|(Photo coutesy of Steel Dynamics Inc.)|
The most severe cost crisis in living memory has hit fabricators and contractors that work with anything made of steel. And nobody saw it coming. Structurals, plate, rebar, mesh, studs, ductwork, guardrails, fencesif it was a product made with steel and you had a fixed-price contract to deliver it during the first quarter, you were in trouble. And the contractual ripples are expected to be felt for many months to come.
Reinforcing bar prices made the first move last spring while structural steel prices began moving up in the fourth quarter of 2003. But the unprecedented, across-the-board price increases that followed during the first quarter of this year stunned the industry. "If this trend continues, it has the potential of putting the majority of fabricators in the U.S. out of businessand I mean the majority," says Robert Abramson, president of Interstate Iron Works Corp., Whitehouse, N.J. Several other fabricators agree that this is not an extreme statement.
At the beginning of 2004, steel mills started indexing their base price directly to the price of scrap, which had increased 41% in 2003 after jumping 47% in 2002, as China drove demand for global scrap.
Scrap is the basic raw material of minimills, which produce most construction materials. These mills responded with surcharges that raised prices dollar for dollar to match increases in scrap prices. The nations largest minimill, Nucor-Yamato Co., Blytheville, Ark., tacked a $20-per-ton surcharge onto its wide-flange products in January, says Joe Stratman, plant general manager. This rose to $49 in February and $93 in March.
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|Scrap Metal Prices|
|Rebar and Structural Steel Prices|
This action followed four increases in Nucors base price for most wide-flange products in the second half of last year, ranging between $10 to $15 per ton each. Nucor just announced another $25-a-ton increase in its base price in February, which brings the average price of a ton of steel to around $420, says Stratman. The $162 in surcharges would boost that price another 39%, and fabricators are bracing for more surcharges in April.
For many in the industry, the surcharges came as a total surprise. One week before Christmas, Frank Williams, partner in The Williams Group, Merrifield, Va., met with two suppliers regarding delivery of steel for a large project over a three-to-six month period. "They said they could not hold prices past April 1, which I felt we could deal with," says Williams. "Then two weeks later, I get a dear valued customer letter with these huge surcharges." Using surcharges as cover, "we have seen suppliers run in mass from existing quotes in contracts and just not honor them," he says.
Bridge fabricators may be in a better position to weather the storm because they tend to be more financially sound after five years of robust markets, says Williams. But commercial building fabricators, still struggling to emerge from recession, are vulnerable to the current situation. "I think you are going to see a tremendous number of very large and very old fabricators shut their doors in the next six months," he predicts.
Rebar fabricators are in the same boat. For the past 30 years, reinforcing steel prices have been very steady, keeping in a plus or minus 10% bandwidth, says William Brack, CEO of Milford, Mass.-based fabricator Barker Steel Co. So he figured last springs $35-per-ton price increase was the firms hit for the year. "What happened after that, nobody was prepared for," he says.
What followed was another $50-perton increase in the fourth quarter of last year. "At that point, people thought that was a record and we had a crisis on our hands," says Brack. But the real crisis was still coming with another price hike between January and the end of April that will total $170 per ton, if announced increases are included, he adds.
To make matters worse, there are increasing concerns in the market about availability and delivery times. Because supply problems are playing a crucial role in price escalation, mills cannot ramp up production to take advantage of higher prices, as they normally would if demand was the primary concern.
"Business is being driven now by the ability to maintain the availability of supply," says Brack. Ironically, he thinks that this may be fabricators best hope in escaping the current crisis, since owners tend to fear the cost of project delay more than higher materials prices. "We are talking to our customers, and to keep their jobs running, we need some cooperation in terms of price relief," he says.
Perhaps the most damaging aspect of the current steel market crisis is the uncertainty it has sown. Mills are not tipping their hand on what prices will be. "Price quotes for structurals are good for 30 days, at best, and pipe quotes are only good for a few weeks," says John Murphy, chief procurement officer for Black & Veatch, Overland Park, Kan. "No one knows how high prices are going or how long this situation will continue."
