Precast Consulting Services
Finance, Marketing & Operations


Have steel prices gone mad?
27 February 2004

by Bill Ray

E very producer has been shocked to hear from their steel supplier, again.  Most producers got an  unwelcome phone call and price increase in December.  That was followed by another increase in January, yet another for February, and promises of more to come in March.   The price per ton of the index grade of hot rolled coil steel is up 66% from June of last year.  This closely characterizes what has been happening in rebar, strand, and mesh.  I am afraid to say but 15 cent strand and 20 cent rebar are long gone.

The immediate cause for the increase is some supply bottlenecks:  Energy prices are up.  There was a coal mine fire  that had the effect of reducing supplies of coke.  And, Georgetown Steel in South Carolina shutdown.  The secondary cause is that the price for steel scrap has shot up, due to buying by China.  Expansion alone in China's economy is reported to be greater than the total steel used in Canada and Mexico, combined.

Here's the key.  The underlying cause of the price increases is that the dollar is now much weaker compared to foreign currencies, and the US buys a lot of steel offshore.  The Euro, the Yen, the Pound Sterling, the Canadian dollar, etc. have gained in value making it more expensive in $US to buy steel offshore, and also more attractive for foreign steel mills to buy scrap in the US.   What's the outlook?

The US continues to run a huge imbalance of trade; Americans are consuming goods made overseas like there was no tomorrow.  The Federal budget deficit is very large and has become a political issue.  US interest rates are at a record low, and barely attracting capital to the US.  Lastly, the Administration appears to have taken a posture of acquiesce to the weaker dollar.  In short, the weak dollar is unlikely to change any time soon, and it could get worse.

Steel suppliers have typically called these increases “temporary” and put the increases through as surcharges.  The steel industry is very competitive and some suppliers probably have over-reached.  But, don't hold your breath waiting for a big rollback.  Don't think “temporary.”

If that's the bad news, is there a silver lining?  Yes indeed, and an important one for management!

  1. Bridge producers will see an immediate improvement in their competitive standing compared to their chief competitor, steel bridge beams.  Similarly with poles, and a lot of other products.
  2. Concrete pipe will become more competitive compared to corrugated steel and iron pipe.
  3. Structural producers generally will see their competitive position improved compared to steel building systems.  This is the right time to be looking at market initiatives for total precast systems.
  4. Think hard about new markets also.  For example, bar joists specifically will be affected with sharply increased price and reduced availability.  Similarly steel studs, just to name two.
  5. Finally, remember that among our greatest strengths is speed of erection, and one-stop shopping.  Steel construction has a checkered history of missed dates and fabrication delays.  That's going to get worse, maybe a lot worse.  Consequently, trades coordination will be negatively affected.  Most precast producers can point to a good record of on-time completions, together with excellent job engineering support and turnkey lump sum contracting.  This is the time to sell the whole package.
What about practical suggestions for the here and now:
  1. Review your estimating to be sure current steel prices are being used.
  2. Review your backlog of work under contract for which the steel has not yet been delivered.  The gap may not be as bad as it seems.
  3. Using the 80/20 rule, sharply focus on the problem contracts.  Fix  the biggest problem contracts first.  Each contract is probably different and not subject to a general solution.
  4. Evaluate your pricing on products produced to stock like pipe and manholes, including unsold product on the yard, to insure the pricing reflects today's market realities.
  5. This matter emphasizes again the need to stay current in getting paid for stored materials.  This would be a good time to review what's billable.
  6. Look very carefully at the “force majeure” provisions in each of your contracts.  Trust me, steel fabricators on the job will be very aggressive in this area, and so should we.  This would be the right time to spend some money for a review by a top construction lawyer.
  7. As far as I can see, no producers are on allocation.   Insist on timely delivery from your steel  suppliers.  Work with your suppliers.  Forecast demand for them.  Seek and expect their full cooperation.
  8. Don't hoard.  Remember, some of these price increases may not stick.  You could get stuck holding the bag on some high cost steel.  This is not the time to be speculating on the price of steel.  Speculate in the futures market, not in the business.  Stick to the knitting.
  9. Review project engineering.  How much “feel good steel” is in there.  I did this exercise once and I found a 10% savings.
  10. This would be a good time to look again at waste strand and rebar drop.
In summary, this steel price level is the "new normal.".  On the whole, it contains a lot of opportunity.  It will require focused management of the immediate problems .
 
 

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click here for   Steel Price II for action steps on contracts and bidding

Bill Ray

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