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Nails: What Is Happening and Why?
Nail Outlook: Prices for pallet nails are on the way up as the cost of steel rod climbs; U.S. slaps anti-dumping duty on bulk and collated pallets imported from China and United Arab Emirates.
By Dr. Ed Brindley, Publisher
Date Posted: 3/1/2008
Steel – A Worldwide Market
What is going on in the nail world? To analyze and answer this question, one has to look at the overall nail industry worldwide, not just in North America. From the beginning of our analysis we need to understand that both the overall steel industry and the nails are affected by global issues.
Scrap steel moves around the world to be processed into steel products which also travel around the world to their markets. In spite of some slowing economies, the demand for steel and the raw materials to manufacture steel products have grown and continue to be hot. In particular, the price of wire rod, the raw material for drawing into wire and eventually nails, has gone higher and continues to move in a higher direction. So, you cannot just look at a particular steel product, such as nails, and wonder why steel rod supplies are limited and prices are going higher. You have to realize that nails are affected by the overall steel industry, which has been strong globally.
On February 6, an editorial release in SteelOrbis, a daily news service in the steel industry, carried the following title, US Wire Rod Market – Domestic and Import Price Escalation Continues. It said that United States domestic wire rod prices had gone up an average of another $20/net ton ($22/metric ton) in the last week. In addition, some rod suppliers had announced another $50/net ton ($55/metric ton) price hike for the next month.
It reported that U.S. steel rod inventories are low, and wire rod buyers are concerned that they may run out of materials. It also stated that today Turkey is the only source offering steel rod to the United States. European prices are still far above United States prices, and China is reluctant to offer to the United States, so supplies are being strained. Since Turkish scrap steel prices seem to be leveling out and even dropping a little, there is reason for optimism about the future. U.S. scrap prices are also coming down slightly in February as well, though it is still too soon to say whether this is just a temporary market correction or a new trend.
Our staff has talked with several major players in the U.S. pallet nail market. All of them expect to see continued upward pressure on both the steel and nail markets.
The bottom line is that worldwide rod and wire prices have severe upward pressure on them. This influences the price of raw material for nails, which in turn influences nail prices and supplies. So, when a pallet nail purchaser wonders what is causing higher nail prices, the obvious major factor is a soaring worldwide steel market. There has been much concern about the nail tariffs placed on Chinese nails by the U.S. government in January, which I will discuss below. But the fact is that when worldwide steel prices go higher, higher nail prices are an obvious consequence.
Our Pallet Profile Weekly report has kept readers informed of any significant nail developments, including an article last August about the impending antidumping case against steel nails imported from China and the United Arab Emirates (UAE) and all the events since mid-January. Ever since last summer there has been some talk and concern about potentially higher nail prices. Since scrap steel prices have been increasing, an uneasy global steel market has been building.
Tariff on Chinese Nails
On May 29, 2007, five U.S. nail manufacturers, Davis Wire Corp., Gerdau Ameristeel Corp., Maze Nails, Mid-Continent Nail Corp. and Treasure Coast Fasteners, Inc., filed a petition with the International Trade Administration (ITA) alleging that the nail industry in the U.S. is materially injured or threatened with material injury by reason of less than fair value of certain steel nails from China and the United Arab Emirates. These manufacturers believe that Chinese nail manufacturers have had an unfair competitive edge due to government actions and subsidies.
On January 23, 2008, the ITA acted on the petition when it announced a preliminary decision determining antidumping tariffs on pallet nails that are entering the United States market from China and UAE. Initially, while tariffs of Chinese nails ranged from 20.77% to 118.04%, most Chinese nails were assessed a 29.36% tariff for selling at less than fair value. The preliminary UAE tariff was placed at 4.47%. These tariffs are preliminary because they will not be finalized until later in the spring.
Ironically, pallet companies were just starting to absorb the news of the tariff when the ITA announced that it had made a ministerial error when calculating the 29.36% Chinese nail tariff. A miscalculation resulted from a misinterpretation of foreign rail rates, so the ITA lowered its tariff decision to 19.12%. It had no impact on the 4.47% UAE tariff. The ITA decision affects nails coming into the U.S.; Canada is not involved in this scenario. So, U.S. nail buyers will pay more for their Chinese nails, but Canadians will not be directly affected by the tariff.
World Nail Sources
The debate about whether or not the United States should put itself in a position where it sources nails from other parts of the world has been around for years. At one time there was a number of United States and Canadian nail manufacturing plants that included pallet nails in their product mix. Today Mid-Continent Nail in Poplar Bluff, Missouri is a major nail manufacturing plant that manufactures both bulk and collated pallet nails.
Thirty years ago, before Mid-Continent Nail existed, U.S. pallet people bought nails from a variety of North American and foreign manufacturers. At that time Japanese pallet nails were known as high quality nails and represented a major supplier to the U.S. Over the years, Pacific Rim nail manufacturing moved from Japan to Korea as the major supplier. Much of the Korean capacity relocated to China as it became the major source of nails to North American pallet companies. Many of the well known and recognized suppliers of North American pallet nails are wholesalers or distributors, which source mostly from Pacific Rim plants.
