THE STEEL CRISIS: Demand from China is driving up the cost of construction in the U.S.
Published by Florida Times-Union on April 18, 2004.
A load of steel coils was dropped off in Bruce Mancuso's warehouse Thursday morning, giving him a little more wiggle room.
But just a little.
All of the material, used in making steel buildings, has already been sold: That section of his warehouse will be empty within five days.
Mancuso, general manager of Metal Sales Manufacturing Corp.'s Jacksonville branch, is out of secondary steel, the stuff used for interior framing work, and prices on the stuff he does have in stock are jumping every few weeks. His cost on some materials has almost doubled.
What really concerned Mancuso, though, is that his company -- one of the larger national suppliers of steel to construction companies -- is in good shape compared to others in the industry.
"I'm having a hard time," he said. "The smaller guys, they may not survive. If I'm having a hard time, they have to be struggling."
Mancuso is not alone in his worries. Over the past few months, higher demand in China has caused the cost of steel in Jacksonville to skyrocket, leading to price increases for construction materials such as steel beams and metal pipes. Consumer goods like cars, dishwashers and exercise equipment are also getting costlier to produce, and some of that increase might soon hit consumers in the pocketbook.
It's not only that steel has gotten more expensive. It's also gotten harder to find.
The Jacksonville library project, for example, has had to deal with periodic shortages over the past several months, including an inability to get light gauge steel framing for a few weeks.
"The materials market is likely to be very volatile both in price and supply over the remainder of the year," said Rex Holmlin, the library project manager. "This is an excellent example of how globalization affects us locally."
It doesn't matter if a company is in the global marketplace or not, said Joseph Menendez, human resources manager at Gerdau Ameristeel's rebar-producing steel mill in Jacksonville. "We don't compete in Jacksonville, or Florida, or even the United States," he said. "Even if you don't sell overseas, you're competing with the world."
Fluctuations in the global market, spurred by increased demand by China, are at the root of the higher prices. The prices are affecting a variety of Jacksonville businesses, from the mills that produce the metal to the fabricators that shape it and even to the construction companies that use it.
"The most severe cost crisis in living memory has hit fabricators and contractors that work with anything made of steel," said an article in Engineering News-Record, a trade publication. "And the contractual ripples are expected to be felt for many months to come."
The "crisis" started toward the end of 2003, when China's booming economy began to demand more scrap steel, first drawing in the product that the rest of the world used to send to the United States and then looking to U.S. suppliers for the commodity.
For the past decade, China has been growing -- growing in population, growing in gross domestic product, growing in buying power. As both a cause and effect, the country's infrastructure has also been expanding, with new roads and new buildings springing up nationwide.
"In Beijing and Shanghai, a year ago they had people working on construction day and night," said Jeff Steagall, director of the University of North Florida's International Business Program. "That's the kind of economy we're dealing with. There's lots of cranes, lots of construction, lots of activity."
China's gross domestic product has officially grown at more than 8 percent a year since 1985, with some regions exceeding 13 percent in 2003, according to the People's Daily, an official newspaper of the Chinese Communist Party. The United States' gross domestic product rose 3.1 percent, to $10.9 trillion, in 2003.
Cycle of steel
To build the infrastructure for all that growth requires a tremendous amount of scrap steel.
Steel is initially made from iron ore, but that process is far more expensive than melting down scrap metal, which can come from demolished buildings or wrecked cars.
Such recycled steel becomes part of a giant cycle: The steel beams used in a new office park on Southside, for example, might contain parts of an old downtown building recently torn down. The metal from the old building goes to a scrap yard, which shreds it and sells it to a mill, where it is chopped into even smaller pieces and tossed into a furnace.
The molten metal is then formed into coils, columns or other shapes -- depending on the mills -- and sold to fabricators, who turn it into finished product: If the fabricator supplies the construction industry, for example, it might make structural beams complete with bolt holds and end plates. Those beams might then be bought by a metals wholesaler, who could sell them to the construction company working on the new office park. In today's market, though, construction companies in China have bid up the price of that scrap, making it a more attractive place to sell for scrap dealers around the world. Scrap metal from other countries is no longer pouring into the United States, and domestic scrap yards are loading their material onto slow boats to China.
Last year, according to American Metal Markets, an industry trade publication, China imported more than $1 billion worth of American scrap, a world record. The country used more than 36 percent of rolled steel and half of the cement in the world, according to the People's Daily.
"They're becoming consumers like we are," said Steagall, the UNF professor. "The cars we buy, the buildings we put up -- they're all affected by China. That's something Americans just haven't realized. They have a lot of people and they have money."
As a result, construction companies and their supplies have been squeezed over the past few months.
"There are just so many materials and scope of work in construction that steel is a part of," said Joe Frisco, senior vice president for W.G. Mills Inc., a Jacksonville-based commercial construction company.
Conduits for electrical wiring, fire sprinkler piping, wall studs -- all the steel that goes into a building is becoming more expensive as well as harder to find. "Not only is price an issue," Frisco said, "but availability is becoming an issue."
Suppliers are renegotiating contracts and telling their customers that prices quoted at the beginning of the project can't be honored.
Bruce McCardle, eastern division manager for Mako Steel, which makes components for high-end self-storage facilities, said his company has had to utilize "act of God" clauses in their contracts, allowing them to raise prices based on the extraordinary jump in the cost of steel.
"When you're talking a 10, 12, 14 percent increase, that's something I can absorb," he said. "When your prices goes up 108 percent, I can't accept that."
Mako and other companies who have utilized such clauses have faced lawsuits from customers.
"This is the first time I've had to go back to my customers," said McCardle, who's been in the business since 1982. "We're on the front lines of this thing because of the short turn-around time."
