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  • Random Observations From the World of Industrial Distribution

    Posted by Dan from Madison on April 15th, 2021 (All posts by )

    Things got kooky in my world last year, and they continue to be, well, interesting (I guess that is one word you could use – this is a family blog after all) this year. A few random notes for those who may be interested. For those who may not know, I own an HVAC distributor, which is a subset of industrial distribution.

    We recently received an increase of 15% in sheet metal fittings. The manufacturer just announced that due to continued pressure on steel, there will be another 15-20% increase coming in 60 days.

    This news about sheet metal fittings dovetails into some interesting news I have been hearing about new construction. Lumber and other materials are skyrocketing so fast that builders are going back to people who are building houses and redrawing up contracts and demanding more money. Banks aren’t appreciative. It’s ugly.

    Cans are in short supply. We sell a boatload of aerosol based cleaners for everything from commercial cooking equipment to air conditioners to refrigeration coils – I have heard that there are problems in aluminum, and cans themselves as the sanitization industry is taking up much of the can consumption for cleaners and germicides.

    One of the major HVAC equipment manufacturers that we represent announced a mid year price increase. I can only remember one other time this happened. It is rumored to be in the 8% range.

    An ice machine manufacturer just announced a 10% price increase, then another 20% on top of that one month later.

    There is a force majeure on one of the components that is used to make foam in a can – I think this is from the damage in Texas that was caused by the cold snap but I am not sure. This affects a lot of markets. I have heard that a refrigerator manufacturer is getting ready to idle production because they can’t get foam.

    Industrial distribution is on allocation for PVC pipe and fittings.

    Shipping woes worldwide continue. The Suez Canal thing didn’t help. Shipping costs are triple what they were last year.

    I am getting daily bulletins from all of our vendors with these types of things. With copper, steel, plastics, silver and chemicals all having problems right now and at record prices, it is going to be another interesting year, to say the least.

     

    45 Responses to “Random Observations From the World of Industrial Distribution”

    1. Brian Says:

      “Lumber and other materials are skyrocketing so fast that builders are going back to people who are building houses and redrawing up contracts and demanding more money.”
      From a colleague at work yesterday during a convo about rising lumber prices: “Maybe that’s why the builder of our future home raised the base price $50k right after we signed…good lord”
      What’s going on? Supply dropping, or demand increasing faster than supply can keep up?

    2. Mike Says:

      Thanks for the update Dan. I really enjoy these posts of yours.

    3. Mike K Says:

      I just bought a new Trane HVAC system. I noticed the coils in the AC unit are Aluminum. I asked the guys about it. They assured me it is fine but I wonder. I’m sure it is related to Copper prices. In the discussion, they told me that new houses are being built with Aluminum wiring again although they are pigtailed with Copper at outlets. The house I bought in 1972 was built with Aluminum wiring. One day I noticed that the wall around an outlet was hot. The Aluminum wire was not as elastic as Copper and, as people walked by, the vibration caused the screws in the fixture to slightly unwind. This created a gap and heat resulted. I had an electrician come in and pigtail every outlet with Copper.

      Everything old is new again. I wonder if hyperinflation is in our future ?

    4. Dan from Madison Says:

      “the coils in the AC unit are Aluminum” – if you mean the inside – the evaporator – most manufacturers went with all aluminum construction on those as a result of formicary corrosion issues years ago. There are some that still make them with copper tubing and aluminum fins, however.

      If you are talking about the outdoor condenser, it is probably either copper coils with aluminum fins (age old design) or microchannel. Both work fine (when properly installed). I wouldn’t be too fond of actual aluminum tubing in a condenser, however. I guess it’s possible but I haven’t seen it. I don’t carry Trane so can’t comment on their specific construction.

    5. Dan from Madison Says:

      “lumber” – I have no real idea. My guess is a huge lull in construction last year, and then everyone at once wanting to build, plus worldwide pressures with shipping. So supply and demand, I guess. Totally a wag – I’m not a lumber guy.

    6. Ed H Says:

      It’s not just HVAC.

      There has been a shortage of Friskies “wet”cat food in stores here locally.

      This is annoying as cats are particular.

      When I asked the clerk she said it was an aluminum shortage hitting most of the canners.

    7. Mike K Says:

      I was referring to the pyramidal unit that sits on top of the heater and fan, not the condenser. Thanks for the info.

      I have read that Weyerhauser announced they were shipping their entire lumber production to China. This article is a bit more subtle.

      Lumber exports to China are also skyrocketing, according to Random Lengths, a forest-products industry trade publication. In 2009, U.S. lumber exports to China jumped 72 percent from the previous year, while Canadian exports rose 123 percent, according to Random Lengths.

