Raise your hand if you can say that you’ve recently made a trip to your local grocery store with a craving for bagels and cream cheese, but after searching, you can’t seem to find your favorite flavor of cream cheese, and the bread shelves are barren.
Like many other industries, no one could have predicted the multitude of unrelated events that conspired to cause supply chain issues worldwide. But one thing is for certain in the water and wastewater pipe sector, we have experienced one challenge after another.
The availability and cost of Ductile iron pipe (DI pipe) have been very trying over the last year, and we will continue to face headwinds based on demand and rising input costs. So how do we weather the storm that does not seem to be subsiding anytime soon? This Iron Strong Blog will discuss why we are experiencing supply chain issues, rising costs, and what McWane Ductile is doing to combat these obstacles.
Origins of Supply Chain Issues
The beginning of the issues with DI pipe availability can be traced back to the housing bust and resulting economic crisis from 2006-to 09. Demand for DI pipe was significantly reduced. The resulting consolidation and closures of operating foundries brought the industry from twelve manufacturing plants to just seven today, thus greatly diminishing the available production capacity for pipe. But that was just a precursor for what lay ahead:
- In early 2020, the onset of the COVID-19 pandemic caused widespread staffing shortages in all aspects of manufacturing and shipment of DI pipe.
"It's been extremely challenging during the COVID-19 pandemic to hire and retain employees. Over the last 12 months, it has gradually become more challenging. In Ohio, our employees have stepped up to meet the demands of supplying our customers. They have done this safely and effectively, even while being short-staffed and enduring extended hours,” said Tom Crawford, VP/GM McWane Ductile Ohio.
- The inability to obtain needed parts for maintenance affected the upkeep and operation of plant equipment for many industries. Some businesses, including McWane Ductile, had to find alternatives to established supply to maintain our facilities and produce at a consistent level.
- At the very early stages of the coronavirus pandemic, production of many construction materials, including PVC pipe, was slowed as the shutdowns chilled the economy and put construction projects on hold.
- With an overall decrease in demand for fuel, significant cutbacks in oil production were implemented.
The pandemic increased the focus on the water sector and the importance of clean, accessible drinking water. Much of the available COVID relief money was earmarked by states for infrastructure improvements, and projects once again began to bid. In early 2021, the economy and construction projects began to rebound as markets and COVID restrictions were loosening. Then:
- In February 2021, ice storms in the U.S. Gulf region severely disrupted plastic resin production and the movement of resin goods already in short supply.
- PVC pipe is made from resin, a byproduct of refining oil into petroleum. Most of this resin is produced by companies along the Gulf Coast of Texas.
- Then came a severe winter storm in Texas that forced resin producers to shut down for several weeks.
- Later that year, Hurricane Ida slammed into Louisiana in August, forcing refineries in the region to shut down again.
- To overcome this shortage in plastics, many buyers upgraded to Ductile iron pipe.
- Ductile iron pipe manufacturers did not have sufficient winter inventories to meet this unexpected surge.
Since the late summer of 2021, McWane Ductile has been selling pipe as quickly as we can make it, and, as Crawford states, “We expect the demand for Ductile iron pipe to remain strong over the next three years as a result of the infrastructure Bill that includes several billion dollars in water and wastewater infrastructure rehabilitation and electrical infrastructure hardening.”
How is Inflation affecting the cost of Ductile iron pipe?
In addition to supply chain issues, we've seen the U.S. inflation rate gradually climb over the past few months and is currently at a 40-year high. Think about it ─ there is hardly anything one could purchase at this time that does not cost significantly more than it did a year ago.
Demand, however, has not subsided and, in fact, continues to increase, which suggests the upward rise in consumer prices is unlikely to relent soon. Inflation has not only affected the pricing for consumer goods but also the input prices that manufacturers must pay for the raw material, such as scrap, as well as natural gas and coke - the fuel sources needed to melt and anneal Ductile iron products.
What are we doing about it NOW?
