership Worldwide study that projected in increase of 25,000 new jobs in the steel and aluminum industry over the next three years as a result of the tariffs.

But the same study estimates that 16 U.S. manufacturing jobs could be lost for every metal-producing job gained, resulting in over 400,000 net jobs lost.

The U.S. is the world’s largest steel importer, followed by Germany, yet in 2017 steel represented just 1.2 percent of the total goods imported into the U.S. As of June 2018, the U.S. was purchasing most of its steel from Canada (20 percent) according to the International Trade Administration, followed by Brazil (12 percent) and Mexico (11 percent). Russia accounts for 8 percent, while China is not a significant exporter of steel.

Section 232 aluminum tariffs imposed on Mexico and Canada as part of the United States-Mexico-Canada Agreement (USMCA) are likely to remain in place because the trilateral agreement announced Oct. 1 won’t head to Congress before 2019.

In March and June, tariffs on steel and aluminum went into effect, placing a 25 percent tariff on imported steel and a 10 percent tariff on aluminum imports. Manufacturers like Milwaukee-based Harley-Davidson and auto manufacturers reeled, with Ford recently announcing that the tariffs have cost the company $1 billion and will result in layoffs.

Hoping to explore the impact of these national issues on Dane County manufacturers, we quickly learned that this issue is a political hot potato that few companies wanted to touch — at least publicly.

But a couple did go on record — Sean Cleary, at Cleary Building Corp., and Ray Statz, founder of Qual Line Fence Corp. in Waunakee.

Tariff-ic or tari-ible?

Cleary Building Corp. in Verona is a 40-year-old company with 82 offices around the country. Sean Cleary, president, regularly follows economist blogs and media and trade articles to keep a closer ear to the ground on tariff news. His company manufactures and builds a wide range of structures ranging from pole barns and pole buildings for residential, office, or agricultural use, with steel, aluminum, and lumber being crucial components. Business is good, he says, but to understand the present, one needs to understand the past.

America’s steel industry lost ground years ago. Many companies consolidated, and historic stalwarts, like National Steel or Bethlehem Steel, went out of business. Only a handful remain, such as NuCor Corp., U.S. Steel, or Steel Dynamics, Inc.

Tariff rumors started well before implementation in March. “There’s always a lag time,” Cleary explains, but anticipation is enough to drive up prices. “When word comes down that tariffs will happen, domestic companies announce that they’ll raise prices right away and then talk about expanding their capacity.”

That’s a good news-bad news scenario, he says. Some dormant U.S. steel plants have reopened as a result, creating jobs and boosting production, “but it hasn’t brought down the price of steel,” Cleary notes. In fact, over the past year, he’s seen steel prices rise 43 percent on average, but he’s concerned about ancillary industries, as well.

“Fastener companies (e.g., nail manufacturers) are really being affected,” he says, “and we use a lot of fasteners.”

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Case in point: Deacero, a Mexican company, acquired Mid Continent Nail, a Poplar Bluff, Missouri nail manufacturer, in 2012, and through the years doubled in size to grow to be the town’s largest employer.

But recent tariffs have forced the company to charge more for its nails — from a reported $27 for a box of 50 nails to $32.50 to cover the cost of the tariff — resulting in a 70 percent drop in orders over the past year, according to a story in the Chicago Tribune. At full capacity, Mid Continent employed 500 workers but had to cut 150 jobs in June, prompting executives to threaten a total shutdown. The problem, it claimed, was finding a U.S. company able to supply enough steel wire to continue production.

Mid Continent applied to the federal government hoping to be excluded from the tariffs, and after meeting with Commerce Secretary Wilbur Ross, left feeling “hopeful,” according to reports.

But they had to get in line.

As of Oct. 1, the U.S. Department of Commerce had received 35,872 such steel tariff exemption requests and nearly 6,000 had been approved, according to a MarketWatch report.

Whether or not the steel and aluminum tariffs are good or bad for the U.S. economy may depend on whether a company is a producer or a customer. While many metals manufacturers are expanding and adding jobs knowing they’ve gained tariff protections, customers like Cleary Building, which require and purchase metals for their livelihood, must pay the higher costs.

“We buy millions and millions of dollars worth of steel every year, usually from U.S. Steel,” Cleary says. In fact, Clearly Building Corp. has always purchased 100 percent U.S.-made steel because of its superior quality, he explains, suggesting that companies that try to lower costs by importing product may save money but risk quality.

Cleary cites another problem with imported products — sometimes the price quoted may not necessarily be the price companies pay when the product arrives in the U.S. “If you order a load with a three-month lead time, for example, and a tariff is applied in the meantime or something else changes, you’re responsible for the price hike when it gets into dock, which could be substantially higher.”

Cleary Building is also affected by tariffs on aluminum, which it orders primarily from Canada, a major exporter of the metal. “A lot of the components we use in our products are aluminum,” Cleary says, “including trim for doors and windows, and that drives up door and window prices.”

Those costs have increased 37 to 40 percent in one year, he says.

Does China affect the mix at all? Not necessarily, he says. “It’s kind of crazy because there’s only a small amount of steel that comes into the U.S. from China, but tariffs that have been put on European countries or Canada affects the prices of steel, aluminum, and lumber here. So it’s a real challenge. There’s no way a company could absorb all those increases and stay in business.”

Cleary Building Corp. frames its buildings with lumber. The U.S. grows a lot of lumber domestically, particularly in the south, he says, but Canada has always been a traditional resource. As recently as July, Cleary reported year-over year lumber costs rising between 50 and 75 percent on average, although he says they’ve come down somewhat since then.

