Supply Chain Updates 2021
Up and down the supply chain, from manufacturers to distributors to fabricators to contractors and installers, everyone is dealing with disruption in the supply of building products. It is part of a global issue affecting multiple industries and products. The result is products that are delayed or unavailable, forcing contractors to find substitutes. And, across the board, prices are going up.
According to Anirban Basu, chief economist for the Associated Builders and Contractors, construction input prices as of August were 20.8% higher than a year ago, and iron and steel products have nearly doubled in the last year, going up 95.2%. A recent slight decline (August prices were down 0.6% compared to July) can be attributed to sharp reductions in soft lumber (down 27%) and crude petroleum (down 10%). In our market, though, prices increased in August, up more than 3% for steel mill products.
Why a Disruption?
For some products, just getting them at any price is a problem. Ken Simonson, chief economist for Associated General Contractors of America, points to a variety of factors affecting the disruption, including availability of labor, transportation and commodities. “All of them are part of the problem,” he says. “Like a rolling traffic jam, it seems that as soon as one blockage eases, another crops up.
“It’s the domino effect of the global pandemic.” Kathryn Thompson, Thompson Research Group
First, it was factories in China and Italy that shut down in the first wave of the pandemic. Then West Coast ports were swamped with containers. More recently, there have been shutdowns in major Chinese ports, shortages of containers, overwhelmed U.S. ports, shortages of truck drivers and train crews, and shortages of workers at some U.S. mills and factories. Local, short-term blockages have spread through the global supply chain and wider ranges of products than usual because inventories are depleted.”
“It’s the domino effect of the global pandemic,” says Kathryn Thompson, CEO, Thompson Research Group, Nashville. “Along with residual impact from tariffs. If we break it down, there are some bigger issues such as China. Yes, tariffs on all sorts of products and material affected supply, but, conceptually, China is seeking more as a country to use more of what they produce. They are a huge supplier of aluminum on a global basis.”
“Like a rolling traffic jam, it seems that as soon as one blockage eases, another crops up.” Ken Simonson, AGC
Closed ports in China for different reasons, shortages of shipping containers due to high demand and other issues are all affecting the transportation of materials. “There are huge bottlenecks throughout the U.S.,” says Thompson, “Then you have to rush goods across the country, so there’s a strain on rails and trucking. Layer on top of that the availability of people to drive trucks. During COVID-19, a lot of people decided they didn’t want to be on the road that much.”
Perhaps the most surprising and unexpected issue affecting the supply chain is the reaction of China to the global climate initiative. Previously, the country was known for its lack of concern about pollutants, so much so that during the Olympic games in Beijing in 2008, there was concern about the health affects of air pollution on marathon runners. “Because of the energy intensity of aluminum during manufacturing,” says Thompson, “those plants came into the cross hairs of President Xi Jingping who is cracking down on pollutants.”
What Does This Mean for the Metal Construction Industry?
The supply chain disruption affects manufacturers and contractors in different ways, and there are different solutions they can take to address the fallout, but one of the issues is how amoebalike the issues are. “The supply disruption is occurring over all facets of the industry,” says Jim Bush, vice president of sales and marketing, ATAS International Inc., Allentown, Pa. “It seems as when one area of the supply chain recovers, another breaks down, creating ongoing struggles for production and scheduling.”
“It’s very difficult to bid prices beyond a 30-day window.” Jim Bush, ATAS International Inc.
Jeff Henry is CEO and co-founder of CEI Materials, Manchester, Mich., which fabricates and installs metal composite (MCM) panel systems. He says of the shortages his firm is facing, “We are seeing delays on everything from hardware, insulation, aluminum extrusions, MCM, sheet metal and HPL [high pressure laminate]. Lead times have increased by double and in some cases quadrupled.”
Western States Metal Roofing, Phoenix, recently blasted an email to customers and other stakeholders warning of potential delays in deliveries as a result of a shortage of PVDF coating because manufacturers are unable to secure the resins necessary to produce the coating. Western States hasn’t experienced shortages yet and is taking action to secure materials.
“Embrace the escalation clause!” Jennifer Heimburger, Heimburger Construction
Heimburger Construction, Bonne Terre, Mo., is an AC 478-accredited metal building contractor. Jennifer Heimburger, president, says, “Building deliveries are changing on a weekly basis due to manufacturers’ inability to obtain material from bolts to coil.” She points to coil steel as one of the materials most affected and says, “Coil issues are driving the delays. It’s difficult to put up a building without purlins.”
Jim Tuschall, president of Tuschall Engineering Inc., Burr Ridge, Ill., says, “Insulation is becoming harder to secure. Steel is also more difficult to find.” He also is receiving reports that high-performance paints such as PVDF will be rationed because one of the chemicals it requires is going to batteries.
Because of the shortage of resins for coatings, there are delays in coil shipments. But some shortages of products completely unrelated to steel can affect the ability of a contractor to deliver a job. Paul Lechiara owns East Coast Metal Roofing, Oxford, Mass., a larger residential metal roofing company that last year had revenues in excess of $21 million, which was up about 50% over 2019. One of the items he sees delays in is underlayment. “We use a breathable underlayment for metal,” he says, “because it’s better for condensation issues, but the materials used for the underlayments, because of COVID, were being used to manufacture masks. They were prioritizing what they were using materials for.”
How Long Will the Disruption Last?