So, what are some steps McWane Ductile is taking to improve manufacturing efficiencies and increase production capabilities? It starts with a commitment to making significant capital investments, including:
- More than $18 million of downstream equipment will be operational at the Ohio facility by March 2022.
- A new line featuring zinc coating will weld TR Flex® Restrained Joint pipe in line with the same speed as casting and annealing rates.
- The Utah facility added new welders and zinc guns to increase the production of specialty items.
- A new small-diameter, high-speed casting machine will be installed at the New Jersey facility and is expected to come online in the Fall of 2022.
- The Utah facility will add material handling equipment to increase casting capacity by 20 percent.
In total, more than $60 million will be committed to McWane Ductile facilities during the calendar year 2022 to facilitate meeting your needs.
What are we doing about it in the FUTURE?
Along with the investment noted above for 2022, the following capital projects are also being undertaken:
- The Ohio plant has hired an additional 80 employees to begin a second shift, starting May 1, 2022.
- Spring 2022: the Ohio facility will break ground on a second annealing oven, increasing the production of pipe and poles by more than 20 percent.
- Until the Ohio oven is fully operational by the end of 2023 or early 2024, hours and staffing levels will increase to improve output to meet demand.
"The significant capital investments coupled with adding an additional shift in Ohio show that we are proactively doing all we can to increase supply and meet demand," said Crawford.
Why is a Scrap Surcharge being applied?
At McWane Ductile, each pipe is made from up to 95 percent recycled materials. Things like shredded automobiles and structural steel are the primary ingredients. The Russian-Ukraine conflict, which many did not expect to continue for as long as it has, has caused a severe shortage of pig iron in the international market, as both Russia and Ukraine are two of the world's top producers.
While McWane Ductile does not use pig iron, consumers of pig iron have downcycled to raw materials such as busheling and auto shred, resulting in immediate and intense demand for all grades of U.S. scrap, which in turn has dramatically driven up scrap prices over the past few months.
We expect this cost escalation to continue until the conflict resolves. Considering the detrimental impacts of these unexpected events, beginning on March 14th, 2022 it was necessary to implement a scrap surcharge, currently at $170/ton, for all shipments.
Additional points:
- This surcharge is temporary, and we will rescind it when scrap prices return to February 2022 levels.
- We will adjust the surcharge monthly based on changes in the Busheling Index published monthly in Fastmarkets.com.
- Fastmarkets publishes the settled scrap price on the 10th of each month.
- You may choose not to pay the surcharge and delay your scheduled shipments until scrap prices have returned to lower levels. However, because of unprecedented demand for our products along with supply chain constraints, any previously communicated lead times, delivery schedules, and availability are not guaranteed.
In Summary
Price increases have spread throughout the economy, and the businesses are still suffering from widespread shortages of labor and supplies, not to mention shipping delays and higher transportation costs.
The recent unanticipated circumstances have brought unprecedented times. Like the grocery store's bread shelves, keeping the pipe yard full of fresh-made stacks of pipe has been a challenge. But rest assured, McWane Ductile is constantly evaluating current and future scenarios to provide quality products in a timely manner and enable our customers to build Iron Strong utilities for generations.
If you have any questions regarding the Ductile iron supply chain or your water or wastewater infrastructure project, be sure to reach out to your local McWane Ductile representative.
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References
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OEC, “Pig Iron, Trade Complexity, and Rankings.” Accessed April 2022. The Observatory of Economic Complexity | OEC - The Observatory of Economic Complexity
- Ferriot, “What’s Going on With Our Country’s Most Popular Polymers?” Accessed April 2022. https://blog.ferriot.com/blog/resin-crisis
- Fox, Greg. “Supply Chain and Costing Update.” Sigma.com. March 21, 2022. Accessed April 2022. https://www.sigmasupply.com/
- Wiles, Jackie. “Five Key Costs Considerations as Oil and Other Input Prices Rise.” Gartner Inflation Outlook, March 11, 2022
- Cavalieri, Ronald R., P.E., BCEE. “Supply Chain Issues Affecting Water and Wastewater,” Florida Water Resources Journal, FWEA Focus, April 2022
