(AMM) HIGH PRICES MAY LIMIT STEEL CONSTRUCTION OPPORTUNITIES
By Scott Robertson
April 28, 2008
The pain of rising steel product prices could spark a shift to cheaper materials in construction projects, according to some sources. And while steelmakers have seen little sign thus far of projects being canceled, they acknowledge that if prices stay at elevated levels in the long term they might face that prospect.
It's not just the fact that steel costs are becoming painful, said Tom Valvo, president of Aegis Metal Framing LLC, St. Louis, it's that customers who might be willing to build with steel are being forced to go with other, less-expensive materials.
"The issue we are seeing is that these (steel) prices are opening the door to alternate materials," Valvo said. His company specializes in the use of light-gauge cold-finished galvanized steel to build roof and wall framing. "A lot more people are looking at building with wood. Lumber is cheaper now than it's been in a long time. They are seeing fairly substantial savings by re-engineering some of these buildings with wood, and that is translating into tons of lost business in steel."
The Steel Framing Alliance (SFA), a Washington-based organization set up to promote the use of steel in residential and light commercial construction, faces the issue on a daily basis. SFA president Larry Williams acknowledges it's a battle that was difficult in the beginning and made tougher by rising steel prices.
"We're operating in an environment where steel prices are much higher than they ever have been while wood now is at the same price that it was, I'd say, back in 1990 or '91," Williams said. "The rising price of steel has significantly impacted our ability to compete."
There are few indications that steel prices are going to drop dramatically any time soon. The combination of high raw material costs, which steelmakers are passing on to their steel-buying customers, along with a weak U.S. dollar and high freight rates that discourage imports and encourage steel exports, means that high steel prices likely will last until at least the start of next year.
"Raw materials have increased, as have energy and transportation costs," said Jim Stavis, vice president and chief financial officer of Paragon Steel, a Long Beach, Calif.-based steel distributor. "And now we have a weakened dollar that is keeping cheap imports away from our markets, thus creating short supply and increased prices. As a result, every month we seem to eclipse the old highest price we have ever seen for steel, stainless and aluminum products. And similar to the gas situation, there is little chance that there will be a reversal in prices. Fifty-cent (per-pound, or $1,000-a-ton) steel is here to stay."
The high prices haven't greatly affected non-residential construction yet, although steelmakers see potential storm clouds brewing.
"We haven't seen any cancellation of projects in development due to escalating prices of the product," said Dick Teets, who heads the Structural and Rail Products division of Steel Dynamics Inc., Fort Wayne, Ind. "You might see something in non-residential construction activity with schools, where the schools will go out and get bonds if they want to do a project. The bonds are at a fixed value and if (steel) prices go up, the schools might delay the projects."
Executives at Nucor Corp., Charlotte, N.C., said they haven't seen any significant projects cancelled, but acknowledged that some currently on the drawing boards might be pulled until prices abate somewhat. "As far as building activity, there haven't been any cancellations of projects," Joe Strattman, who heads Nucor's plate and structural steel operations, said during a company conference call. "When you look out over the next six months, the market is strong as far as we can tell."
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Daniel R. DiMicco, Nucor's chairman, president and chief executive officer, said during the conference call that projects removed from the drawing board wouldn't greatly affect the market in the near term. "A lot of those projects, those tons are speculative," he said. "There never has been any order pattern established."
Many of those projects will be revisited in the future, likely after prices fall somewhat, DiMicco said. "There is still a lot of time for them to be re-established."
SFA's Williams said there are other reasons for optimism. His group has taken the approach that there are still things that steel framers can do that give them a comparative advantage to wood or concrete in residential and some commercial construction applications.
"In a lot of cases it is still required that non-combustible materials be used in medium-rise construction," he said. Williams also stressed the notion of "cash-in-pocket" to developers, meaning that steel-framed structures can be built much faster. He cited a four-story steel-framed building recently built by Courtyard of Marriott in Nashville, Tenn., across the street from a similar structure using concrete. The steel-framed building started going up two months after the concrete building but was finished two months in advance. "That allows revenue to be generated four months faster," he said.
There also are insurance benefits, including lower premiums for steel-framed buildings since they're safer than wood and more resistant to fire and other damage. Williams also mentioned other, more subtle benefits, such as steel weighing less than concrete and reducing the need for large foundation pads. "That kind of thing can save a company 20 percent on concrete costs," he said. "There's no question that the residential market is hurting badly. But there are places where we can compete. These (rising steel) prices have just forced us to shift our focus a little bit."
Paragon Steel said customers can combat higher steel costs by planning better, assessing their inventory and storage capabilities, working closely with suppliers and throwing out their crystal balls.
"Though all of these things are more expensive than last year, adjusted for inflation they cost about the same as they did in 1981," Stavis said. "In fact, lots of things such as clothing, electronics and restaurant meals are, by historical standards, cheap. It's the paradox of our new world order. Stuff is cheap, but the things that truly sustain us, from health care to retirement to education, are not."
Valvo, who has worked with Williams and the SFA, is aware of the benefits of steel. He remains unconvinced, though, that many of them will trump costs in decisions to build.
"The bidding process is getting to the point where the numbers just don't work," he said. "The greatest threat right now is that projects will be canceled or delayed because it's getting to the point where it doesn't pay to build with steel. There is a tremendous amount of re-quoting going on. A lot of people right now are having trouble with credit limits and that's another part of the problem. Things are just getting out of control."
Valvo warned that while business might be OK for steel in the short term, sustained record prices are causing numerous opportunities to slip away. "At some point opportunities are lost," he said. "I think if these prices don't ease somewhat, you're going to see a fairly substantial problem in the market that results from these higher material costs."
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