Prices Slip After Last Spring’s Spike

After staggering price increases during the past year, prices for structural steel this quarter appear to have stabilized as indexes begin to show the first signs of a long-awaited correction. The leveling-off of structural steel prices this month follows a drop in scrap metal prices over the last two months and fat inventories that producers have accumulated this year amid waning demand.

Structural steel prices “have peaked,” says John Anton, director of steel services for Washington, D.C.-based forecasting company Global Insight. “Mills have been increasing production throughout this year and now that inventories are replenished it’s time for producers to pull in the fences. It’s a hyper sellers market.”

Mill prices for hot-rolled steel coil had crept close to $1,100 per ton by the end of summer, yet had recoiled to about $950 per ton at the start of this quarter. Correlated to the decrease is a 40% drop in scrap metal prices since July, which fell from a peak of about $400 per ton to approximately $300 per ton by the end of September.

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  • “Clearly there is some weakness in steel prices,” says analyst Chuck Bradford at New York-based Soleil Securities. Commercial construction markets, which in the past had buoyed prices of small beams, reinforcing bar and structural products, despite tanking residential markets, now face a dour near-term outlook as the residential drought begins to infiltrate once-robust nonresidential markets, Bradford explains. “As the market for homes has diminished so too has the market for steel-intensive projects for schools, hospitals, and infrastructure which would have served those communities,” Bradford says. “Commercial markets are finally being affected by the residential downturn and that is reducing demand for structural steel.”

    Producers are reacting to their inventory glut by cutting production as a means to revive narrowing margins. The oversupply and shrinking demand, along with a super-jittery stock market spurred by Wall Street’s woes, have mills in survival mode; stock values of the world’s major steel producers took a collective dive in September. The world’s largest steel maker, France-based ArcelorMittal, announced this month it will cut production by up to 15% to maintain steel prices. The situation has forced buyers and producers into a stare-down to see who blinks first. “Buyers are on strike,” says Bradford. “They are standing on the sidelines waiting for lower prices. As a result, some mills are reducing production because nobody wants to get stuck with a lot of inventory.”

    The Spike in Scrap Prices is Easing
    Reinforced Earth Company
    Source: Global insight. No. 1 heavy melt, three city average.

    The clamor to cut production in order to keep steel prices aloft has highlighted friction that is heating up between some mills and fabricators. In September, Scranton, Pa.-based steel fabricator Standard Iron Works filed a class action suit in U.S. District Court for Northern Illinois, naming eight of the nation’s biggest steel producers as defendants and alleging the mills “conspired to fix, raise, maintain and stabilize prices of steel products,” since 2005. Standard Iron Works alleges the steel companies met to organize a collectively imposed industry production discipline and to adjust production rates to keep prices high. It is seeking damages under antitrust laws.

    The suit “alleges a conspiracy which we intend to defend vigorously,” says Douglas Gunson, general counsel for Seattle-based Nucor. Named in the suit are: ArcelorMittal USA, U.S. Steel, Nucor, Gerdau Ameristeel, Steel Dynamics Inc., AK Steel Holding, SSAB Swedish Steel, and Commercial Metals.

    Relieving Pressure on Structural Steel Prices
    Reinforced Earth Company
    Source: Global insight. National average spot price concrete reinforcing bar, carbon steel.

    Big Questions

    Uncertainty prevails among contractors as estimators plunge into uncharted territory in the months ahead. “How contractors will be able to estimate steel prices a year ahead is beyond me,” says James A. Stori, president of Schenectady, N.Y.-based fabricator STS Steel Inc. “We may see more owners and architects going to concrete buildings.” Stori says the only certainty is that, after this year’s rapid and unprecedented price ascent, “Steel prices are not going to go down to what they once were.”

    Anton projects structural steel to decrease by about $100 per ton by January, but stops short of saying prices will return to pre-spike levels.

    In the twelve months since August 2007, “structural steel prices have gone up 50%, and it will correct some, but not completely,” say Stori. “The world is changing. Over the next few months steel prices will stabilize, but after that it’s anyone’s guess.” In the uncertainty, owners are bringing fabricators in on projects earlier to manage steel prices on projects, fabricators say. On many projects, contractors are either asking owners for escalation clauses, or requiring mills to lock out prices for up to a year. In some cases fabricators say they are being forced to hold the risk of price escalation.

    Owners and contractors are turning to fabricators for their ability to closely monitor pricing and availability of specific shapes from mills in their regions, says Steven Kufrovich, director of preconstruction services at Providence-based Gilbane Building Co. Fabricators’ inside understanding of steel-shapes pricing is a valuable asset to structural engineers when design transitions from a basic pound-per-sq-ft estimate to a specific steel package, where a pricing disconnect often begins, says Kufrovich. The price impact is most acute on non-standard shapes. “If you don’t specify off-the-shelf steel you’re pretty much at the mercy of the mills,” he says.

    Wildcards in the future of steel prices are the voracious hunger for steel in Asia and the Middle East, and the sinking value of the dollar. “With the weak dollar, exports have gone up and imports have gone down,” says Bradford. “There is a seasonal component as well and we expect foreign demand for scrap, which is 75% of production costs for domestic mini mills, to go up in November and December as projects ramp up in Asia. It will affect steel prices domestically. In the next year the commercial construction market looks bleak, and it could be a prescription for major problems.”