Higher Tariffs May Weaken Margins and Credit Metrics in U.S. Building Products

...Rising input costs caused by commodity and transportation price inflation drove a median Fitch Ratings-measured gross margin decline of 186bps for our rated universe of building product manufacturers in 2018. Margins are likely to continue to be pressured during the latter part of this year and into 2020 due to the increase in the List 3 Section 301 tariff rate to 25% from 10% on $200 billion of Chinese imports in May. Many Fitch-rated building product manufacturers did not expect the tariff to increase given the appearance of progress with US-China trade negotiations earlier in the year. Some companies had already raised prices and made changes to supply chains to mitigate some of the effects from the initial 10% tariff and elevated commodity and transportation costs. We anticipate the sector will attempt to pass along the increased tariff to customers but we believe some companies will have more success than others raising prices. Companies with strong brands, small-ticket product portfolios...

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