How developers are ‘steeling’ themselves in troubled times.
By Carlos Martinez, CPA
Under the best circumstances, there are more than enough moving parts to keep even the most organized construction manager busy. Material costs, project delays and ripples in the supply chain are just a few variables that need to be juggled from planning to project completion. But the current trade war has shuffled yet another wild card into the deck – one that has been causing turmoil and feeding into all the other common hurdles of project management.
As the international intrigue with China rages on, tariffs on highly demanded Chinese steel have introduced myriad issues that have reverberated down the supply chain to impact projects. Just as an example, one particular steel yard that I met with recently has seen its profit margins plummet from 43 to 20 percent in the last year alone, due entirely to the rising cost of steel because of anxiety in the commodities market surrounding the actual tariffs.
The most harmful aspect of today’s trade environment, particularly with a resource as vital to operations as steel, is how it brings to light all the worst fears of any savvy developer. For starters, material costs have gone up, and budgets have been adjusted in turn. As companies tighten their belts, their reduced liquidity has begun to affect other areas of business.
Cost is only one portion of the issue, though – availability from suppliers has gone down as well, forcing many companies to grab whatever they can, whenever they can, at whatever price is being asked. This presents two opposing problems – on one hand, suppliers are forced to purchase excess steel when it’s available, as they have no way of knowing when the next batch will be available. The fact that many of them don’t necessarily have the storage space for those excess materials is something they have to figure out – even if it means just piling up the metal in their parking lot. The reverse is also possible – in some cases, the necessary steel simply won’t be available, which means a project delay is inevitable.
It’s clear to see that trade decisions in Washington have wide-reaching effects – but is there anything that a construction manager can do about decisions made by the highest office in the land? Short of being able to weather the storm, there are two main paths to follow, each with hurdles of their own: budgeting and sourcing.
The first approach is one that can require both transparency and rapport with clients to pull off – often it will involve apologizing and raising costs mid-project, which can carry great risk. The market is in such a state of flux right now that it wouldn’t be unusual for steel prices to swing well outside the range of a developer’s budget after the contract has already been signed and sealed. What then? Well, an apology has to be the first move. From there, there are a couple of ways to go – either raising the project cost or asking for a term extension. Neither is likely to make the client happy, but that’s the unfortunate reality of the current economy.
One way to try avoiding the issue is by introducing flexibility into the commodity budget ahead of time – this will be as high as 50 percent for steel – or aluminum, depending on the project. A well-established developer might also have the option of eating the metal hike and cutting costs elsewhere. Of course, such flexibility isn’t feasible for everyone, so what else can be done?
The key for many construction managers is going to be sourcing. The earlier example of piling up steel in the parking lot may seem dire, but buying steel when it’s available – and at reasonable prices – can be the difference between a project being a smooth operation or outright impossible. Excluding such measures, there are other places to turn.
According to the World Steel Association, China produces roughly half of the world’s steel – and until recently, it was also one of the cheapest options for buyers. With tariffs impacting both price and availability, it may be time for suppliers and developers alike to turn their attention elsewhere, at least as the need arises. A very recent ray of hope has emerged in the form of the United States-Mexico-Canada Agreement (USMCA) – the renegotiation of the North American Free Trade Agreement that, among many other benefits, will improve U.S. access to affordable Canadian and Mexican steel. The USMA was recently ratified by Mexico, and now awaits action by the United States and Canada before it can go into effect. In the meantime, buying American remains an ever-present option, as does recycled steel, but both are comparatively expensive.
Ultimately, there isn’t immediately any answer to the tariff situation that results in any position as comfortable as things were before the trade war began. For many suppliers and developers, this is going to simply be a matter of toughing out a rough time – but those who think critically and closely assess their costs while everyone is hunkering down will have that much more of a head start once things return to normal.
Carlos Martinez is a principal for Haskell & White, one of the largest independent CPA firms in Southern California. Based in the San Diego office, he specializes in the life science industry, including financial accounting and reporting, compliance, auditing, internal control reviews and operational efficiency opportunities, as well as assisting clients on mergers, acquisitions, leveraged buy-outs and recapitalizations. For more information, visit www.hwcpa.com.