      However, a timber industry analyst cautioned not to read too much into China’s log-buying surge. Invoking the name of the world’s most populated nation can send markets into a tizzy that may not last, said Paul Latta, an analyst at Seattle-based McAdams Wright Ragen brokerage.

      “These days, mentioning China with the log markets was a lot like mentioning dot com in the tech markets of the 1990s,” Latta said.

      This is not new.

    8. Roy Kerns Says:

      In about a week I plan to start a roof reshingle job I have contemplated for several years. Retired, I have the time to do it myself. I have the tools and skills, and have done roofing before. Figure that rather than exercise in a gymn, a roof job will both help keep me fit and prove productive as well as recreational. (No, I’m not a masochist. I’m doing it before summer weather, tho I gotta admit a bit warmer weather makes the shingles far more cooperative. And I have friends whom I have helped who will help on this job.)

      Although I think the shingles have several years life left in them, several factors led to my deciding to take the step now.

      In the not too far distant future (maybe those several years, sigh), I might find I could not do the job myself. But without waiting more years, if I do the job now the shingles should outlast me.

      Gas prices. Locally since before the 2020 election at $1.59/gal they are now $1.69. Much as one might expect (and as I publicly predicted last Nov), the result of shutting off pipelines and placing obstacles to fracking. That means I also expect that as I had seen for lumber (locally about half again to double last year), shingle prices are going to rise. A lot. Buy now, save much.

      Government fiat created money and the implications of that influencing what one might do to preserve current wealth. One implication that makes cents to me: buy hard goods now. Sort of a cautious way for low risk speculation in the futures market.

    9. Dan from Madison Says:

      Roy – “Sort of a cautious way for low risk speculation in the futures market.”

      This. Definitely part of our calculus of having record levels of inventory right now, along with making sure all of “our guys” have product to get through the Summer.

    10. Raymondshaw Says:

      It is too late to beat the lumber price increases. I have been following this gal for the last 6 months or so:

      https://madisonsreport.com/

      My google-fu advises that the average 2,000 SF single family home contains 16,000 board feet of lumber and 6,000 SF of panels (OSB, plywood).
      To simplify, I’ll use $1,100USD/MBF on lumber and $1,276CAD/MSF on panels. So that lumber package will currently run $23,418.56USD (1 $CAD = 0.76 USD).

      Brian, your friend must have spec’d an awfully big house, or else his contractor took him for a ride.

    11. Sgt. Mom Says:

      Like Roy K and his roof – I had work done on the exterior of my house late last year and early this spring: new hardi-plank concrete siding, warrantied paint job and new windows, all in the expectation that materiels will be either in short supply or prohibitively expensive (or both!) in the next few years. I’m on a fixed income, (with no expensive habits)aside from income from books and the occasional publishing project – and I very much wanted to get the house sorted before the storm hits.

    12. Brian Says:

      Ray: He lives in the DC area. Housing there is as nutty as the people. Some of the price hike was probably just because he could.

    13. phwest Says:

      Chemicals as a whole were hit really bad by the Texas freeze – too much of that production is either in or based on feedstocks from the Houston/Beaumont area. I’m in the industry (bulk chemical manufacturing, heavy in construction) and we had units down for weeks from damage. Things are finally getting back to normal on the production side but it will take longer to rebuild inventories to the point where supplies come off of reduced allocation. And demand was strong even before that mess, so there is still a lot of upwards pressure on pricing. We’ve gone from uncomfortably weak demand 2 years ago (we shut down a site) to effectively sold out, and that was before the outages. It’s beyond even our upside forecasts during planning last fall. We haven’t seen this level of demand since before the housing market cratered in ’08.

      It’s not just the US BTW – our demand in Asia is also running well over forecast, and Europe is in even worse shape in terms of raw material availablity that the US (although here I’m just talking about our particular feedstocks, I don’t know as much about the broader industry over there).

      Personally I think the last stimulus round is reaching the economy just as people were starting to push their savings back into consumption anyway. Inflation is coming, there’s just too much money chasing a limited supply of goods. I really hope Biden’s infrastructure package gets delayed in Congress long enough for it to be clear what’s going on – this is probably the worst time possible for the feds to shovel even more fuel into the fire. Still, it’s better to be too busy than idle, so there’s that.

    14. MCS Says:

      We were planning to replace the fittings like door handles that have been damaged by being doused hourly with bleach for the last year. If it’s going to be too expensive, we may end up putting it off for a while.