Obviously, the spigot didn’t just turn off for these products. There are just shortages. But in times of scarcity, competition becomes fierce and suppliers tend to default to selling to the highest value, and that’s where the construction industry runs into trouble.
Lechiara’s example of underlayment material going to COVID masks is one example, and, as Tuschall pointed out, the chemical needed for the coatings is going instead to batteries. The same is true with other materials and commodities. “To make matters worse,” says Thompson, “[suppliers] are going to go after higher price-add materials. Steel studs are not one of them. Anything that’s light gauge and has less of a value-add element to it will get delayed. It sounds a bit harsh, but if you know you can get a ton for a three-year construction project with Tesla that will go quicker than steel for a 7-11 that’s going to go up across the street.”
How long this disruption lasts will depend, in part, on what the material is used for and what the competition for that material is. If you could wave a magic wand and suddenly ease the backups and congestions at shipping ports as well as resolve all the other transportation issues, you still wouldn’t have solved the disruption.
When asked how long this disruption will take, Thompson says, “It depends on what industry, some will get resolved in nine to 12 months. Other industries might take a bit longer. It will take longer with metals, maybe 24 months. Because it’s such a global product, one of the biggest global producers [China] is doing less just as demand increases. There is not an effective solution, and diverting costs to expand production capacity can take years.”
In addition to problems on the supply side, there are issues on the demand side. “The continued growth of the U.S. economy means demand will continue to put pressure on inventories and production. It appears supplies of some critical items, such as certain semiconductors, may not catch up with demand before 2023. For construction steel products, it is possible owners will postpone or cancel projects, which would lead to shortening of lead times, but there is little sign of that yet.”
And that brings us to demand for construction projects. Tuschall reports that his company has not lost any projects under contract, “but we believe we are losing some due to long lead times,” he says.
Henry expresses a greater concern about how this disruption could affect the industry. “We are doing everything we can do not to lose work and maintain healthy relationships with our clients,” he says. “Most of our clients understand, but, at times, this requires overtime and expedited trucking fees, which has a huge impact on profitability. On the few projects we have lost, the client went with an entirely different building material due to lead time. In most cases, this is an inferior product. I’m afraid that these issues are going to have a lasting impact on our industry if we do not find a way to resolve it soon.”
At the manufacturing level in the supply chain, Bush reports, “We have had to turn many opportunities away due to raw material availability. We have also seen construction projects experience delays due to the inability of the trades across the entire construction team to deliver their scope of work in a timely fashion.”
What Can I Do?
No one can easily resolve a global issue. When asked about regulatory solutions, Simonson says, “The quickest step would be to end the tariffs and quotas on steel, aluminum and Canadian softwood lumber. The Administration should also negotiate an end to tariffs on Chinese products. Repeal of the Jones Act would enable more efficient marine movement of products. [The Jones Act prevents ships flying foreign flags from transporting goods between U.S. ports.] Funding and regulatory approval of infrastructure projects, especially port, intermodal and certain highway projects, is needed to avoid future blockages.”
None of those regulatory issues are likely to arrive soon, and there isn’t total agreement that taking those actions would solve the problem. “I don’t know if removing tariffs even solves anything,” says Thompson. “It’s a little bit like a college freshman who finishes a 12 pack, then has a shot of whiskey. If you take away the shot, it isn’t going to change anything. The damage is done.”
If it feels like this disruption is going to take a long time, that may be because it has so many reasons, and solving one issue doesn’t resolve the disruption. That doesn’t mean that contractors on the frontlines don’t have tools at their disposal to address the problems caused by the disruption.
“It has become very difficult to bid prices beyond a three-day window,” says Bush. “All past models of being able to hedge material prices do not follow the current situation and dynamics.”
Heimburger says one solution is to, “embrace the escalation clause! We have added an escalation clause to all of our proposals and contracts to reflect the volatility of our industry. Lead times are also addressed.”
Managing customers while prices and lead times fluctuate can be challenging. “We are finding workarounds,” says Heimburger. “And I am continuously amazed that clients are accepting the price increases and leads times and moving forward with their projects.”
Substituting materials, as Henry mentioned, is also a solution, and rethinking your approach to a project can prove beneficial. “We are changing the way we deliver projects,” says Heimburger. We’re looking for alternate building materials in light gauge, conventional steel, reusing existing buildings and installing stub columns to increase clear heights or conventional frames to add square feet. We aren't buying building packages but getting sheeting, frames and secondaries from different suppliers. We are lucky to have a good structural engineer that will work with us on these projects.
Lechiara has taken a very aggressive approach to resolving material shortages and it is part of an overall strategy to grow the business significantly during this period of uncertainty. His lead time on projects has gone from four to eight weeks out to nine to 12 weeks, but the number of projects he as lined up in the cue has also increased from between 60 and 80 to more than 200.
To manage that, he has rented shipping containers and purchased enough materials from his suppliers to offset the delay. Stockpiling materials has allowed him to manage his business with far less disruption and provide his customers with more consistent service. “Not everybody can do that,” he says. “We’re fortunate that we’re able to. We have enough in our operating budget to do it.”
Tuschall embraces all those tactics. “Advance planning is key to reserve material ahead of normal durations,” he says. “We have been substituting other materials that are available such as zinc. New sources are also an option that has been working; we have found that some vendors have secured large lots of product to remain competitive.”