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April 17, 2016 10:09 PM, EDT

Low Material, Commodity Prices Not Translating Into Discounts for Truck, Component Buyers

Alcoa

This story appears in the April 11 print edition of  Equipment & Maintenance Update, a supplement to Transport Topics.

If fleets were expecting to see lower prices for trucks, trailers and components as the cost of raw materials continued their downward trajectory, they may be waiting for some time if comments from industry executives are accurate.

Steel and aluminum are leading a long list of materials and commodities whose prices have fallen sharply over the past year as industrial economies slowed, most notably China but also Russia, Brazil and others. Global supplies have soared past market demands.

The price drops have been dramatic. Spot prices for steel are down 40% to 50% depending on the type (rolled, stainless, scrap) compared with 2014. At the end of 2015, aluminum had declined more than 30% compared with the same period in 2014, and iron ore prices had hit a 10-year low, according to Metal Miner, a data service that tracks metal prices and supplies.

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“Eighteen months ago, hot rolled steel was going for $640 a ton and scrap [steel] cost about $360 a ton,” said Steve Mance, CEO of Defiance Metal Products in Defiance, Ohio, a metal component manufacturer. In February, those prices were down to $360 and $130 a ton, respectively.

“We’re in uncharted territory with these prices,” Mance added.

Lower material and commodity prices sound like a good thing. However, they do not flow dollar-for-dollar through the supply chain and are not translating into across-the-board discounting for truck and component buyers — at least not yet.

One reason is that manufacturers are using the savings to bolster their bottom line. Goodyear Tire and Rubber Co. estimates that about two-thirds of its raw material costs are tied to oil prices. Given that 85% of costs stem from the tire business, with half attributed to raw materials, changes in petroleum pricing affect about 28% of the cost of its goods sold, according to Bloomberg News data from 2015.

Goodyear did report a 28% increase in 2015 earnings, a record attributed partly to higher sales and lower prices for materials.

Another factor is that manufacturing costs for labor, power and other fixed expenses have not changed, said John Anton, director of steel analytics for IHS Inc., a research and analytics firm based in Englewood, Colorado. The greatest price drops have been for raw materials, but the more labor and energy that go into shaping and forming a product, the less that product price will fall.

Unless a company is buying materials on the spot market — which many do — contract prices typically are indexed, or averaged out. That means a 40% drop in scrap steel does not automatically translate to a 40% drop in manufacturing costs.

The long-term contracts that most original equipment manufacturers have with their suppliers include clauses specifically designed to protect them from being whipsawed by cyclical material and commodity price swings, said Tim Kraus, president of the Heavy Duty Manufacturers Association. As a result, they wouldn’t necessarily see a dramatic price drop in any event.

Simon Guest, marketing leader with Cummins Emissions Solutions, which manufactures diesel truck emissions systems, essentially agreed. The long-term agreements CES has with its materials and precious metals suppliers mean that the effects of the lower raw material prices are not as “dramatic as you might think or expect,” Guest said.

Without commenting directly on end-user prices for its aluminum wheels, Tim Myers, president of Alcoa Wheel and Transportation Products, said that, despite the price premium, their product costs do flow through to customers.

“Our prices adjust based on the spot price [of aluminum] and are passed through to our customers,” Myers said.

He added that the next phase of greenhouse-gas emissions regulations will make the case for weight-saving aluminum wheels more viable and competitive, despite steel’s price collapse.

Accuride, which supplies both steel and aluminum wheels, passes through changes it experiences in raw material costs, said Mary Blair, senior vice president of supply chain management.

“These mechanisms allow us to convey our raw material pricing — whether up or down — in the prices customers pay for our products. In this way, we are able to mitigate much of the risks associated with potential volatility in raw material markets,” she said in an e-mail response to a question.

Down the supply chain, smaller suppliers don’t have the volume to benefit from commodity price drops, said Rick Hudson, CEO of R.L. Hudson, an Oklahoma-based supplier of custom-molded rubber and plastic components. Where the company’s typical contract might be for 100,000 units, the labor cost for smaller production runs can be higher than the materials, Hudson said.

Buyers may see lower prices for parts and component costs if material prices remain low, but that hasn’t happened yet. In fact, it’s the opposite, said David Fulghum, research and data analyst with MacKay & Co., a Lombard, Illinois-based research and marketing firm. Based on the company’s survey of parts distributors, prices are increasing at about the same rate as inflation.

“Nobody is bringing prices down,” Fulghum said. “The only time we saw prices drop was in the recession in 2009, when the market was so bad.”

Hudson said they did not see a price increase in their rubber costs last year, “but no one has told us they’re going to drop the price this year.”

Nevertheless, fleets may see some gains as time goes on simply because prices, especially for steel, are expected to remain low until demand catches up with the supply.

“There is a major oversupply worldwide, and demand will remain low for a couple of years,” said Anton of IHS.

The collapse of oil prices along with an expected slowdown in truck sales this year may yet push down tire prices, Peggy Fisher, president of Tire-Stamp Inc., told Transport Topics in January. Tire-Stamp, based in Rochester Hills, Michigan, provides remote tire monitoring and tire training services. Tire prices have effectively doubled over the past decade.

The collapse of steel prices and weak demand in the near future means that U.S. steel mills are struggling, noted Defiance’s Mance. “Anyone with a bad balance sheet will be in trouble,” he said.