Intro/Outro (00:01):
Welcome to dial P for procurement, a show focused on today’s biggest spin supplier and contract management related business opportunities. Dial P investigates, the nuanced and constantly evolving boundary of the procurement supply chain divide with a broadcast of engaged executives, providers, and thought leaders give us an hour and we’ll provide you with a new perspective on supply chain value. And now it’s time to dial P for procurement
Kelly Barner (00:32):
Corporate sustainability initiatives are critical to the health of our planet, but the distance between objectives and regulated execution on a detailed level can sometimes be very broad. The news story I’m gonna cover today provides an ongoing example of the complexities associated with even the simplest mandated change. And it throws in a healthy dose of illegal dumping on the part of China, just for good measure. This is the story of Worthington industries. The last us based manufacturer of lightweight recyclable cylinders for transporting refrigerants. These cylinders are used to service stationary air conditioners service refrigeration units, and in some cases to service motor vehicle air conditioning, because their cylinders are used to transport hydrocarbons or HFCs Worthington now finds themselves on a collision course with the EPA. But before I go any further, let me introduce myself. I’m Kelly Barner. I’m the owner of buyer’s meeting point a partner at art of procurement.
Kelly Barner (01:47):
And I am your host for dial P here on supply chain. Now I’m constantly scanning the news for complex subjects that we can discuss. These are things that are interesting, but which may escape people’s notice. I think these are great opportunities to think, analyze and learn dial P releases, a new podcast episode or interview every Thursday. So be on the lookout for future episodes. And don’t forget to check out past episodes as well. Now, before I get back to today’s topic, I have a quick favor to ask, as we build out dial PS community and following I’d love to get a review, a share, some stars alike, your favorite emoji, whatever it is, I’ll take it. The net impact of that is bringing more voices and opinions and opportunities to learn into this audience. And I benefit from all of that as well. Most of all, I’m grateful for your interest and for your time.
Kelly Barner (02:53):
So thank you for returning every single week and listening to these new episodes. All right, let me pick up where I left off on June 28th, 2022 Worthington industry’s CEO, Andy rose wrote an opinion piece for the wall street journal titled the EPAs supply chain disruption, a ban on non refillable cylinders for air conditioning, coolant will cost American jobs and help China. I’m sure it comes as no surprise that I was hooked before I even got to the body of that article. At the same time, I approached this story with a healthy sense of skepticism. Like I do everything that I read. I always look for independent validation and I seek out both sides of the story. Worthington industries is an industrial metals manufacturer and they are used by 99% of companies based in the us for heating ventilation and refrigeration. Their production facilities are based in Ohio and Kentucky.
Kelly Barner (04:04):
And that Kentucky location used to be AMRO, which was the last us manufacturer. Other than Worthington. They were acquired by Worthington industries in 2017. For these cylinders, all of their competition is based in China now of great importance as we go forward in this story is the difference between a few key words. And you’re gonna hear variations of these as I pull information from different sources, disposable, refillable, and recyclable. So non refillable cylinders, meaning either disposable or recyclable, depending on your point of view, these are containers that cannot be refilled, but there is a notable difference between disposing and recycling. They weigh about 35 pounds when they’re full refillable cylinders weigh about 50 pounds. Worthington produces both types of cylinders and their lines are dedicated to either refillable or non refillable, which in their case means recyclable. And according to the CEO, their production lines are currently at full capacity.
Kelly Barner (05:27):
Now, if you think you had a tough 2020 let’s check out, what’s been going on at Worthington on March 27th, 2020 Worthington industries petitioned the us commerce department charging the China was dumping non refillable cylinders in the us market dumping, not a technical sounding term, but one that actually does have established meaning means another country or company is selling a product in a different market at less than fair market value. The goal is typically to drive out local companies that have higher costs of business because they’re actually not finding subsidies anywhere. And when the dumping occurs and lower priced comparable product comes into the market, usually what happens is the domestic producer is priced out of business. Then the dumpers get to take over all of that demand for themselves in the United States. The practice of dumping is illegal. According to the us tariff act of 1930 now in March Worthington, alleged dumping margins, as high as 61% saying that all of this incoming product was being subsidized by the Chinese government.
Kelly Barner (06:48):
Now, while they were waiting for the commerce department to do their research and make their ruling, Congress passed the American innovation and manufacturing act or the aim act, it was enacted on December 27th, 2020. And the goal of it was to reduce those HFCs being transported in different types of cylinders, whether you call it disposable, recyclable or refillable, the aim act gave the EPA the authority to phase down HFC production in the United States by about 85% over the next 15 years. And as with so many of these acts, despite the intended benefits, the aim act is expected to potentially cause significant transition costs, especially for businesses like supermarkets and data centers that use an awful lot of these refrigerants to keep their facilities and equipment. Cool. So now we have two things going on in parallel. One is the investigation into Chinese dumping of these steel cylinders.
