Steep Steel Prices Stun Contractors

Tue March 09, 2004 - Northeast Edition
Pete Sigmund

A startling and continuing rise in steel prices, caused partly by shortages of materials resulting from surging production in China, is sending shock waves through the United States and worldwide construction industries.

Prices for all types of steel, for heavy highway, bridge and building construction, have risen at least 30 percent since December, increasing costs, sometimes by many millions of dollars, for contractors, dealers and equipment manufacturers.

The precipitous increase, part of an alarming inflationary spike in the Producer’s Price Index (PPI) took many in the industry by surprise. Steel prices do not generally swing abruptly. They had been expected to remain relatively stable after President Bush lifted tariffs on steel imports in December.

Costing Contractors

The price hikes are walloping highway contractors and suppliers across the nation who had bid much lower prices before the precipitous rise but must now pay a lot more than they had expected for current deliveries of the actual steel.

“It’s a serious situation for contractors right now,” said Dennis Day, spokesperson of the Associated General Contractors of America (AGC) in Washington, D.C. “Steel prices have really spiked up. One highway contractor told us that costs on one bridge project had risen by $15 million because the cost of steel had gone up since the contract was signed. We’re urging owners and the federal government to look at escalator clauses as an alternative to provide some relief so that contractors aren’t absorbing these price increases entirely on their own. Contractors operate on a very slim margin. In this volatile market, it won’t take them long to lose that margin.”

Day said the increases “caught everybody by surprise; the industry hasn’t experienced such a spike in steel prices for many years.”

Ken Simonsen, AGC’s chief economist, who also expressed concern, said, “This really has blown up very suddenly and the price increases are very extreme. A number of contractors have told me that their steel suppliers have already socked them with increases of 25 percent or more and have told them to expect increases of 10 percent a month indefinitely, with no guarantee of any price for more than a week.

“Contractors bid a job and they’re stuck with the price they’ve put in for better or for worse,” Simonsen said. “This is going to cut into profits on jobs that have already been bid, or maybe wipe out the profit in some extreme cases, depending on how much of the job involves steel materials. It will also make some contractors more hesitant to bid on new jobs unless they receive some kind of price protection.”

Steelmakers Add Surcharges for Costs of Material

One of the shocks has been that U.S. steelmakers, waging their own survival battles with rising costs of materials and fuels such as natural gas, suddenly added surcharges to their original contracts with fabricators, who then passed them on to general contractors or manufacturers of equipment, automobiles and other goods.

“We have absolutely no choice in the matter,” Bob Johns, director of marketing of the Steel Mill Group of Nucor Corp., the nation’s largest steel producer in Charlotte, NC, told Construction Equipment Guide (CEG). “It’s either that [raising steel prices] or go out of business.”

“Steel producers are confronting skyrocketing costs of raw materials for making steel, and are adding surcharges for this reason,” said Nancy Gravatt, vice president of communications of the American Iron & Steel Institute (AISI) in Washington, which represents North American steel producers. “Equipment manufacturers are feeling the ripple effect from a global phenomenon where the basic laws of supply and demand are at work. There’s a shortage of coke, coal, iron ore, scrap metals, and alloys — the raw materials that are used in making steel — and an upward push in costs. A lot is generated by this huge, very intense demand emanating from China.”

Construction Industry Seeks Relief

Price escalation clauses would allow contractors to be compensated for increased material costs. As contractors pay more for fabricated steel, they would simply pass the additional costs through to the state DOT, which would then be compensated by the Federal Highway Administration (FHWA).

Leaders of The American Road and Transportation Builders Association (ARTBA), AGC and other industry organizations recently discussed such relief from skyrocketing prices with top officials of the American Association of State Highway and Transportation Officials (AASHTO) and the FHWA.

ARTBA President Peter Ruane met several times with FHWA Administrator Mary Peters, urging her to support price adjustment clauses on highway and bridge contracts, which are already signed, and on contracts to be signed in the future.

FHWA, in turn, has established a special team of contract specialists to investigate what’s happening.

Big Surprise

The surprising price surge began late in December 2003.

Earlier that month, construction industry leaders interviewed by CEG had expressed confidence that prices of steel would remain relatively stable. Major equipment manufacturers such as Caterpillar, for instance, said they had longer-term contracts with steelmakers that weren’t affected by fluctuating prices.

They also enjoyed exclusions from tariffs on some of the sheet roll and big-ticket steel imports, so were not troubled by President Bush’s rescinding the tariffs on Dec. 11.

“I think there was some expectation that prices might actually go down after the tariffs were removed,” said Gravatt. “Even though what’s going on now is not related to the tariffs, it’s kind of a startling turn of events.”

“I think the rise in prices has been a surprise in that it happened so quickly,” said Nick Yaksich, vice president of government affairs of the Association of Equipment Manufacturers (AEM) in Washington, D.C., adding: “There were reasons to be optimistic. Productivity was increasing. Demand for new products was picking up. Inventory had moved on. Manufacturers were cranking out equipment. Then this hit us in the last month and a half. We’re looking at a serious issue of fundamental costs, a tremendous increase in steel prices. Some companies have told us that, since January, they have been paying 80 percent more for flatbed steel, and they don’t see an end in sight.

“Even some of our larger members say they’re seeing steel costs rise 10 percent or 15 percent. They may have enjoyed exclusions from tariffs in the past, but now, in this situation, there’s nowhere to go. Rising costs, of course, affect the prices of equipment.

“There are also job losses among small and medium manufacturers who can’t pass on their costs. Some of their big customers are saying, ’Okay, if you can’t get your costs down, we’re going to outsource this,’ which means more loss of U.S. manufacturing jobs.”

