PRESS

PRICES SOAR FOR ANOTHER COMMODITY: STEEL

By Stacy Clements

May 13-26, 2008

It’s a $60 billion enterprise and the backbone of the country’s infrastructure and transportation industries—steel. The commodity is used to construct bridges, cars, railroads and skyscrapers, but steel prices are peaking as rapidly as petroleum, and there seems to be no end in sight.

“It’s gone up 40 to 50 percent just recently,” says Jim Stavis, vice president and CFO of Paragon Steel, which is headquartered in Long Beach. “I don’t think that it’s going to be reversing itself going forward. The prices that people are being forced to pay are here to stay.”

As prices for raw materials and energy soar, so do the bottom-line prices consumers pay for aluminum, carbon steel, stainless steel and precious metals. The global market and weak dollar also impact domestic steel prices, and Stavis notes that China, now a steel manufacturer, uses one third of the world’s produced steel. With fewer imports and increased domestic demand, “50-cent steel is here to stay,” he says.

A shortage of scrap worldwide has also pushed the price upward, since steel is primarily manufactured from recycled materials. Stavis notes that “the base metal, the iron ore [and] all of the components of the steel itself are in short supply.”

“We’re very dependent on import steel in terms of pricing,” he adds. “If there [is] a lack of imports, that forces us to go to the domestic makers and pretty much pay the price that they’re charging…There aren’t a lot of options.”

While local competition increased over the years, Paragon Steel expanded its distribution services, located in the City of Commerce, to include a steel fabrication facility in Placentia. Stavis notes that price hikes also contribute to a lack of supply and “holes” in inventory, and that more companies now tend to shop the market in hopes of finding lower prices.

Paragon recently completed the fence and gate work for the Los Angeles County Museum of Art, while contract negotiations are in the works with the L.A. Metropolitan Transportation Authority rail line, but Stavis says that rising steel prices are impacting its operations.

According to the U.S. Department of Energy, the country’s steel industry accounts for nearly 10 percent of the global raw steel market, producing more than 107 million net tons in 2003. In 2002, there were about 140 U.S. plants producing raw steel, with a smaller amount of integrated mills—about 20 today?producing steel in basic oxygen furnaces. Most of the mills are in the Great Lakes region, including Indiana, Illinois, Ohio, Pennsylvania, Michigan and New York.

California Steel industries, a 450-acre mill in Fontana that manufactures coil, sheet and pipe products, appears to have benefited from the increased domestic demand. Its first quarter sales revenue of $369.2 million is 17 percent higher than last year’s first quarter earnings. In a recent report, California Steel President and CEO Masakazu Kurushima attributed the results to increased shipments and an almost 10 percent increase in selling price.

Stavis says it’s not about the price, but rather, “What can we do about it?” He says that companies can offset rising prices by forecasting needs and calculating a higher cost margin; assessing storage capability and increasing product inventory; and working closely with suppliers to lock in prices.

Daryl Phillips, president and CEO of Phillips Steel Co., says that its location in West Long Beach is advantageous because of its proximity to the ports and major freeways. His grandfather founded the company in 1915, while fourth-generation family members currently run its day-to-day operations. The company also recently expanded to include Phillips Steel and Industrial Supplies in La Porte, Texas.

“There’s a lot of negativity [about the economy] going on in the newspapers and on the news channels, but we don’t see it. The Los Angeles/Long Beach port [complex] is a very strong business environment,” Phillips says.

“We don’t care what the dollar is or what the cost of goods are because it’s a commodity,” he adds. “We just pass that on to the consumer.”

Phillips Steel’s Westside operations are comparable to the Home Depot center that specializes in metal. The facility distributes and supplies steel, stainless steel, aluminum and brass. Additionally, it distributes metal working tools and provides on-site cutting and fabrication. The original warehouse still stands on the approximately 100,000-square-foot lot on Anaheim Street.

“The demand for metal for industry [use] is still strong, and we’re very optimistic that it will remain strong,” Phillips says.

But Stavis says that if the commodity continues to increase, companies could begin seeking alternative sources.

“It runs the risk of pricing itself out of the market, so that companies are going to be forced to look to alternatives, [such as] lumber products or composite plastics,” he says. “I’m already seeing manufacturers who are looking at different ways to make their products because they kind of want to get off of being tied to steel per se, and I think that’s a real inherent danger.”

Copyright © Long Beach Business Journal. All rights reserved.