Steel price volatility spreads through industry

August 11, 2010

A surge in steel prices that began last year is creating uncertainty throughout the construction industry — starting with owners debating whether to initiate a project and extending to steel suppliers and contractors wondering whether they will be able to recoup higher costs.

Neil Platz, director of procurement for Turner Construction Co., says structural steel shapes (I-beams and channels) experienced significant base price increases during the last five months of 2003, when an increase of $70/ton was added to a base price of about $400/ton.

Also starting in mid-2003 was a spike in the cost of reinforcing steel that goes into concrete buildings. The rebar price tends to follow that of structural steel, within a range of about 10%.

In December, steel mills announced the imposition of monthly surcharges. For steel rolled and delivered in January, the surcharge was $20/ton. This increased to $49 in February, $93 in March and $120 in April.

The combination of surcharges and base price increases since mid-2003 translates to an increase of nearly 50%. Steel fabricators absorbed much of the initial increase because the cost of fabricated steel was not increasing, even though basic steel prices were.

The increases for structural shapes and reinforcing steel, products that usually go directly from the mill to their point of use, were quickly reflected in the market. Prices of other products that utilize fabricated steel — including pipe and ductwork — will be impacted as their inventories are drawn down and replenished.

Karl Almstead, Turner's VP of reconstruction, expects the impact of higher steel costs to ripple through the industry for months — perhaps through December.

Almstead says that when prices began to increase, product initially was available to buyers willing to pay higher prices. But more recently, stockpiling has become a factor, particularly in the case of metal studs. Even if they don't need the product, buyers may believe they will be able to make a profit by reselling it.

Almstead believes this factor helps to explain why deliveries of steel studs that formerly took two weeks are now taking about eight weeks. Delivery time is becoming almost as critical as price, he says. "I think you'll start hearing about schedule extensions."

Steel analysts emphasize that many factors, including higher energy prices, are behind the price increases. The biggest factor has been China's insatiable demand for scrap metal used to produce steel. China has heavily increased its purchases of scrap from the U.S. in the wake of tightening supplies resulting from developments such as Russia's taxing of scrap exports, and the Ukraine's banning of them.

Meanwhile, a number of steel mills have opened in China, and the country is approaching the capacity to produce 300 million tons per year, starting from virtually zero 15 years ago (U.S. production of all types of steel ranges from 90 to 100 million tons annually).

Another factor cited by analysts is a desire by steel producers to increase prices that have been depressed for the past several years. In late 1970s and 1980s, steel was selling for $500/ton, compared to about $400/ton in July 2003.

John Cross, VP of the American Institute of Steel Construction (AISC), views the situation as a classic example of supply and demand. The higher price of scrap should draw more scrap into the market, he says. "As the demand for scrap increases, more will be processed."

The fabricated and erected steel frame accounts for 10-12% of the total cost for a typical building, according to Cross. Steel purchased from a mill accounts for 20% to 25% of that, or 2% to 3% of the total project cost.

Cross characterizes the current steel market as one experiencing "a period of volatility." He said in mid-April that he had not heard of projects that have been canceled because of the steel price increase, although some owners were debating whether to proceed.

Mike Tylk, former president of the National Council of Structural Engineers Associations, says fabricators of structural steel and rebar are forced to guess what the surcharge will be on work they are currently bidding, even though the steel will not be delivered until a future date. He says owners may be sympathetic to contractors by offering an advance to pay all or part of the surcharge on products not yet delivered. The alternative may be that the contractor defaults on the contract.

"The crisis in steel prices presents major obstacles for all parties, especially steel subs and owners whose projects are going to be negatively impacted if prior commitments cannot be met," says BD&C legal columnist Richard Stockenberg. "A lot of false hope is being raised for contractors who have lump sum contracts to supply steel at a fixed price. I do not believe that force majeure clauses or the Uniform Commercial Code will provide realistic hope for relief under the current state of the law."

In future contracts, Stockenberg recommends that contractors and suppliers qualify their bids by stipulating that the price will be increased in the event of a "significant" increase in the price of steel, as well as other materials.

         
 

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