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Cheap Materials to Help US Manufacturers as Trade War Rages On

Declining costs of materials used by America’s manufacturers may be starting to help diminish the impact of tariffs for some as the U.S.-China trade war rages on.

Declining costs of materials used by America’s manufacturers may be starting to help diminish the impact of tariffs for some as the U.S.-China trade war rages on.

An examination of select transcripts from U.S. earnings calls in the most recent quarter reveals that cheaper materials are emerging as a silver lining for margins and operating costs as end-use product makers remain under a dark cloud of sluggish global growth and turbulent trade policy.

As worldwide demand began to stumble over the last 12 months, the price of steel plunged 34%, oil slumped 21%, aluminum dropped 15% and copper dove to a two-year low. While slowing export markets that threaten to cascade into the domestic economy remain the primary concern for manufacturers such as General Motors Co. and Caterpillar Inc., retreating input prices represent a potential, albeit modest, tailwind for margins and operating costs.

U.S. manufacturing slipped into a recession in the first half of 2019, with output falling in consecutive quarters, as companies waylaid by waning worldwide demand and the repercussions of tariffs ratcheted back capital expansion plans. But some industry leaders aren’t discounting the subsequent drop in commodities prices.

At Stanley Black & Decker Inc., U.S. tariffs on China that have adjusted to 25% from 10% will amount to a $70 million headwind for the toolmaker in 2019 and again next year, Chief Executive Officer James Loree said on an earnings call. However, lower commodity prices will provide some offset.

“If things stay where they are, we would expect a carry-over impact,” Loree said. “It may be as reasonably close to the tariff impact at this stage. So hopefully they neutralize themselves.”

A gauge of commodities used in industrial processes, including steel and copper scrap, zinc, cotton and rubber, is at a three-year low.

While steelmakers such as U.S. Steel Corp. are bearing the brunt of investors’ mounting concern surrounding the trade war and a feeble world economic outlook, a price drop over the past year is somewhat of an ameliorating effect for end users of steel and other inputs. To be sure, while steelmakers over the past month have actually raised prices on the heels of low inventory and signs of a rebound in the cost of scrap, economic and trade concerns have the potential of nipping further increases in the bud.

The headwind from commodities “is probably closer to half of what we originally expected and that’s serving to offset some of the international volatility that we’re seeing,” Dhivya Suryadevara, GM’s chief financial officer said on the automaker’s second-quarter earnings call.

At Caterpillar, “‘we do a lot of our steel buying on a contractual basis and there is a lag,” CFO Andrew Bonfield said on a recent call. “But we are starting to see some of those things flow through as well into the second half.”

Consumer-products maker Church & Dwight Co. raised its full-year gross margin forecast by 30 basis points from its previous projection, partly “attributable to a more favorable forecast on commodities,” CFO Richard Dierker said on a second-quarter earnings call.

Outside of manufacturing industries, homebuilders are also seeing some commodities-based relief. The government’s measure of prices paid for lumber fell 18.2% in June from a year ago, the biggest decline since 1970.

D.R. Horton Inc.’s gross profit margin in its latest quarter was 20.3%, up 100 basis points from the previous period “primarily due to lower incentives and lumber costs,” Jessica Hansen, the company’s communications director, said on the homebuilder’s latest earnings call.

At Lennar Corp., the builder’s cost of materials was “lowered sequentially by 0.5%” in the second quarter, company President Jon Jaffe said on a call. “This is the first time in years that the cost of materials has dropped as lower cost lumber and synergies flow through our closings.”

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