Articles

Spike in material prices hits hard for Houston manufacturers

By Bart Taylor GHMA

We’ve quantified how tariff-and-trade-related disruptions are challenging US and Houston manufacturers, difficulties that today are amplified by geopolitics, by war.

The hits keep on coming. Jeff Applegate, founder of GHMA member-company Texas Injection Molding, was featured recently on NPR’s Marketplace, explaining how strife in Asia and the Middle East is constraining the supply of key ingredients for plastics manufacturers, constraints that have sent materials costs soaring. I asked Applegate to net-out the reasons for the price increase. “(There are) real supply shortages in the market affecting resin producers in Asia,” he said. “Specifically, producers of ABS (Acrylonitrile Butadiene Styrene) and PC (Polycarbonate) that get their supply from the Middle East. These are true shortages and demand outstripping supply leading to force majeure.”

As unforeseen the current wars, there’s also a correlation today between higher costs and America’s more aggressive trade posture. Call it a cost of a new US industrial policy. The outcomes here aren’t at all that surprising.

One example that hits home in Greater Houston is the soaring cost of carbide used in the manufacture of drill bits and other industrial tools. I spoke off-the-record with a Houston-based manufacturer to size-up the challenge.  

Manufacturers utilize a tungsten and carbide mix to harden drill bits, and in some formulas, as much as “50 percent of the mix is a tungsten and carbide matrix product.” Some drill bits are made of steel, but those used in more durable applications are what the industry calls a “tugs and carbide matrix” product, that in the end is baked like a cake with nickel to form the hardened drill bits used across the industry. 

The rub is that today, the primary source of carbide is China. “China owns about 85 percent of the world’s product,” my contact said, “and about six months ago, they started restricting which carbides could be exported to the West – and those restrictions included the carbide we use in our matrix powders.”

With restrictions come price increases. How significant? “To put it into perspective, one of the main powders utilized in the industry used to cost about $85 per kilogram and is now $500 to $600 a kilogram,” I was told. For large manufacturers, utilizing large volumes, it’s a massive increase.  

I asked if the situation is a result of the tariff-and-trade upheaval. “We believe it is,” was the response. “We think with carbide, it’s very much tied up in this ‘tit for tat’ between the US and China.”

It’s also true that China’s leverage has been years in the making – a lesson US policy makers, and producers in other industries, would be wise to heed. 

My contact recounts an increasingly familiar story. “There’s a lot of carbide in the world, tungsten carbide, and a decade ago, all the mines that used to be operating in the US and Canada, in Latin America, places like Kazakhstan –  they all shut down production because China mass produced, brought the cost low and stable for many years, and pretty much put the other mines out of business, made it uneconomical.” 

Or to put it differently, China has cornered the market. 

Manufacturers have the option to produce drill bits out of steel – in some cases utilizing a tungsten carbide “cladding” that entails a lower volume of the matrix product. It’s up to industry players to convince buyers that steel is a good alternative. 

In the meantime, manufacturers are managing customer expectations the best they can and considering the best approach to passing along significant price increases — or not. It’s a scenario playing out across multiple industries with companies large and small.  

Today a conservative approach, at a time when many providers are simply being opportunistic, may be wise, an option not lost on Texas Injection Molding’s Applegate. “We do not have a shortage in the US of natural gas,” Applegate told me, “but the producers of polyethylene and polypropylene on the Gulf Coast have used this as an opportunity to raise prices. They are filling increased demand from exports and taking advantage of the crisis to increase margins.” 

Suppliers might consider the long game when deciding. That said, frustration with America’s current trade policy would be understandable. 

Bart Taylor is executive director of the Greater Houston Manufacturing Association. Reach him at [email protected].