Kelly Barner (08:01):
And the other one are the new regulations about the management of HFCs, kind of a good news, bad news situation. I like to be positive. So let’s start with the good news in April of 2021, the commerce department ruled in favor of Worthington quote, an industry in the United States is materially injured by reason of imports. That would be their fancy way of saying yes, dumping is happening. And it was interesting because Worthington had alleged margins in the sixties in terms of Chinese government, subsidization of these cylinders, the commerce department’s research turned out that those dumping margins were actually 80% and above. One of the interesting data points that went to proving the case of dumping is that Chinese imports of these cylinders had increased by 52.2% from 2017 to 2019. In the finding the companies associated with the dumping were forced to pay tariffs equal to the dumping margin, basically paying a fine that would’ve brought their costs to where they should be.
Kelly Barner (09:19):
So that’s the good news. This celebration was short lived because it was quickly followed by the bad news. Two weeks after the us commerce department ruled in Worthington’s favor, the EPA announced they were banning non refillable containers in the us starting July 1st, 2025. Now I’m guessing at Worthington, this came as a bit of a shock. The ban on disposable containers had not been mentioned in congressional debates, and it was not in the text of the law. So remember that we’re gonna come back to that later. The APA was claiming additional inherent authority to adapt these measures complimentary to the aim act. What they were saying is that based on their mandate to draw down these HFCs, every time a steel cylinder used to transport them has to be destroyed or recycled. There’s the question of what happens to the heel. That’s the little bit of HFC that’s left in the cylinder.
Kelly Barner (10:26):
And the question is about whether it would be released or disposed of properly before the cylinder was destroyed or before recycling took place. This was the rationale that they used to justify the additional measure of actually banning these non refillable containers. So from good news to bad news, according to Worthington, quote, the aim act provided the EPA with authority to phase down HFC production and use, but nothing in the act suggests that Congress gave the EPA authority to impose an outright ban on cylinders, simply because they contain HFCs end quote. So Worthington industries petitioned the EPA via the DC circuit of the us court of appeals in November of 2021, and then nothing in December of 2021, about a month after that petition was filed Worthington and a number of HVAC trade unions filed a lawsuit against the EPA. And that’s when California said, hold my beer.
Kelly Barner (11:39):
Okay. Not quite California’s response wasn’t to the EPAs ruling. This is something that’s been going on, but anytime we look at anything related to sustainability, environmental issues, you can bet the California’s going to be involved, setting their own standards. And in some cases leading the way for what happens in the rest of the country, the California air resources board currently limits the production of disposable or non refillable cylinders for every disposable cylinder sold four refillable ones have to be in circulation because the manufacturer of one refillable cylinder displaces the manufacturer of five disposable cylinders over the course of its 20 year life. So basically the California air rare air resources board looks at this as an offset and the EPA factored this into their decision because certainly their mandate is about drawing down HFCs, but they still have to make sure that there are enough refillable cylinders remaining in the country, or that can be produced to meet demand so that businesses are not interrupted.
Kelly Barner (12:51):
And if you need a review of why government action should not be allowed to suddenly or unduly affect how businesses operate, check out the story of baby formula, that’s all I’ll say on that. Now Worthington says there is not sufficient global capacity for refillable cylinders. So they’re saying by outlawing anything that can’t be refilled, you’re actually going to be left with a shortage of these containers for transporting HFCs. And of course, because we’re being fair. We’re also going to acknowledge that this ruling by the EPA and the California air resources board takes away some of their market share by requiring that us demand be filled with global supplies. Remember we said, Worthington, their production lines are already at full capacity. And so any competition means bringing in Chinese cylinders that meet the us standards instead of allowing Worthington to meet that demand. Now I read some of the analysis done by the California air resources board in advance of them releasing their guidance.
Kelly Barner (14:00):
Now remember the three words that we’re talking about, disposable, recyclable, refillable, the EPA and the state of California say disposable or non refillable Worthington says non refillable or recyclable, not quite the same thing. And everybody shares that word non refillable, but the difference between disposable and recyclable, both in practice and also in the court of public opinion is enormous. California looked at the lifecycle analysis of high global warming potential greenhouse gas destruction. Now they use the term scrapped disposable. That’s a little bit more charged because it absolutely strikes out the possibility that we’re talking about something being recyclable. And yet they still estimate the potential for metal reuse being between 15 and a hundred percent. They used a conservative estimate to assume that 75% of the non refillable cylinders would eventually be recycled. So it’s interesting if their ranges from 15 to a hundred and they settled on a conservative estimate of 75, not exactly in the middle.