Typically, McCardle said, prices increase 4 percent or 5 percent every few years. "It could be dealt with," he said. "Right now, we're dealing with a 30 to 50 percent increase. Our phones are ringing off the hooks. We're putting disclaimers on our proposals. This is the last position I want to be in with customers I've dealt with for 10 years."
Steel prices are set at the end of every month, and since the end of 2003, each of those benchmarks has been higher than the one before.
"It is making it extremely difficult to provide predictable pricing to our clients," said Bob Renaud, manager of public affairs for The Haskell Co., a Jacksonville-based nationwide construction firm. "A lot of projects have a pretty long gestation period. We're having to include an escalation clause in the proposal we give our clients, provide some negotiating room."
So far, residential construction hasn't been overly affected by the increase in steel prices, because the cost of steel is usually only 4 percent of the cost of building a house. But the construction industry is a bellwether: The higher prices haven't finished rippling through the economy. In the coming months, cars, washing machines, weight sets and nails may all jump in price as the higher costs work their way through the system.
So far, the construction crews actually doing the work haven't been affected, said Bill Bradley, president of Ironworkers Local Union No. 597, although it has made bidding projects more complicated. But if prices continue to increase, he said, some jobs might stall.
"I think that it's going to have an effect on us, slow things down some," Bradley said.
The main beneficiaries of the price increases are the dealers at the front of the supply chain, those selling scrap to mills here and in China. While the mills are making more money, much of that goes to cover the higher supply costs, and fabricators and wholesalers are ending up being squeezed on both price and supply.
"We have customers that want a firm bid," said Frisco, the construction company vice president. "We have subcontractors and vendors saying 'Here's the price today,' but they're not holding the price firm."
The rising prices have, ironically, also affected supply, said Charles Berman, whose company, Berman Brothers Inc., buys scrap and sells finished product. Much scrap comes from sources like old buildings being torn down, but with the high cost of new construction, some developers are electing to keep old buildings extant.
Berman is dealing with the price increases on several fronts: The scrap he buys costs more, as does the finished product he gets from places like Ukraine. On the other hand, he can charge more to mills who buy his scrap and the construction companies who buy his pipe.
"This is really taking the market for a spin," Berman said. "I've been in it for 35 years and never seen anything like it."
In the past week, China's steel purchasing has actually slowed slightly. The country's consumption of the metal hasn't let up, though; instead, shippers are running out of vessels to carry the stuff to Asia. Yet-to-be-unloaded boats filled with construction supplies are clogging China's ports.
Of course, with so many boats tied up, shipping prices are rising as well, making U.S. suppliers less interested in looking to imports to make up domestic shortfalls.
And that momentary lull isn't expected to last -- and demand might even get worse as China continues to industrialize. According to Mary O'Connor, a senior associate with Locker Associates, which produces the Steel Industry Update, Chinese society is not yet as "steel-intensive" as, say, the United States, with fewer cars and appliances per capita than here.
"In their next level of development," she said, "they'll start buying higher-priced, steel-intensive goods."
With the Olympics scheduled for Shanghai in 2008, and China's growth showing no signs of diminishing, high prices might be here to stay.
"There isn't really a whole lot to be done," said Steagall, the UNF professor. "China isn't going to change [its] hunger for steel. The rest of us are going to be paying higher prices. It's just a change in the global economy."
The impact of soaring steel prices
Here's how the rising price of steel has impacted local construction projects, and what the fallout will be on other metal-dependent goods.
As steel prices jump and supplies dwindle, big construction projects in Jacksonville are feeling the heat.
Already, the Main Library has had to deal with a shortage of light gauge steel framing, although project manager Rex Holmlin said work has not been delayed.
"We have to be very sensitive," he said. "There's a possibility for supply-availability issues that might affect our schedule."
The rise in steel prices won't make the library more expensive, however, because the contracts for the project don't allow contractors to pass along the costs. If supply issues actually do push the library off schedule, contracts might also be hit with penalty clauses.
For now, Holmlin said, the crews will work around any shortages while he keeps an eye on the situation. "It continues to be something we're watching very careful," he said. "As we move into the summer, it could become more of an issue."
The Duval County Courthouse project will have to deal with higher material costs, but the jump in prices won't make the city go over budget, said Susan Wiles, Peyton's chief of special initiatives and communications.
"Our design documents aren't complete," Wiles said, "so we're in a position now to evaluate the amount of steel and metal products we use. Right now we're in a place to be a little flexible."
The city will go out for bids over the summer, she said.
Steel doesn't play a huge part in residential buildings, although things like nails, pipes and sinks will become more expensive. What homebuilders will have to deal with is a general increase in construction supplies like drywall and wood beams. Although these increases aren't as dramatic as steel's, they will drive up expenses.
Appliance prices, generally, haven't gone up yet because of the lead time between the factory and the store. Analysts are unsure how much of the price increase will be passed on to consumers. Last week cast-iron pan manufacturer Lodge Manufacturing told the Wall Street Journal that retailers have forced it to simply accept lower margins. "There is a whole set of challenges when you're dealing with national retailers," Chief Executive Officer Robert Kellermann told the paper, "because it's your problem, not their problem."
Automobiles will become more expensive to build, but much of that cost will be swallowed by the car manufacturers -- reluctantly -- and by steel suppliers. Suppliers who are unable to pass on the higher costs will be hurt the most: GM supplier Federal Forge, for example, has had to file for bankruptcy because it couldn't recoup its costs.
Fabricators of steel supplies -- structural steel, framing and the other metal products that make up big buildings -- are the most squeezed here: Often their contracts don't enable them to pass on the price increases. Construction companies, in turn, are being hurt by the drop in supply, which could eventually lead to a drop in projects.