Wire mesh is among the most unpredictable material, says Brack, whose firm also runs a materials warehousing operation. Mesh suppliers are only quoting prices at time of delivery but will not guarantee when that delivery will be, he says. Try putting that into a bid estimate.
"It is impossible to put together an estimate in todays environment," says Joseph Majewski, president of JPM Construction Consultants Inc., Spring Lake, N.J. "How do you tell a client that this is the best guess because I dont know what is going to happen 10 days from now?"
Majewski is trying to cope with three announced price hikes totaling 50% for metal studs over the next 45 days, with no guarantee that the actual price increases will not be even higher. "You include a contingency and hope youve got it covered," but in the end a contingency is just a guess, he says.
This higher risk factor is changing the way contractors now do business. "Historically in our industry, weve built escalation into our jobs," says Eric Benson, president of San Diego-based Pacific Coast Steel Inc. "Now, were quoting projects with open escalation tied to the rising price of steel and some owners are getting sticker shock." Benson says that general contractors "are coming back to an industry that has historically absorbed the price escalation and saying, What are we supposed to plug in for our escalation?" Firms may be "forced to deal with what they may consider non-responsive bids," he adds.
This uncertainty is creating a thriving environment for inflation. "The risk is that in trying to guess what is going to happen in the next six months, firms start factoring in more escalation than actually happens," says Neil Platt, Pittsburgh-based purchasing manager for Turner Corp.
"In the fourth quarter, we lost a lot of really large jobs to really low-priced competition and we were forced to survive on smaller jobs," says Jim Mangarella, estimator for JM Ahle Co., a South River, N.J.-based rebar fabricator. That turned out to be a blessing in disguise, with small jobs shorter cycle offering some protection against unexpected price hikes. "Now our larger competition is overbidding prices like crazy," he says. Escalation clauses may help elevate the problem of overbidding, says Williams. "Otherwise, people are going to put in high bids up front to cover the risk factor," he says.
Pricing Time Lag
The onslaught of higher steel prices that began hammering contractors at the start of the first quarter slammed into ENRs published prices during February and March. By the end of the quarter, ENRs 20-city average price had increased 15.5% for channel beams, 19.4% for wide-flange beams, 18.4% for grade-60 reinforcing bar and 20.2% for steel plate. These quarterly gains make up the bulk of the year-to-year price increase.
Some readers of ENR have expressed concern that the steel component for the February cost indexes was up only 3.8% for the year. However, the published February cost index is computed using the published January steel price, which in turn was collected in mid-December. Readers can find the most up-to- date prices on the construction economics page in the fourth issue of each month.
The current steel price and supply situation is putting "an enormous cash strain on all contractors honoring fixed-price contracts," says Bing Drastrup, president of Santee, Calif.-based J.L. Davidson. As a result, "the industrys ability to offer fixed prices at this point is virtually gone," Drastrup says. "If you have a project thats long range we are unable to put a firm price or to guess what the price may be."
Exacerbating the problem, credit also is tightening drastically. Only six months ago, 45 to 50-day payment terms "were quite acceptable," says Drastrup. Now, "its net-30-or-nothing. And, if youre over your credit line, its cash with shipment," he says. Further straining cash-strapped fabricators, a credit line now buys only 60% of what it did six months ago. Between supply shortages, shrinking credit, and a cash drought, "youre getting it from all sides," Drastrup says.
Higher prices are complicating other basic business issues. "The product we are now carrying has doubled in cost and that means the financial resources you need to carry that product are also increasing," says Brack. "We cant bankroll a contractor and a contractor cant bankroll an owner."
Firms are now pushing for stability. "Were going back and asking clients to make price adjustments that will hold us harmless for price increases going forward, so we can stop the bleeding at some point and try to recover," Drastrup points out.
More seasoned and flexible contractors seem to understand that replacing a fabricator is likely to drive up costs further, Drastrup says. A new vendor will likely seek full market prices rather than the cost adjustments requested by the fabricator already on board. "On existing contracts, there is not enough money in the pipeline," says Williams. "It is going to be very difficult to get reimbursed on some of these unprecedented cost increases."