As a business owner in the PPE supply industry, we have been extremely busy over the past couple of months, but the overall situation looks bleak.
Covid-19 has affected US industry in so many ways. Businesses have had to scale back operations or close entirely. Distributors and resellers of PPE products needed by businesses still in operation have had to scramble to obtain stock to sell. Mega distributors have even had to shut down because they have no more inventory to sell. Demand for PPE products is sharply higher than at any time in our history. Because needed PPE supplies are in such short supply, they come at a much higher cost than pre-Covid-19. This whole situation puts more workers and consumers at risk because they cannot get the items they desperately need.
What were previously considered to be cheap commodity items now come at premium prices, no matter the brand. Many of these items come from China, which has exerted strong control over the supply chain at both a governmental level and by individual factories.
I’ve heard lots of stories about price gouging, and many of them are true. But it’s not really gouging by the person selling to the final buyer if they need to pay inflated prices to get the items people need. When gouging starts at the source, we’re all screwed.
There are 5 categories of PPE items that have been affected by Covid-19.
• Respiratory protection - The first item that saw a spike in demand was respiratory masks. An increased need for N95s, KN95s, dust masks, surgical masks, etc. surged in China in January, during the Lunar New Years holiday. Factories were closed for the multi-week holiday and panic spread through the country as did Covid-19. Unable to obtain sufficient supplies from within China, especially when the government ordered factories to continue to be closed for a couple more weeks after the holiday, hospitals and citizens turned to the USA to buy masks. This depleted the US inventory almost overnight, and ultimately caused 3M to pull back on their distribution of US made N95s to long term customers.
When factories reopened in communist China, a capitalist enterprise occurred. Factories which previously did not make masks suddenly changed their production lines to include masks as the primary focus. While you might think that increased supply would resolve the vacuumed inventory, it did not because the demand still far exceeded the available supply. Still does.
That once in a lifetime demand triggered multiple nuances that have made the situation even worse. Mom and pop shops decided to start producing masks at home, of generally inferior quality. Factories and brokers of the raw materials for masks and other protective items decided to take advantage of the situation and increased their prices of the critical fabric on a daily basis to the actual production factories. Brokers horded the essential supplies, leaving production factories no choice but to pay the new prices. These were not small increases either; price increases were as much as 3 times higher. Production factories in turn decided to add additional profits on for themselves to meet the demand by US importers, quoting a price for masks as much as twenty times the price charged before Covid-19.
The Chinese government has now stepped in, restricting the export of certain masks to the US and how they can be marked, or requiring special licensing (probably bribes in there, too) for a factory to ship masks to the US. The rationale is that the government does not want the country to be embarrassed by inferior masks that create a false sense of security in America. However, some of the reason is also due to the government wanting to retain more masks for its own citizens. Some of the restrictions by the government are to get a bigger slice of the profits for themselves. And some is probably retribution for our President continuously calling it the “China virus”, as well as agitation for 3M shipping China made masks to the US (which China has also restricted).
Factory prices increase every day. Most factories now require a deposit or payment in full when an order is placed. However, that does not stop them from increasing the prices after they have already accepted your PO and payment. It’s like ransom; you can’t get the product unless you pony up more cash, and good luck getting your original payment back. Moreover, since there are fewer flights between China and the USA, space for airfreight rush shipments is at a premium, further adding to costs. And the demand continues to grow.
The final wrinkle in all of this is that US Customs and the FDA has been seizing large shipments of legally imported masks for their own allocation within the US. It’s like “Thank you very much for your hard work and advance payment, Mr. & Mrs. Importer, to bring these masks in to the US, but they look to be of really good quality and FEMA can use them elsewhere right now. Sorry!” And who knows how long they will take to pay for this merchandise…
• Disposable clothing / category 1 – Coveralls and lab coats are needed by health care workers, first responders, and those exposed to the public at much higher usage levels than before Covid-19. US inventories are being exhausted pretty quickly. Substantial shipments of ASTM F1670/1671 disposable clothing items in the US went back to China in January and February when the virus was running wild there and factories were shut down. Chinese production of these garments to replace lowered US inventories was first delayed by the extended Lunar New Years Holiday, and then by the same broker raw material hording that has occurred for masks. Prices for these items to importers is now two to three times higher than before, if you can get them. A full container Purchase Order we had submitted to our factory for disposable coveralls at the beginning of December 2019 has not yet been filled and might not be until September, at sharply higher prices than before. Our replacement cost for the inventory of the stock we still have on hand will likely be 200% higher. Alternatively, rather than pay such higher prices and be exposed to overpriced inventory when the bottom falls out of the market (which will happen when Chinese brokers decide to dump their inventory of raw materials), we may have to wait to purchase new inventory until pricing levels are back to a more normal level.
The Chinese government has also stepped in on these items and will now be requiring factories to obtain special licensing to export them to the USA, a process that can rake a month and won’t be granted to everyone. This will reduce the supplies even further and result in headshaking increases to pricing.
• Disposable clothing / category 2 – Bouffant caps, shoe covers, protective sleeves and the like are needed by health care workers at sharply higher levels than before. Some of the same dynamics that we see with the category 1 items also pertains here. But there is also a more consequential thing happening. These are cheap items, and factories don’t want to produce cheap items when they can supply more expensive items with the same workforce. Therefore, supplies in the US of these items will soon run out, and new shipments from overseas will not be available for some time.
• Disposable gloves – Demand is markedly higher across the USA. Factories of these items are maxed out in production, but it is still not enough. A full container Purchase Order we submitted to our factory 6 weeks ago has not yet been accepted because their production schedule is already full. Consequently, we believe that supplies of disposable gloves that are imported by smaller importers such as us will shortly run out in the US. The only stock available will likely be huge conglomerates who are paying a premium to put themselves higher in the queue, but at sharply higher prices.
• Protective goggles – Demand is markedly higher across the USA for this item as well. Factories of these items are maxed out in production, and fulfillment has been delayed. While we have not seen an increase in factory prices of these items, we need to wait longer to get them. However, airfreight (to try to get items sooner after the completion of production) for chemical splash resistant goggles will be three times the price that the factory is charging for the product. Therefore, if we want to get items quickly to fill the demand, prices will have to be much higher than before.
Overall, it is not a good situation. We are trying to determine how to best allocate the stock we have left, recognizing it may be a long while before we can obtain more. At the same time, we encourage our distributors to buy as much inventory now as they can at the best prices they can get. It is clear that inventory in the coming months will be greatly reduced and at much higher prices. This adverse impact on the supply chain will likely be in place until very late in the year. This will have a major negative impact on a wide array of US businesses as well as the overall economy.
The factory prices of all of these PPE items are higher. Tariff charges on these items are based on the import price, and those added taxes need to be passed on by the importer to the ultimate buyer in the US. Contrary to what our President keeps claiming, the tariffs are not paid by China; they are paid by all of us.
Over the last couple of months, my wife and I have been working every day and very long hours. It’s been exhausting. But when my wife hears the stories of all of the people who need masks, she pushes forward with tears in her eyes, sometimes putting our finances at great risk.
In many ways, the worst is yet to come. Whatever you need to do, stay safe.