      It’s normal for refineries and chemical plants to shut down in advance of major storms, usually hurricanes on the gulf. This is because an unplanned shutdown can cause liquids in pipes and reactors to turn into solids or worse. They may have been surprised by this storm just as they were recovering from the late hurricanes.

      Aluminum cans are mostly made on site with strip from guess where. At times, the cost of transporting a container across the Pacific has been less than $2000, right now it’s around $15000, if you can get a place on a ship.

    15. Assistant Village Idiot Says:

      I had a guy over for men’s pub night who is a factory rep for cabinet makers who describes much the same difficulties. Supply chains are broken in numerous places. For example, he can’t get drawer rollers from anywhere for a few more months – so no new kitchens.

    16. TangoMan Says:

      At times, the cost of transporting a container across the Pacific has been less than $2000, right now it’s around $15000, if you can get a place on a ship.

      https://www.youtube.com/watch?v=qo-2gDg-37w

    17. Roy Kerns Says:

      Groan…just glanced at my comment above and observed that I wrote gas prices went up from $1.59/gal to $1.69 when it should have said $2.69. The first a mere 6.2% increase, while the second a 69.2% increase. One might ignore the first. But probably not the second. I’m guessing folks just wondered how come I was so bothered about paying $1.69/gal….

    18. Achilles Says:

      This is what inflation looks like.

      You are going to get Bitcoin at the price you deserve.

      I think it will be 200k by the end of the year.

      If you own a house cash it out and buy bitcoin. Debt is going to go to zero with the dollar.

    19. MCS Says:

      TangoMan,
      Simple answer: These ships wear out fast and become uneconomic even faster. The largest container ship today has a capacity of around 22-23,000 TEU (20 foot container equivalent), It changes on a week to week basis as new ships are launched. Ten years ago it was around half that. Operating cost is nowhere near double. What that video doesn’t show is dozens of these huge ships in service in the last couple of years with dozens more on the ways right now and more on order. The bottleneck is port facilities with cranes big enough to load and unload these very tall, wide ships connected with channels and basins deep enough for their draft.

      Whether this is a good idea is what we are finding out now, the hard way.

    20. Dan from Madison Says:

      Super interesting video TangoMan. Amazing how so much has changed from when they posted it until now. Just four months.

    21. Mike K Says:

      Roy, I did wonder. In Tucson, gas was $1.99 on Election Day. By Inauguration Day it was at $2.99 and has dropped slightly since to about $2.97. Interestingly, Costco is now only about 5 cents less. It was about 25 cents cheaper before the election. The Costco founder is a big Democrat donor. Hmmm.

      The container ship thing seems to be going in the direction followed by the ULCC in the 70s. A pretty good sailing novel was written about them called “The Shipkiller.”

    22. Anonymous Says:

      “I wonder if hyperinflation is in our future ?”

      Very possible, certainly inflation raising its ugly head in beginning.

      Death6

    23. Mike K Says:

      David Goldman posted a chart of it today on facebook.

      Can’t find the chart but here is a discussion.

      Or even so look at Britain during the Sterling crisis of the 1960s and 1970s. I was a graduate student in London in 1974 and 1975. And I remember the lights out in Piccadilly circus. This was a poor country in deep crisis.

      Richard Reinsch (19:42):

      Talk about that. How did that affect Great Britain, when that moment happened?

      David Goldman (19:46):

      Well, people were pretty miserable. Britain went from being a global power to being a second rate power, to being much less important. Margaret Thatcher fortunately came in and set things right, but the North of England has never really recovered. So the United States could end up being a second rate economic power, while China becomes a dominant power in the world as a result of this. I’m not against spending money from the federal government, Richard. If Biden had said, let’s spend 1.9 trillion on infrastructure, research development and STEM education, I wouldn’t be unhappy about that. But simply to put money into people’s pockets in the hopes that they spend more means, namely, that they buy more smartphones and computers from China, and China’s exports to the US are soaring.

    24. CapitalistRoader Says:

      If you own a house cash it out and buy bitcoin.

      I wonder if both parts are wise. I don’t doubt that bitcoin will continue to rise. Houses, though, as real assets, typically don’t lose real value during inflationary times.

    25. Tatyana Says:

      What part/percentage of those metal shortages is due to manufacturing abroad?
      F.ex, how much steel is domestic and how much is coming from China.
      Aluminum – when in engineering school, we were told AL is the most widespread raw ingredient-wise metal in nature, and thanks to modern metallurgical processes, the least expensive to produce. How much AL is in US?
      And how difficult would it be to set up (or, rather, re-start) our own production?
      I know, those are questions to the empty air…
      14 yrs ago when on vacation in Portugal I met some Brits; Roger was an industrial engineer and we got talking about “service economy” – we both were strongly opposed to exporting manufacturing overseas and perceived this exact situation will happen. When we are pushed into dependency of the foreign monopolies, and our governments are too unrealistic and lacking in will to change things.

