Even before the Trump Administration imposed tariffs on imported steel and aluminum, U.S. manufacturers were beginning to worry about a trade war. As the Institute for Supply Management polled its manufacturing members for its March report on business, fully one-third of respondents expressed concern over the possible impact of tariffs.
“[There’s] much concern in the industry regarding the steel and aluminum tariffs recently [imposed]. This is causing panic buying, driving the near-term prices higher and [leading to] inventory shortages for non-contract customers,” said one procurement executive. The PMI – the ISM’s leading index for domestic manufacturing activity—is rarely forward-looking. Although the PMI data is extremely fresh—it’s released within days of the previous month’s end – commentary typically focuses on the past four-or-so weeks.
By April 4, China had reacted to the U.S. tariffs by imposing duties of its own on products made in America. A chain reaction across numerous industries appears to be inevitable.
Electronics companies are familiar with one side effect of the steel and aluminum tariffs: companies are hoarding steel on the expectation prices will increase dramatically. Businesses looking to procure steel in March were told prices were good only for 24 hours, according to Tim Fiore, chair of the ISM’s manufacturing business survey committee. Hoarding – in electronics parlance, “double ordering”—contributed to an historic electronics component glut in the early 2000s. Severe shortages across many component categories were experienced in the late 1990s.
This activity drives prices up. “[There were] significant price increases in the steel commodity due to [the tariffs],” one manufacturer reported. “The price increases will begin to impact our company’s performance.” The ISM’s overall raw materials price index increased by 3.9% in March to reach 78.1 (any number above 50 indicates expansion.)
“There’s really no reason the prices index went up except for the tariff issue,” Fiore said. The price index is at its highest level since April 2011, when it registered 82.6%. In March, price increases occurred across 17 of 18 industry sectors tracked by the ISM.
Although the electronics industry has wanted to increase prices for years, shortages inevitably impact factory output. That, in turn, harms manufacturers’ business. “Supply constraints, extended lead times, capacity constraints [and the like], particularly in the electronics components markets, continue to frustrate and drain needed resources, have delayed production schedules and, in some cases, caused missed or delayed sales opportunities,” an electronics executive told the ISM.
“Production targets continue to be a struggle due to shortages of globally sourced components,” said a transportation-industry manager. “Many sub-tier components are in short supply for multiple OEMs.”
The negative impact of steel and aluminum tariffs is a grim reminder of the interdependence of the global supply chain. Although electronics companies don’t consume a lot of steel anymore, tariff-related price increases will impact the industry. Backlogs have been building at U.S. seaports as cargo is closely inspected for steel and aluminum imports. This is necessary to impose the appropriate duties. Already, logistics costs are rising as end-product delivery windows are missed.
It will only get worse as the months drag on—even though manufacturing demand remains strong. March’s PMI was 59.3%. “Many comments reflected the negative impact of the Asian holiday period, concerns about tariffs and difficulties in moving containers from ports to using locations,” ISM’s Fiore concluded. “Demand remains robust, but the nation’s employment resources and supply chains are still struggling to keep up.”
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