Final Thoughts

Steel, plastic and wood are dealing with many of the same issues: labor shortages, supply chain snarls, and unprecedented price swings following the COVID-19 outbreak. And across all three industries, there are more variables to consider now – from climate change to abrupt trade policy changes. (Yes, we’re looking at you Section 232.)

Steel

I told the AFA crowd that steel prices have likely peaked and that we’re starting to go down the other side of the commodity roller coaster. It’s hard to draw any other conclusion when the data we collect has been consistently indicating lower prices, shorter lead times and weakening sentiment.

And the vast gulf between domestic prices and world prices probably indicates that U.S. prices are too far above world prices too hold. That’s especially true with Section 232 tariffs on the EU being replaced with a tariff rate quota (TRQ), a deal with the UK in the works – and no doubt talks with other traditional allies and trading partners ongoing.

Those further up in the steel supply chain, the first cars of the roller coaster (service centers and mills, for example), have taken the long ride up, felt the coaster peak, and know they are going down the other side. It’s only a question of how fast and whether the coaster will plunge as far on the way down as it rose on the way up. (If you’re an analyst, the question might be whether there are even any tracks at the bottom.)

But if you’re making or installing fences, that’s not how you see things. You’re less worried about potential import surges than about keeping up with sudden surges in business when the next big storm brings trees down on fences – lighting your phones with frantic customers. Those storms might cost homeowners billions. But someone else is making billions on the other side.

And you’re already struggling to keep up with a sharp uptick in demand coinciding with a boom in new home construction. We built too many homes in the runup to the 2008-09 financial crisis. But we’ve built too few in the years since. And what’s each new home have? A fence.

You were already super busy because the pandemic led to more people working from home and spending on “backyard experiences” instead of traditional experiences like travel and restaurants. Maybe they got tired of looking at their old fence. Or maybe they decided to put in a pool or adopt a pandemic dog – both of which require a fence. So demand from existing homes is surging too.

A fence company might be paying more than ever for various parts, steel fittings, for example. But customers seem to understand that prices are going up for just about everything, and they’re willing to pay more because they have more – assuming you can get the part, that is.

In other words, end users are in the last car. It’s been climbing for what feels like forever. They know in theory that the coaster will peak and come down the other side – but the prospect of a big drop is so remote from their current experience that it’s hard to imagine.

Even if you know a drop is coming, it’s hard for you to know when. And in the meantime, you’ve got a business to run. You need to order material this winter so you’ll have it in stock for the spring building season. And the academic debate around inflation seems out-of-touch with a day-to-day world in which inflation for everything – stuff, trucks, and labor – is rampant.

And it’s not just steel prices that have gone crazy. So too have prices for polyvinyl chloride, aka PVC, which is increasingly being used to replace other materials in fences.

PVC

Remember Snowmageddon? The cold snap in February that caused mills in the southern U.S. and northern Mexico to temporarily stop production – sending already high prices through the roof.

That happened in PVC too. The difference: About 90% of domestic PVC production capacity is in Texas or Louisiana because it is close to PVC’s primary raw materials – natural gas and salt. And so when Snowmageddon hit, it wasn’t just a significant portion of production that went down, as happened in steel, it was very nearly all of it.

And the supply shocks have just kept coming in the months since. Hurricane Ida in late August, for example. In fact, severe weather now forces producers to halt output so often that “force majeure” can practically be baked into forecasting models that take hurricane season into account.

Also, just as in metals, the PVC world has been rocked by policy changes in China. China has cut PVC production in hopes of reducing carbon emissions. Its industry is far more reliant on coal than ours. Chinese production has also been cut in hopes of alleviating a global energy crunch. As in steel, China’s PVC industry dwarfs that of the rest of the world. But, unlike in steel, the U.S. PVC industry is a significant exporter.

So what does that mean? U.S. PVC prices are being driven higher not only by strong demand at home but also by a global supply deficit stemming from Chinese production cuts. Prices will go nowhere but up in the short-term. No doubt it will moderate eventually. But when is hard to say, and whatever the new floor is will probably be much higher than it was pre-pandemic and before China cut ouput.

Wood

I was a bit lost in the woods when discussions shifted to wood – pressed wood, engineered wood, red versus white cedar – and people can argue for days over which is better, it turns out.

The East Coast prefers white cedar made in New England and eastern Canada, for example. And Texas absolutely adores red cedar grown along the Pacific Northwest – or similar cedars from Japan and China.

What struck me most was this tidbit. There were, as recently as the early ’90s, more than 70 sawmills producing processing white cedar for big markets like the Boston area. Now there are only about 10.

While New England still maintains a fondness for its white cedars and a modest saw mill industry, fencing in the region (like much of the U.S. that is not Texas) has inexorably shifted toward PVC. And that product substitution means there will never again be the need for anywhere close to 70 sawmills in the area.

The wood folks could also talk for days about antidumping duties on softwood lumber from Canada. Will duties go higher next year, and how much higher? Exactly which products will they cover, and which are exempt? It’s a massive issue for wood, akin to what Section 232 is for steel.

But let’s not get lost in the trade policy forest. The key lessons I took away from our panel (and the lengthy Q&A afterward) were these:

The Takeaways

• The wood fencing industry might be a cautionary tale for steel. And it’s important context in the days and weeks ahead. We’ll no doubt spend a lot of time discussing Section 232, the nitty-gritty details of the deal with the EU, and what potential deals with the UK and others might look like. Trade talks will always be there. But never assume that your material will always be necessary to an industry. The idea that people would prefer plastic fences over wood fences in New England would have been heresy a few decades ago. Now it is reality. (Except in Texas.)

• Climate change – hurricane season causes a lot more trouble than it used to – isn’t going away. Whether we do anything lasting and meaningful about it remains to be seen. But you need to factor it into both long-term forecasts and into day-to-day business decisions.

• What if consumer spending on stuff is a far more durable trend than we realize? What if inflation remains a more permanent feature of the economy than it used to be? And what if China really is serious about cutting production this time? Sure, prices can’t go up forever. But whatever the next floor is might be a lot, lot higher than what we’ve seen before. We’re still on a roller coaster. But it might not be the same one we’ve ridden so many times before.

By Michael Cowden, Michael@SteelMarketUpdate.com