    26. Brian Says:

      I tried to “mine” some bitcoin about a dozen years ago but couldn’t get the software to install on an older laptop. Wish I’d at least figured out how to buy s hundred bucks worth though. Oh well.
      I don’t see the real reason for it though. Seems to me that anything that’s not cash will do, for what seems to be coming…

    27. Gavin Longmuir Says:

      CapitalistRoader: “I don’t doubt that bitcoin will continue to rise.”

      Remember — back when Democrat Insiders were still Americans — FDR effectively de-monetized gold and put real limitations on its possession.

      Does anyone imagine that FedGov will not do something analogous with bitcoin if the Political Class ever feels the need?

      Better to focus on tangible assets that will still have tradable value after the electricity dies along with the internet. Beans, MREs, ammunition, beer, cigars, condoms, aspirins, seeds, batteries … maybe even books & tools.

    28. Mike K Says:

      I agree on keeping your house. What will be a useful hedge? Back in the 70s, I had freeze dried food, was considering a mill and hard red wheat, and had a plan if things fell apart. I had a sailboat and could head off into the sunset. I’m too old for most of that now but I do have a supply of freeze dried food and have considered getting a propane powered generator. Gold would be valuable, as well as ammunition. Bank accounts are vulnerable and a hoard of cash might be advisable. A lot depends on your age. I suspect that guns, barring a real confiscation program, are a pretty good hedge on inflation.

      I hope none of this becomes a serious issue but it might.

    29. Brian Says:

      “Gold would be valuable, as well as ammunition.”
      In any social breakdown situation someone with more ammo will steal your gold, then where will you be?

      “Bank accounts are vulnerable and a hoard of cash might be advisable.”
      Why? If there’s hyperinflation, cash will be ever more worthless. Seems to me you want to hold any sort of non-cash asset, no?

    30. Tatyana Says:

      Brian: makes sense.
      I think it’s time to stock up on shoes.
      (well, for me it’s always time to stock up on shoes)

    31. Mike K Says:

      If there’s hyperinflation, cash will be ever more worthless. Seems to me you want to hold any sort of non-cash asset, no?

      In the 70s inflation scare, lots of people hoarded gold and some also hoarded silver dimes and quarters. Once base metal dimes and quarters appeared, the real silver ones vanished. I have a few rolls of silver quarters. the theory was that gold would be too expensive to use for such purchases as food.

      I dunno but ammo, gold and silver seem useful to keep. Then last time I checked, silver quarters were about $4 each.

      Higher now.

      About $5 now.

    32. Brian Says:

      Well I think we need to distinguish between high inflation and hyperinflation, no? The former impoverishes but the latter threatens societal breakdown.

      I still don’t see why for now I shouldn’t just feel relatively secure with keeping most assets in the market, which the government is clearly determined to keep boosting as long as they can, over cash.
      When they can’t anymore, we’ll have bigger problems to worry about…At least hopefully I’ll get to say I’m a millionaire for a while before it all falls apart.

    33. CapitalistRoader Says:

      That’s fine as long as you diversify the markets. The stock market, the bond market, the precious metals market, the real property market, the virtual currency market. And of course all of those markets are valued in terms of real currency markets.

    34. MCS Says:

      Tatyana,
      Base metal production always comes down to a balance between several factors that depend on the metal you’re producing.

      As you said, aluminum is very widely distributed in the lithosphere. The economically recoverable form known as bauxite is much less widely distributed although not that rare. It often comes down to the cost of mining and transporting it to a refinery. The indispensable requirement for refining aluminum and most other non ferrous metals is cheap and abundant electricity. Generally, the ore is transported to the refinery by ocean transport, so port facilities are important considerations. Refineries have been built to take advantage of abundant hydroelectric sources near sources of bauxite, notably in Venezuela and Africa. Rising electricity cost, probably combined with environmental regulation is why most of this has disappeared form the U.S.

      Pittsburgh originally rose to dominance in iron and steel production because the confluence of the three rivers provided easy access to coal for coke, lime and iron ore. Environmental and labor costs as well as proximity to end users is more of an issue than non-ferrous metals. And the U.S. is on the wrong side from the standpoint of production, better as far as breathing is concerned however. China is now the largest producer of ships that use lots of steel.