China Buying Scrap

China is undoubtedly a big factor in the price rise.

“I think most people believe costs are rising because all the scrap metal is going to China, where there is great demand,” Yaksich said. “In the past, domestic prices of steel would eventually get to the point where imports were a little lower. That kept prices down. Now some of our people are saying that there’s such a demand in China that there may not be imports to the rescue soon enough.”

AISI’s Gravatt said flatly, “The huge ramping up of manufacturing in China is probably the single largest factor in the global pricing of raw materials for steel. China went from producing 100 million tons of steel in 2000 to 250 million tons in 2003.

“I, and a lot of others in our industry, didn’t know we would see the raw materials situation intensify so quickly. The shortage is partly due to China and unknowns about China. The fact that they would ramp up their manufacturing so rapidly, particularly their steelmaking, caught people by surprise.”

Said AGC’s Day, “China is buying steel left and right, including scrap steel and fabricated steel.”

Simonsen, AGC’s economist, said, “Some people have been blaming the run-up particularly on very strong Chinese demand for scrap steel, which is a major component in new steel. It’s true that Chinese steel consumption has been leaping ahead and they just don’t have the raw materials on hand themselves.”

Other Factors

There are other reasons, too, for the rising prices.

“Demand for steel is also high from the rest of the world,” Simonsen pointed out. “The Japanese economy seems to be back on track, and there is also demand from parts of Europe and other developing countries besides China.

“Another factor is that the significant decline in the value of the dollar makes it a lot cheaper for foreigners to buy our products, whether it’s scrap or finished steel. Conversely, their finished steel is a lot more expensive to buy.

“Finally, over 30 steelmaking companies in North America have gone bankrupt in the last two or three years. This has really put the crunch on steel prices for many products, for automotive as well as construction applications.”

AISI’s Gravatt said the improving economy in the United States also has created upward pressure on demand for the materials. She said fires in coal mines in China and in West Virginia had been a factor is rising coal prices, but that an even bigger factor has been the rising costs of energy.

“The average steel mill is extremely energy-intensive. Rising energy costs have been extremely significant, whether it’s natural gas, electricity or a petroleum-based fuel. On the demand side, another factor has been that the cost of transporting these materials across the ocean has been increasing as fuel costs go up.”

Prices for diesel fuel are at an 11-month high, making heavy materials such as steel particularly costly to transport. In this situation, Simonsen said, shippers also may put on their own surcharges.

Leading Indicator of Inflation?

Rising steel and fuel prices are, of course, inflationary.

“Steel and petroleum are used in a lot of products, so their prices are likely to affect the producer price index,” said Simonsen. “The big question is whether manufacturers, whose huge productivity gains have allowed them to swallow a lot of price increases in the past, can absorb the rising costs.

“Labor is still the number one cost for many manufacturers. So, even if they are hit with a 25-percent increase in steel and a 10-percent increase in fuel, if they can eliminate some labor costs by producing more with less labor, they may still be able to hold the line on their output prices.”

“Prices, of course, are a function of supply and demand,” said AGC’s Day. “In the U.S., a number of steel makers have consolidated or shut down plants, increasing demand. Other commodities are going up too, including copper, plywood and natural gas, oil and diesel fuel, off-road equipment, and trucks and freight delivery charges. It does look like an advance indicator of inflation. The CPI [consumer price index] rose .5 percent for January.”

Contractor Rage

John Voss, co-owner with his wife, Lisa, of J.V. Concrete Construction Co., Ofkaloosa, IA, is incensed.

“We use one-half-inch steel rebar for residential and commercial construction,” he said. “Over the past year, rebar prices have skyrocketed. Early on, it was blamed on the tariff. It was wrong to put the tariff on, anyhow, but now that they’ve been lifted, the price of steel has continued to skyrocket and is three times what it was last year. All the vendors tell us there’s no bottom to it until the end of June.”

Asked how prices have increased for his company, Voss replied, “We were buying one-half-inch 40-grade steel in October 2003, for $345 a ton. Right now the same grade and diameter steel is running $615 a ton. Not only does this cost us thousands of dollars more, but it hurts our building market because a house can now cost $1,500 to $2,000 more. Add to that the increased cost of fuel and the building industry is hurting.”

Voss said that he and competing companies share the same feelings. “It’s all political. They say there’s a shortage of steel. If so, they’re sending it all over to Iraq, and that’s wrong. What it will do is drive up interest rates, which have helped our business and our economy because they have been low. This is also happening to plywood and other building materials, driving up their price here. People in the building industry need to speak out and tell their congressmen and the president that it’s wrong.”

Bright Spots

Gravatt said some positive factors are mitigating the crisis somewhat. One is that the U.S. steel industry regrouped after the tariffs on imports and after a wave of bankruptcies.

“The price situation would have been worse except that the industry underwent probably the most drastic consolidation and restructuring in the last 50 years,” she told CEG. “This brought a new health and resiliency, and steel companies have been purchasing some facilities which were idle. If that hadn’t occurred, much more capacity would have gone out of the market and prices might be higher.”

She also pointed out the increasing productivity of the U.S. steel industry.

“We’re producing about 108-million tons of steel per year in the U.S. Efficiency and productivity has improved tremendously. The industry employs about 125,000 workers compared with 500,000 in the 1970s.”

And AGC’s Simonsen commented, “What will happen? I don’t think we can tell. The fact that there’s a lot of shut-in capacity means that it should be possible for some firms to reopen their steelmaking lines, or some companies may reopen greenfield plants if this looks like a sustained recovery. I think there’s a market for reopening, but I’m not putting my money on the line. I don’t know how long it will take to convince investors that the demand will last and that they ought to reopen or invest in new capacity.”