This post may be venturing off into “rant” territory, which is largely uncharted water for me. But an article in yesterday’s Wall Street Journal about the negative impacts that the Buy American Clause is having on some of the very businesses it’s supposed to help shows the fallacy of drafting government policy-by-marketing-slogan.
The Journal tells the story of Aquarius Technologies, a Wisconsin based company that makes sewage treatment equipment. Their industry has received billions of dollars in stimulus funds for projects around the country. Yet by their estimates, Aquarius may lose up to 25% of their total business if neighboring Ontario can no longer utilize them, due to Canadian retaliatory protectionist policies - a direct result of the Buy American Clause.
So in the end, a policy designed to help American workers may actually have the opposite impact on a subset of those workers, the companies that employ them and the towns they are from. The reason is that a complex issue, like global supply chains or interconnected commerce in border regions, isn’t easy to deal with using bumper sticker politics. “A strong dollar”, “buy American” or “tough on crime” slogans play well in short issue ads and
As we’ve discussed before, the recently enacted ‘Buy American’ clause was expected to have global ramifications if the proposed measures to supply public sector stimulus projects using domestically produced steel came to fruition. As we expected, the Buy American clause has been modified as the US was pounded by pushback from other nations. But, even after scaling back the restrictions somewhat, they have alienated several key trading partners and kicked off a small, but potentially growing, trade war on multiple fronts.
Japan. Last week, Japan officially objected to a pending appropriations bill, which would mandate that only fleet vehicles made by The Big Three be purchased with the funds. As the Japanese rightly point out, “if it limits it to just the three, this violates the World Trade Organization’s fundamental principle of non-discrimination.” (And of course, this ‘Buy American’ requirement ignores the complex web of automotive OEMs and their suppliers, since many “foreign” cars are made on US soil with American parts and labor. But, that’s an argument for another post.)
China. In an unlikely turn of events, China recently
Battle lines have been drawn in the fight over carbon emissions. Late last month, the US House of Representatives passed the Waxman-Markey Bill, which in addition to an infusion of R&D money would create a cap and trade system for carbon, giving away 70% of the available carbon credits while auctioning off the remaining 30%. Although the Senate has delayed taking up the legislation (while their one track minds focus on healthcare), resistance is solidifying against cap and trade from many quarters, including ripples of opposition amongst the largest steel makers.
The proposed legislation would have the biggest impact on integrated mills because of the energy-intensive manner in which they make steel from iron ore and coke. Steelmakers argue that the industry’s carbon emission has decreased significantly since the 1990’s and therefore do not warrant government controls. Steelmakers also suggest strict emission controls would indirectly force integrated steel production into developing nations such as Brazil that would not have as stringent emission controls (a fierce point of contention around cap and trade is the lack of commitments by many developing nations, including Brazil, China and India).
The U.S. steelmakers appear to be taking credit for overall reduction in carbon emissions despite the fact that the reductions are a direct result of increased production from mini-mills, which by the nature of their production from scrap emit 66 percent less carbon dioxide into the atmosphere. Interestingly, mini-mills have joined the ranks of integrated mills in their public opposition to such cap and trade legislation.
Although the justifications of the argument by steelmakers may be flawed, history has proven that steelmaking groups are among the most effective and influential lobbyists in the world. While it is not feasible that the US government would allow for the majority of its steelmaking to go overseas, this issue does justify careful watch as any carbon emission limitations would have a significant impact in supply and pricing of steel products in the US.
In the mean time, there are still opportunities for steel buyers to take advantage of relatively low prices. My colleague, Kevin Graham, is presenting on current metals opportunities and sourcing strategies in the Top 5 Categories to Source Now webinar tomorrow (register here). If the economy is indeed on the rebound and carbon caps are around the corner, buyer’s market conditions may not last for too much longer. So, take advantage of them while you can.
Mike Petro is the Lead Category Manager for Direct Materials in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.
