There are several reasons that companies have been raising prices this summer. Tie Down, like most companies, doesn’t enjoy raising prices because consumers don’t like it. But as much as we resist it, it is happening all around us. Gas prices are up over 50% in the last 12 months. Wages have increased about 8%, and inflation has spiked over 5%. We have been keeping track of the increases and have responded with a strategy that will continue to produce high-quality products across all six divisions. We thought it would be good to explain the fundamental causes of our changes and educate our customers on how we plan to navigate these challenges.
Domestic Steel prices are at historic highs
Never have the domestic metals indices seen such volatility, and for commodities in general, what we see with regards to steel is genuinely historic. When looked at through this historical lens (figure below), both the rate of increase, current price highs and the disparity between Domestic prices vs. that of both Europe and Asia are frankly shocking. Currently, the average world export price for Hot Roll Steel coil sits at $981/M.T. Meanwhile, U.S. domestic prices are over double at $1966/M.T. This price is also 64% higher than the previous high set during the commodities explosion leading up to the financial crisis of 2008. One would think that these price levels are not sustainable, primarily when operating in the greater global market. The cost disparity between Domestic, Europe, and Asia would naturally put pricing pressure on Domestic producers. And they would be correct; however, imported lower cost steel is not flooding into the Domestic market and thus is not increasing available supply and alleviating current demand. At Tie Down, we have countered these metal price increases by purchasing more substantial quantities and moving up our annual supply agreement negotiations by a full calendar quarter.
According to our sources, higher prices are expected for the near term and into Q2 2022. Despite record-high prices, Tie Down, with our strong and close relationships with all of our suppliers, has been fortunate in that we’ve been able to secure materials required for sustaining our increased order demands. Albeit that has been a daily challenge. One key area in the organization we have been able to leverage has been our Business and Data Analytics team. Decisions are made in a proactive manner vs. reactive. These decisions are based on sound data and not a “gut feeling.” When demand or costing change for any given sourced item, predictive A.I. is used to correctly forecast and inform us of pricing movements that allow us to both stays ahead of the curve as much as possible on both the costing and demand side.
“These decisions are based on sound data and not a gut feeling.”
In addition to the increases in metals, there are significant labor shortages. If you watch the news, you know that in the United States, there are millions of job openings but few workers willing to fill them. The coronavirus pandemic was the leading cause because potential employees are hesitant to return to the workforce. After all, they’re afraid of the virus or losing their expanded unemployment benefits or both. Regardless, the labor shortage in the United States is at historic proportions, and most economists admit that this says this is already a labor crisis. Labor crises will always threaten the economy because companies will scale back operations, turning away business because they can’t find employees. This negative impact on the economy has occurred throughout history. Tie Down has implemented policies to bring more workers into the company. These hiring policies are starting to work, but time is needed to train workers. Tie Down has a very talented workforce and is concurrent with adding additional employees. A strong focus in automation has been instituted with the introduction of an automation team and the drive towards continuous process improvement. All major CapEX purchases have an emphasis on minimizing scaled labor needs.
This does not mean equipment and automation initiatives are to replace our skilled operators. The intent and vision are to make the most of our existing and growing workforce.
Increased demand across all industries:
Tie Down Manufacturing has six divisions, and we have seen a massive increase in all of them. The construction industry has increased the most of our industry divisions. But even the other division have spiked because of the decline in production during the COVID-19 pandemic. Add to this shortening of supply the increase of stimulus money and extended unemployment. The Federal government injected these dollars into the economy, and people could put it toward their spending.
These consumers have created extremely high demand for all kinds of products, from homes to boats to food. The domino effect from this situation is in full swing because this demand means increased construction, more tractors, tractor parts, more boat trailers. More of pretty much everything Tie Down Manufacturing manufactures. At some point, increased interest rates could slow this demand, but there is no sign of a rise in interest rates in the foreseeable future.
Anyone connected to Manufacturing or distribution knows that freight costs have exploded.
The situation has been a leading cause of both inventory shortages and higher prices. The United States is the most robust economy globally, but It’s unknown how quickly these higher prices might ease, and we can get back to normal. There is no doubt that until freight costs normalize, they are a potential threat to the economy and a driver of long-term inflation.
Perhaps the most frustrating element of the soaring freight costs is that they are higher across all levels. For instance, 40-foot containers that historically cost $3,000 to ship Tie Down our parts, plastics, and fittings, hardware items, are costing $20,000 currently. This situation alone has created an environment where we are forced to pass along at least some of the costs to the consumer. Another level of freight is the trucks that come to our facility to pick up our finished products. Trucking prices have skyrocketed, and there are even bidding wars the same day the truck is scheduled for pick up. If someone offers a higher price, the trucking companies and independent drivers renege on the arrangement or provide us an opportunity to match or beat their new offer. It is crazy that it violates our standards, but it’s the world we find ourselves in.
Regardless of the increase in costs to freight, materials, labor shortages, higher wages, free money, and the negative impact on growth, it’s important to remember that this is temporary. The United States and Tie Down Manufacturing have been here before, the supply shortages and high inflation of the ’70s and ’80s, the challenges through the 2000s through the financial crises, tariffs, and now the current challenging environment. When costs come down over the coming months, and we believe they will come down when the Federal government tightens rates and stops the flow of free stimulus money, this will act as a relief. It’s essential to remember that we are fortunate to have a history of these moments and a playbook with which to work.
In the meantime, we thought it was important for our valued customers to understand where the price increases are originating, and the factors involved. It is also crucial that we remain focused on the future of our company, our employees, and this great nation.