HARDI Wholesalers Worried About Disconnect Between Mill & Downstream Pricing

The HARDI wholesalers were concerned about the base price increases coupled with changes in the coating extras which is hitting their customers doubly hard. They reported having difficulties moving the needle and convincing their customers (who are HVAC mechanical contractors) of the need to pay higher prices. They attributed that resistance on full inventories at the galvanized service centers many of whom have been willing to sell steel based on “floor cost” versus replacement cost.

The discussion about competition and competitive pressures from “non-traditional” suppliers to the HVAC markets had been relatively muted over the past few months. The wholesalers at that time were reporting not seeing as many non-traditional competitors in the markets with the assumption being made that inventories were tight or there was a concerted effort to sell at, or close to replacement prices. This changed in today’s discussion as every wholesaler who spoke on the call brought up the subject of lower margins and lost sales to these non-traditional steel service center competitors.

“Everyone can get steel now,” is the concern expressed by one wholesaler. If the service centers are now flush with inventories of galvanized steel the first thing that happens is margins get squeezed as the contractors shop their business.

A wholesaler out of the Southeast told the group, “We could have had a record quarter if we had just sold off of floor costs.” They made a conscious decision not to do that and sacrificed some of their business to protect themselves against the higher cost inventories still coming in.

A couple wholesalers spoke about the disconnect between the mill level and the service centers offering steel into the HVAC contractors, “…Demand okay, a little softer than anticipated. We are seeing kind of a pretty big disconnect between the raw material inflation, the mill tightness, the lack of imports; everything that spells out what should be a fairly bullish market and then have appropriate responsiveness downstream at the distributor and manufacturers level. There is a disconnect at what we are seeing in the market and how other actors are portraying what is happening in the market versus what is going on upstream at the mill level. We are amazed but, there are enough players having enough material; demand is good but not exceptionally robust on the commercial side, [Price increases] are taking forever to work down into buys that people made and people are still looking at floor costs instead of future costs.  Lead times are long enough to have people look at their future costs so our challenge is trying to prepare our customers.  They [the contractors] have a tough inflationary market that may impact their P&L’s [profit & loss statements], their job quotes, and the whole dynamic… I haven’t seen this level of disconnect from my seat for some time…“

One of the wholesalers brought up the subject of Big River Steel (BRS) and what impact they were having on the market. The wholesaler reported they were getting offered material out of the mill and confirmed that the mill was willing to make small PIW coils (many of the wholesalers buy 10,000 pound maximum coil weights).

SMU did have a discussion with one of the wholesalers quoted above after the call had concluded. We discussed index based “bucket” deals and their potential impact on the downstream spot business (sales to mechanical contractors and the like). This is a subject we would like to pursue as the “bucket” deals hurt the mills in the past and if they are allowing them again, well, history has a way of repeating itself…

HARDI = Heating, Air-conditioning, Refrigeration, Distributors International