The pandemic and its aftermath have been beneficial to the HVAC market, but supply chain issues have tested the sector.
Joe Ross Merritt needed just 11 words to perfectly encapsulate the state of the HVAC industry, and many steel markets, over the course of 2021.
“It has been an incredible year with a lot of challenges,” says Merritt, the CCO for Birmingham, Ala.-based Jemison Metals.
The story is one repeated many times these past 12 months. Volumes are up, demand is great and pricing is historic. And finding material, personnel and drivers have made every day an adventure.
Like other materials, the heating, air conditioning, ventilation and refrigeration market got whacked by COVID in early spring 2020. But the market was one of the very first to bounce back, driven by several beneficial factors.
“Demand was driven by three things,” says Brian Loftus, market research and benchmarking analyst for HARDI, an association that supports HVACR wholesalers. “The wealth effect from the stock market doing well; home values going up; and housing permits have been strong.”
The demand kick was definitely driven by the residential market. COVID lockdowns and the semi-lockdowns that followed kept people at home, with not a lot of places to spend their money. Replacing a balky air conditioning system, a system now in greater use, was one way to do so.
The back half of 2020 into 2021 created a split market for the industry. “Residential was by far the top performer,” says Tom Schleisner, an area leader for the major nationwide supplier Winsupply. “But I do see commercial getting stronger.”
That’s encouraging news, as Loftus doesn’t think the residential space can continue to grow as it has. “Residential is just so inflated right now. [Single-unit permits] are not going to go up 20 percent again, especially if interest rates start to pick up.”
Loftus estimates sales growth, which was in the double-digit range for most of 2021, will fall back to a more modest, but still healthy, 5 percent next year.
Any increase in activity on the commercial side should pay big dividends for the industry, largely because of what the world has just gone through. Awareness of air quality and other measures of making buildings safe has increased considerably, which works in the favor of the HVAC industry.
“We’re definitely seeing a huge uptick in IAQ (Indoor Air Quality) products,” Schleisner says. “The reasons are self-explanatory.”
The coronavirus and the increasing understanding of airborne pathogens will drive decision making for years to come, particularly at the commercial level. “That’s a different area for HVAC to expand. You can cycle air through the AC typically three to five times, where the CDC recommends six or eight,” says Jessica Moralez, steel and HVAC product manager at WAVE, Fontana, Calif.
The industry hopes to see that drive to improve air quality play out in many ways, including the ever-changing infrastructure bill still weaving through Congress. The initial agreed-upon bill was going to be quite positive for the sector, the Sheet Metals and Air Conditioning Contractors’ National Association noted.
“SMACNA members have expressed their support for a major infrastructure package for decades, and this Senate-passed bill has everything the sheet metal industry could need,” Executive Director of Communications for SMACNA Jeff Henriksen said of the fall bill. “Indoor air quality is a critical issue and central to any vertical structure upgrades and retrofits, including schools and buildings that support infrastructure including airports, train stations and all types of commuter transportation.”
Even without an infrastructure bill, there will be some gains in the commercial sector. One big change is the shift toward larger warehouse facilities. “I think overall, total square footage that will need to be cooled and refrigerated will probably go up, but instead of seeing 100 grocery stores in a mid-sized market like Birmingham, you may only see 50 and Amazon has two centers that are two million square feet each and they’re delivering half the groceries,” says Merritt. “I’m interested to see where the market goes from that. Is it better? Is it worse?”
While demand has been outstanding and the outlook remains positive, the industry still was faced with plenty of those challenges Merritt mentioned. Chief among them was simply the ongoing scarcity issue for so many raw materials.
Merritt notes that Jemison, as a domestic buyer and 100 percent contractual supplier, didn’t have the same struggles in accessing material as some companies did. On the other hand, his customers most definitely dealt with supply issues, which affected their forecasting. If a component was unavailable, they might have to switch directions and produce a slightly different product, changing their needs. “There were heavy pulls, slow pulls. It was just a lot of stress on the supply chain,” he says.
The lack of metal often leads to other pressures. “If your lead times are longer or uncertain, and you’re selling more than you thought you would, then your orders have to ramp up. Then folks think, ‘I’ll order more because I’m not going to get everything I order,’ which means suppliers are flooded with orders. It’s happening in all industries, that bullwhip effect,” Loftus says.
“You have to have a higher level of inventory when lead times aren’t good.”
The supply issues are represented nicely in the monthly sales-inventory ratio HARDI tracks. “The sales to inventory ratio right now is pretty close in most regions to what it was in 2019. Except in 2019 the supply chain was reliable and lead times were shorter. If you placed an order and were told it would be there in two weeks, it would be there in two weeks,” he says.
Obviously, it’s not just metal or components in short supply. Labor remains a major problem.
“While we hope supply chain issues resolve themselves quickly, we are actively increasing awareness and recruitment efforts to try to avoid a workforce shortage. Like most trades, the sheet metal and HVAC industry is facing an aging workforce that has only been accelerated by the pandemic,” Henriksen says.
Yet, that might not be the biggest issue. Merritt says that while some of the employment worries may start to subside, it may take longer for the transportation market to get back to equilibrium. “Logistics around the world are still a problem. The cost of bringing a 40-foot container used to be $7,000 and is now $30,000. I don’t see that getting better real soon.”
Of course, running concurrently with the availability issue is the pricing of all commodities, most notably steel. “In addition to the supply chain constraints, the volatility in the steel market presents material challenges for sheet metal and HVAC companies scrambling to keep up with demand for products. Manufacturers and distributors have had to manage their own supplies of steel and protect their inventory, which has led to prioritizing orders to contractors and increase the practice of selling steel in smaller increments,” Henriksen says.
Yet Schleisner believes the inflationary environment affecting all commodities has cushioned the blow of metal price increases. “Nobody likes them, but it’s not just pertaining to HVAC or plumbing, it pertains to every walk of life. I’m not going to say it makes it easier, but it makes it more palatable,” he says.
The biggest threats to continued growth in 2022, Loftus says, are continuation of the supply chain shortages, including labor, or further COVID problems, particularly any kind of new variant.
Merritt is just looking forward to a return to more standard business conditions. “Hopefully, we can get back to more of normal supply-demand concern, not this backlog where ‘I have to have it and I’ll pay what I have to,’ but ‘I can sell it and make money and have an employee who can work on a punch and make a product.’”