Meanwhile, employers are struggling with the nationwide labor shortage. Cleary Building employs about 320 workers in Dane County and 900 nationwide, but the company also has about 200 job openings currently for a variety of positions at locations around the country.

“If you would have told me 35 years ago that my biggest problem would be finding people — just bodies to grow your company — I wouldn’t have believed it. It’s stunning to me, but that’s the world we live in now.”

Add to that a nationwide shortage of semitruck drivers as over-the-road drivers retire. At the end of 2017, some industry reports put that number at around 50,000. That, Cleary says, impacts deliveries, costs, and forces his company to carry more inventory than usual.

But weather this year, from snowstorms in April to unusually high rainfall throughout the Midwest, may have taken the biggest toll on the company’s operations in 2018.

“It’s a perfect storm,” Cleary says, with no pun intended. “We’ve got a good economy and a decent selling market, but all these other factors have made it a very complicated situation.”

Asked for his projections, Cleary suggests that if the tariff issue isn’t resolved by the second quarter of 2019, the country could be in for some economic pain. Some economists, he notes, are even suggesting a potential recession by late 2019. “Who knows? Economists look at things just like weather people. As great as technology is, sometimes it’s wrong.”

But Cleary believes there’s plenty of reasons for optimism, too. “Business is good and there are more people who’ve been out of the workplace that are now returning to the workforce because of the opportunities,” he explains. “I have a lot of faith in the United States. We’re the greatest country in the world, but with our 24-hour news cycle, everything becomes an issue and is always on the forefront of your mind.”

His advice is to just take a breath. “We’ve had bad issues forever. Every country does, and as human beings we tend to dwell on the negative, but I believe we’re still lucky to be living in the United States of America.”

Quality before price

Qual Line Fence Corp. in Waunakee has been containing children, animals, and landscapes for over 63 years. The company sells and installs residential and commercial fences of all types — chain link, ornamental iron, or plastic — but it specializes in customized wood fences usually made of domestically grown western red cedar. It does not use treated lumber and always uses steel posts.

Ray Statz founded Qual Line Fence in 1956 and ran it for 51 years, with wife Harriet joining as vice president in 1991. The second-generation took hold in 2007 when Statz’s son Al was named president and CEO. But make no mistake, the patriarch is still very much involved in the company, and he’s certainly no stranger to cost increases.

“Years ago, ’W’ [former U.S. President George W. Bush] put a 27 percent tariff on Canadian lumber. I couldn’t believe he would do that, but he did, and it’s still there,” Ray says. Fence boards are not really considered lumber, he explains, but they fall into the same category, which makes the company susceptible to increases.

“Within the last year or two, our wood costs have gone up about 25 to 30 percent and we have to pass that on,” he states, adding that they don’t always know why increases occur, whether specifically because of tariffs, shortages, or environmental issues.

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One of his biggest frustrations is the uncertainty in today’s market and receiving short notice from suppliers when costs increase. For example, one of the country’s largest steel suppliers let Qual Line Fence know on Sept. 21 that steel pipe prices would increase by 6 percent effective Oct. 1. “That’s one week notice!” Statz says. “What if we had been in the midst of a big commercial bid?”

Another longtime friend and independent distributor of Chinese-made products the company carries upped his prices 10 percent as a result of tariffs, also on short notice. The friend also warned the company that an additional 15 percent tariff would take effect Jan. 1, meaning anything ordered now from China is upcharged.

“Sometimes companies tell you that if you want the lower price you have a little time to order product, but this guy is saying, ‘Sorry, anything that you order now won’t get here until after Jan. 1 because it’s literally on a slow boat from China,’” Statz explains, “so it’s now a 25 percent increase.”

In just six months (April to September), Qual Line’s costs for a flat, four-by-eight-foot sheet of aluminum increased nearly 36 percent, and a popular aluminum post-hole paint the company has carried for at least 25 years will also increase by 8 percent on Jan. 1, likely due to its aluminum content, he says.

“These are things we know,” Statz emphasizes, “but there are a lot of things we don’t know, and that’s the real problem, the uncertainty of everything. How many more increases are out there? I’ve been doing this for 63 years. Sudden, unexpected tariffs never used to happen and there’s probably more to come.

“But whatever it is, we’ll muddle through.”

Statz says he doesn’t always know where the materials come from. “We buy our metals from Eastern Metals, which has four U.S. locations, but we don’t know where they get it from.”

His suppliers don’t specifically blame the tariffs for cost increases, either, according to Statz. “They’re saying, ‘we don’t have a choice, we have to raise our prices.’ We, in turn, have to say that, too. Most of our customers understand that.”

But he’s clearly troubled by longer delivery times. For example, one particular order for a couple tons of a specialty product was supposed to take 12 weeks, he was told. “That was 14 weeks ago,” Statz remarks, and on the date of this interview, wait time was approaching 15 weeks. “Some customers just won’t wait that long,” he laments.

For years, U.S. manufacturers have been forced to order parts from foreign countries because the factories no longer exist in America. The fencing industry is no different, Statz says, particularly when it comes to things like fence fittings for certain types of fences. “Nobody builds a fence without having some foreign-made parts,” he explains, “so when you bid a job like that, it has to be primarily made in America.”

Statz has found a happy medium, however — India. “We’ve found the quality of products made in India far superior to China’s. I don’t care if it costs a little more, the quality is there, and that’s what I really like and what’s most important.”

He’s always had a reputation for choosing quality first and price second, Statz says, even when it comes to the cars he and his sons race — Corvettes and Porsches. According to the company website, Statz also “recently” took up autocross racing with his Beck Spyder.

“Is that what it says?” he asks, before clarifying. “I did that when I was 70 … about 14 years ago,” he laughs.

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