To shed some light on potential sources of tomorrow’s nails we need to know where they are coming from today and the direction of nail companies’ decisions for tomorrow. A number of the largest nail suppliers at one time manufactured nails in North America. Some, including Stanley Bostitch and ITW Paslode, still do manufacture some nails, not necessarily pallet nails, in U.S. factories. Some of them are reportedly reconsidering reinstating U.S. production for the future. This is not surprising. It is natural that any responsible, progressive company will consider all of its viable options. For nail companies, one of these is to consider manufacturing nails in North America, particularly if they are a big enough company and have experience in nail manufacturing. Stanley-Bostitch, one of the biggest nail companies, has continued to make nails at its Rhode Island plant as well as its plants in Poland, China, and Korea. Some of the big international names in nails have had ownership relationships in China.
Table 1 provides interesting insights into the quantity in short tons of steel nails that were imported into the U.S. during 2004-2006. The January-March columns for 2006 and 2007 allow comparison for the first quarters of the last two available years. Illustrating the worldwide decrease in nail demand during the first quarter of 2007, U.S. nail imports dropped 30.2% from 231,351 tons in 2006 to 160,071 tons. Total nail imports went up each year from 2004 through 2006.
Look at the huge increase in imports from China. Chinese imports went up from 339,002 tons to 615,548 tons, an 81.6% increase. Of course, this figure includes all kinds of nails beyond just pallet nails. The United Arab Emirates imports increased 12.7% during the three years. Virtually all other sources experienced decreases in nail exports to the U.S. as China took over the nail market. Korea dropped 49.4%, Canada decreased 41.9%, Taiwan dropped 61.5%, Mexico went down 37.6%, and other sources decreased 68.7% between 2004 and 2006.
The U.S. steel nail production (not on the table) has supplied 28.6% (2004), 25.1% (2005), and 19.6% (2006) of the total U.S. steel nail consumption, but a growing portion of domestic supply has been coming from foreign suppliers over the past three years.
Some pallet people have asked us what options they have for a nail supplier. Certainly in the short run it seems that most pallet people will probably continue buying nails from many of the suppliers they have been using. Some of the importers may find different sources of nails if their current sources cannot compete, but you buy from them so they can handle the details and hassle involved with imports.
Mid-Continent will continue to be a significant domestic supplier from its Poplar Bluff plant. Dave Libla, president of the company, has assured me that they will continue taking care of their customers at a fair price because this policy works for the long term benefit of both parties. He does not see any shortage of nails, nor does he see anything slowing down the driving force of higher rod prices.
Nail Price Movements
In closing, I want to make it clear that we have not received any indication of a nail supply problem, just a pricing concern. If higher rod prices develop, it is safe to say that nail prices will strive
Pallet companies should not expect any decrease in nail prices due to the slight reduction in Chinese tariffs. The key remains the worldwide rod prices. Nail manufacturers are not likely to be able to buy rod very far out in the future because rod manufacturers are going to want to stay flexible enough to take advantage of what the market will offer. Of course nail manufacturers will pass the higher rod costs through to nail buyers. Pallet companies can relate to this scenario because it is very similar to the relationship between low-grade lumber and pallets. It is difficult for pallet companies to lock in lumber prices, and any significant lumber price increases eventually have to be passed through to customers. The only other option is to close your doors and go out of business, which is what many domestic nail manufacturers have done over the past few years.
From last summer till the tariff announcement in January, nail prices were edging slowly upward from about $20 to $21 a box for bulk nails in many places last summer to something less than $25 by January. Then in mid-January, nail prices jumped in response to the tariff. In February, imported nails are reportedly selling at more than $30 a box and domestic nails are selling for a little less, somewhere in the upper $20 range.
Of course, nail prices are not as significant to pallet companies as are lumber prices, but it is our second material cost. Every U.S. pallet company will pay more for nails. While the focus has been on the U.S. because we are the country affected by the tariff decision, Canadians are affected as well because their suppliers have to function on the same worldwide rod market. Most of the Canadian supply base is the same as that of the U.S., so higher steel prices have to be passed along.
Pallet companies are concerned about trying to pass through higher costs in a slower, competitive market because customers are likely to go out and price shop. And they may find acceptable suppliers at lower prices than your higher quotes. They may even find them at prices below your old prices. This does not, however, prove that competitors are selling at below their cost or that they are failing to try and pass through nail increases. There are natural variations in pricing in any industry; customers might uncover some of the more competitive suppliers with prices that remain below yours.
The bottom line is that no one person or company is responsible for today’s higher nail prices. It is true that a group of companies initiated the action that resulted in the tariff bump that impacted many imported nail prices at the beginning of 2008. Price increases that were coming on and continue to build at this time are mostly a result of the worldwide steel market.