    35. Brian Says:

      “of course all of those markets are valued in terms of real currency markets.”
      Yes, of course. I’m confident the market will keep going up because the government is more than happy to destroy the dollar in order to make it go up.

    36. David Foster Says:

      In 2017, I posted about visiting a former Bethlehem Steel plant, now the National Museum of Industrial History. Some discussion as to why it’s a former steel plant in the comments.

    37. MCS Says:

      The steel that was used to fabricate the trusses that support the sliding roof on AT&T Stadium in Arlington had to be imported because no one produced the necessary material here. It was imported from Europe, either The Netherlands or Germany, I forget exactly. It’s been a long time since labor rates were lower in Europe than here.

      China imports both the coal and the ore it uses to produce iron. Simple economics would seem to indicate that it would be cheaper to produce the iron near one or the other resource and ship the much lighter and compact finished product, or even better, the steel produced from the iron. Instead, the Australians are touting the great advancement of unmanned trains to transport iron ore to the coast for loading onto ships to be processed elsewhere.

      The U.S isn’t the only place exporting jobs.

    38. Mike K Says:

      Australia is exporting coal to China while they have blackouts due to unreliable wind and solar. Catallaxy blog has posts about it every day.

    39. MCS Says:

      So, of course, are we. Also iron ore.

      Not to worry though, the glorious Biden administration in in the midst of negotiations with the CCP to further limit our CO2 emissions so as to not inconvenience them.

    40. Lex Says:

      If you own a house, keep it. You can live in a house. If everything goes to Hell, you have a roof over your head. That’s what a house is for.

      Bitcoin may rally beyond anyone’s wildest dreams, or it may be destroyed by arbitrary government action. Crypto can (should?) be part of a portfolio, but it is very volatile, and it has unpredictable and unquantifiable political risks associated with it. Further, other types of crypto may be superior, and may dislodge Bitcoin as the leader. It is uncharted territory.

    41. David Foster Says:

      Lex..”Further, other types of crypto may be superior, and may dislodge Bitcoin as the leader.”

      And that’s a point that doesn’t get enough attention. Yes, Bitcoin is designed to be self-limiting (since the amount of computer resources required to generate particular quantity increases with how much is already out there. But there is nothing preventing other cryptocurrencies from being created, and several already have been.

      True, gold and silver are also arbitrary as stores of value (although they do have some decorative and industrial uses, respectively), but several thousand years of history does tend to give them some acceptability.

    42. Gavin Longmuir Says:

      “Store of Value” is a difficult concept. “Value” is what someone else will give you for your “Store of Value” at some point in the future. And the key is what that price means then in terms of real goods at the same point in the future. Getting a Million Zimbabwe Dollars for your Rembrandt painting may or may not be a good deal!

      A granary is a good store of value — as long as the rats don’t get to it. A tank of oil is another good store of value — unless it catches fire. A piece of paper saying that a (possibly rehypothecated) piece of gold in the vault of a London bank has your name on it (Trust Us!) — maybe not such a good store of value.

    43. MCS Says:

      Value isn’t nebulous at all.

      At base, everyone needs food, water and shelter. Whatever else they posses has value in so far as it can provide that, either directly or by trade.

      Bit Coin, green backs, Picassos have exactly as much value as someone with access to to the basics is willing to accept in trade and no more.

      Right now, there are enough people willing to take them in trade that they are all equal, give or take the effort of reaching an agreement.

      In extremis, all bets are off. A Bit Coin wallet provides exceptionally little shelter or nourishment, how exactly it will work without universal net access is highly questionable at best. The others, as physical objects could possibly be bartered to someone at some exchange rate without resort to technology.

      The effect of a hyper-inflated Dollar on the rest of the world might be such as to render the domestic fall out moot. I’m pretty sure the majority of the worlds accumulated liquid wealth is in Dollars. It would be truly uncharted territory and not likely to be placid.

    44. Gavin Longmuir Says:

      MCS: “Value isn’t nebulous at all.”

      Absolutely correct! Mow, “Store of Value” — that is something different. And as you confirm, “value” is what someone else is prepared to trade at that point in time for whatever one has to offer from one’s “Store of Value”.

      It is not hard to envisage a world in which a can of beans would be worth more than a gold bar. With the level of idiocy in FedGov, we may even get to experience that world. And once we use up all the stored physical goods, we will be forced to acknowledge the now-forgotten Prime Rule of Economics: Production Precedes Consumption.

    45. MCS Says:

      The brave new economy:

      Good News: You can pay off your mortgage for the cost of a loaf of bread.
      Ban News: There’s no bread.

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