Survey: Tariffs, Oversupply and Marketplaces in Metal Distribution

By Nicholas L. Johnson

Previously, we’ve written about how fragmentation in the metals industry means the industry is ripe for a marketplace. But recently, President Trump announced tariffs on steel and aluminum imports of up to 25% and 10% respectively. This move will strengthen the competitive advantage of domestic US mills, but how will it impact fragmentation in the industry?

To find out, we surveyed small, mom-and-pop metals distributors in the U.S., particularly in California, Illinois and Pennsylvania, each of which has different local market dynamics.

Survey and Results

We asked each participant three questions:

1. Do you think the tariffs will make it harder, no difference or unsure in sourcing metal?
2. Do you think mills and/or larger service centers will have stricter buying requirements or larger minimum order sizes?
3. In 2017, roughly how much metal did you sell that was produced outside of North America?

As you can see above, many of the small distributors we spoke to thought the tariffs would make it harder to source metal, since they bought sizable volumes overseas. However, looking at question two, most distributors thought that less competition would not lead domestic mills to restrict their buying requirements.

As a result, some of the distributors that said the tariffs would make it harder to source metal said the market would even out after one year or so. Domestic mills need time to ramp up production to capitalize on the increase in domestic demand as import competition falls. In essence, in the short term, the tariffs will make it harder to source metal, but as the market has time to adjust and North American mills can ramp their production, the difference should be negligible.

Looking at responses to question three, you can see why the short-term impact could be significant.  Small distributors in these regions had average import volumes of 47%, meaning they sourced that much of their supply from foreign sources. A sudden slow down or price increase in imports would mean that these distributors need to make up much of that difference domestically. With domestic supply growth likely to lag behind this sudden demand shock, you can see why metal will become harder to source in the short term.

Marketplace Impact

So what do tariffs mean for B2B marketplaces in the U.S.? In the short, it could be more difficult for a marketplace to scale across North America within the next year. However, metals, like B2B distribution is a highly regional business. The impact is likely to be stronger in areas of the country that depend more heavily on imports, whereas those that currently get most of their metal from domestic production will see much less of a change.

For a marketplace, it’s likely wise to start in those areas that will have the strongest supply even with the tariffs. With the threat of additional tariffs possibly coming to other industries, how this plays out in metals distribution over the next six months will be a key indicator for what to expect elsewhere.

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