The new U.S. steel and aluminum tariffs are, at best, unsettling for the HVAC industry, nation, and world economy. Here is how the tariffs can be expected to impact the HVAC industry.
Steel and aluminum are basic raw materials for furnaces, air conditioners, and heat pumps. If the cost of raw materials increases, then the unitary equipment manufacturers will either lower gross profit or raise prices. Manufacturers are better about raising prices than most contractors, and a lot of them have already done so.
Currently, 70 percent of steel and 10 percent of the aluminum used in America is produced domestically. Given that domestic steel production hasn’t changed much over the last couple of decades, it is unlikely we will see a big increase in production as a result of the tariffs. However, steel producers will take advantage of the tariff to boost prices and profits, though they hardly need the help. According to the Associated Press, steel industry profits quadrupled in 2017 to $2.8 billion.
Of course, aluminum prices will rise. Before exemptions are considered, at least 90 percent of the supply of aluminum that’s imported will see a 10 percent price hike. Domestically produced aluminum will follow suit.
WILL OTHER PRICES INCREASE?
Yes. Almost all prices will rise. Virtually every industry that uses steel and aluminum will be impacted by the tariffs. In terms of employment, this affects 38 times the number of jobs in the entire steel industry. It affects everything from airplanes and automobiles to canned food and steel building construction.
The Trump administration is ignoring history as they downplay the impact of the tariffs across the broader economy. George W. Bush instituted steel tariffs in 2002 and dropped them 18 months later because they resulted in more lost jobs in the rest of the economy than the entire steel industry employed.
The impact of the tariffs will be economy-wide. The U.S. produces a lot of oil and gas today, thanks to the hydraulic fracturing revolution. Steel is a major cost component in drilling for oil and gas, in the construction of refineries that convert oil into petroleum, and the construction of pipelines to transport oil. Taxing steel is taxing oil and gas production, which taxes everything that uses fossil fuel based power or transportation.
WHAT WILL HAPPEN TO HVAC PRODUCTION?
It is possible that manufacturers will quietly shift production to countries where the absence of tariffs results in lower steel prices. The finished goods/parts manufactured with tariff free steel can then be imported, avoiding the imposition of tariffs. Whether this makes sense depends on the tariff savings measured against the added friction imposed upon the supply chain and the added cost of transportation necessitated by offshore production. Either way, contractors are unlikely to notice if some manufacturing is shifted offshore. Equipment factory workers are another story.
WHAT SHOULD CONTRACTORS DO?
While it is not usually advisable for contractors to tie up capital in inventory floorplans, this might be the exception to the rule. If price jumps in excess of the financing cost for a line of credit are expected, stocking inventory makes sense. Contractors should work with distributors and/or manufacturer territory managers to get a feel for any price increases that are coming down the road.
Contractors should also review their pricing. Make sure that costs (i.e., parts, equipment, and overhead) are accurate or on the high side when determining pricing. They should stay on top of costs and be prepared to act quickly to adjust pricing to maintain targeted margins.
More than likely, residential customers will be unlikely to notice changes in pricing. Commercial customers are much more likely to notice. In either case, if asked, be prepared to explain that prices reflect changing costs resulting from the steel and aluminum tariffs. No one likes paying more, but the tariffs offer a reason people can accept, even if they do so grudgingly.
Hopefully, the tariffs represent political gamesmanship on the part of the president and will either be watered down or soon rescinded. Regardless of populist rhetoric, tariffs are nothing more than taxes and friction on commerce. They benefit a narrow special interest while harming everyone, including the special interest. Ultimately, they harm the nation imposing them the most.
Publication date: 5/28/2018