Kelly Barner (15:13):
The other thing they looked at that I think will be of interest to people in supply chain is that they remembered to account for the total impact. They didn’t just look at the cylinders. They looked at the transport costs associated with recycling and refilling because in many cases, the recycling or refilling isn’t done at the location of use and they found quote distances to transport refillable cylinders from cylinder manufacturer to refrigerant manufacturer to distributor to technician are assumed to be the same as those of disposable cylinders. However, due to the increased size and weight of refillable versus disposable cylinders, over 30% more truck trips are assumed to be required to transport them. Now, remember refillable cylinders weigh about 50 pounds while the recyclable ones or disposable, depending on who you are weigh 35. If refillable cylinders were to replace the use of disposable ones, a greater number of reusable cylinders would need to be produced relative to those currently needed on an annual basis in order to avoid market disruptions and to account for cylinders that are in transit or use.
Kelly Barner (16:32):
Now, as I record this in mid-July Worthington’s lawsuit in cooperation with a bunch of those labor unions is making its way through the courts, but the world doesn’t stand still, as we’ve already seen, waiting for these different things to happen in parallel. And I think I would be remiss if I did not bring into this coverage mention of the recent Supreme court ruling West Virginia versus the EPA. This was related to the clean air act and the ability of the EPA to regulate carbon dioxide emissions. I’m not gonna go into all of the details here, but the key takeaway is the question about how much detail lawmakers have to spell out when they want an agency like the EPA to enforce something. How specific does Congress need to be? The EPA is supposed to be an execution arm of the government. Congress is supposed to make the rules that they execute against these cylinders that have now been banned by 2025 by the EPA are not explicitly mentioned in the am act.
Kelly Barner (17:38):
And they were not discussed in Congress prior to the Bill’s passage. The question, especially based on the ruling in West Virginia versus EPA, where the EPA was found to have inferred far more authority than they were literally given was whether the EPA has the right to ban these containers based on a clear mandate to simply draw down HFCs. Now, I certainly don’t know the answer to this question, but the storyline in both cases seems close enough. That makes it a reasonable question to ask. So what do we learn from this story? First of all, take it from me. Word choice matters. Non refillable does not mean straight disposable, but recyclable does not always mean they get recycled. And when you can look at word, use patterns in a complex situation like this and see trends start to emerge, that’s one really good way to figure out who’s in this corner.
Kelly Barner (18:39):
And who’s in that corner. It’s impossible to ignore the ongoing complexity created by the intertwined nature of business and government. This has come up in many episodes of I P so the us commerce department helped Worthington industries, or I should say more appropriately found in their favor in the case of the Chinese dumping. That’s what the facts supported, but the EPA took it upon themselves to ban a major product line for us based employer with hundreds employees, when they told Worthington, remember the last us based manufacturer of these non refillable cylinders that this product would in fact be banned, sustainability plays a huge role in this story. And again, there’s this question of what is the impact on how the world works and on existing businesses, the devil is always in the details. If it were as simple as saying, let’s just make the environment better.
Kelly Barner (19:39):
Everyone would be in agreement, but someone has to be tasked with a specific act. And that act always has a ripple effect. Some consequences of which are expected. And some that nobody sees coming. The example of the added road time and the additional truckloads required to transport these larger refillable tanks is a perfect example. Even the calculations associated with figuring out what’s best for the environment are not straightforward. And so what it comes to mean is that interpretation is everything who’s doing the calculations who’s making the decision of what’s better. Who’s looking at an act based on congressional ruling and making the decision of what rights are gonna be enforced based on that, maybe more importantly, who do we want doing that interpretation? The last point that I’ll make here is that after two years of supply chain disruptions, one of the words that we heard a lot in, which is now faded is reassuring.
Kelly Barner (20:42):
If you remember the early days of the pandemic where supply chains were disrupted and everything was shut down, everyone in their neighbor was going to reassure everything. Well, now reality is set in and just like sustainability initiatives and global dumping questions. Reassuring is no simpler, but we do know it sure as heck isn’t going to work. If the us doesn’t seem friendly to manufacturers. Now that doesn’t mean regulators have to look the other way. And it doesn’t imply that manufacturing is always a messy business. The answer is somewhere in the middle, but there’s no hope of supporting critical reassuring if everyone can’t work together or at the very least agree on their terminology. Now that’s my point of view on this story. And of course, I appreciate you listening to this episode of dial P for procurement, but as I always ask you, please don’t just listen, join the conversation and let me know what you think, share this episode with your network and bring their thought process and expertise into the conversation as well. If you have knowledge to share on this topic or any other reach out to me directly via LinkedIn, let’s work together to look at the hard questions and do the best we can to come up with workable solutions until next time. I’m Kelly Barner here with you on behalf of dial P for procurement and the whole team at supply chain. Now have a great rest of your day.
Intro/Outro (22:16):
Thank you for joining us for this episode of dial P four procurement and for being an active part of the supply chain now community, please check out all of our shows and events@supplychainnow.com. Make sure you follow dial P four procurement on LinkedIn, Twitter, and Facebook to catch all the latest programming details. We’ll see you soon for the next episode of dial P for procurement.