As the G-20 Summit officially kicks off today under a typical layer of London fog (comprised of economic storm clouds and tear gas), the topic of protectionist policies are certain to dominate trade discussions. Although I suspect many of the assembled leaders are truly “free traders” caught up in populist political pressure to protect jobs at home, they’ll spend the next few days discussing the recession and how they’ll cope with it on the national and global scale - including through tariffs, subsidies and restrictions.
Like I mentioned in my previous post, details of the Buy American Clause are likely to be another bargaining chip on the table, along with the other 47 recently enacted trade-restricting measures. And although complying with the “Buy American” rules is a still somewhat of a moving target right now, there are some strategies that can help buyers and suppliers minimize the risk and maximize potential opportunities.
What strategies should be implemented in response to Stimulus Package and Buy American provisions?
Test the International Waters: If bidding on any public works projects, it will be very important to solicit quotes from foreign suppliers in an effort to identify US suppliers that are using advantageous pricing and to get around the 25% savings from foreign supplier exception.
Set Expectations & Specifications: The use of specialized materials will either benefit or limit the involvement of US companies, so be sure to carefully set specifications that match your optimal supply base.
Anticipate Capacity Problems: Proactively identify suppliers that may be active in public works packages so that you are not scrambling if their capacity for non-public works projects diminishes.
Once we’ve had time to digest the news coming out of the G-20 Summit, I’ll be sitting down for a round table session on the Buy American Clause with my category manager colleagues in EMEA and APAC. The regulations obviously impact regions, industries and companies in different ways, so the session (which we’ll podcast and blog about here) will attempt to bring together the various perspectives and concerns with an eye on providing actionable advice. Stay tuned…
Mike Petro is the Lead Category Manager for Direct Materials in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.
Industries asking for a piece of the economic stimulus package are frantically making their case to Congress, the President, the media and the general public. And although the package still has to go to the Senate for them to modify, the largess in the bill passed by the House of Representatives Wednesday will likely dole out some serious cash in an attempt to turn the US economy around (.xls file of types of project by state available here). It’s no surprise that the steel industry is waiting in line for help like everyone else. And although they’ve made some headway in pushing for infrastructure projects, which obviously use a lot of steel, they’re publicly expressing disappointment at the composition of the House passed package:
“I was horribly disappointed with the amount of hard dollars going into infrastructure,” Keith Busse, chairman and chief executive officer of Steel Dynamics Inc., Fort Wayne, Ind., said. “Out of an $850-billion package, the rumors of $90 billion, $100 billion, $110 billion worth of spending is pathetically low.”
Other steel company execs, like Nucor’s CEO Daniel DiMicco, are urging patience (registration required):
“Our philosophy is that time will have to pass. We have to be patient,” he said, but it’s “unclear whether government actions will lead to meaningful improvement. We hope (the) leadership takes aggressive action to stem the actions that created (the) crisis” and develops “long-overdue policies to rebuild energy infrastructure and restore the balance of trade. We need to invest in America (and develop) a better U.S. economy that actually makes things.”
DiMicco noted that when the economy and steel orders rebound, Nucor could ramp up production in just hours.
Even when I predicted that “volatility” was the operative word for metals markets, I didn’t expect steel’s slide to be so swift and dramatic. But that’s where we are - in a market where steel producers went from enjoying record profits to the same companies waiting in line for a government bailout in just six months.
In the mean time, how should steel buyers adjust to the timing of the stimulus?
One interesting provision that steel companies are REALLY pushing for is a “buy American” clause, which would require all infrastructure to be build with US-produced materials. If that survives negotiations between the House and Senate, it will be a huge boon to domestic steel producers at the expense of mills in other parts of the world. Obviously depending on the timing and size of the infrastructure projects (as well as the level of demand and exchange rates), this could have implications for steel buyers, who could themselves be priced out of buying American.
Metals buyers should exercise diligence to ensure that they benefit from the excessive declines in this and other major cost drivers. No relief appears to be on the immediate horizon for steel producers, as steel analysts foresee no real recovery of demand in the first half of 2009. Similar pricing trends are occurring in other metals markets such as copper, aluminum, nickel and zinc. Buyers waiting for the bottom to act on the movement in the raw materials markets should act fast to take advantage of the current lows in steel and other metals markets.
Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.
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