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Steel Yourself

Twenty contractors all agreed the price of steel had risen more than dramatically, but each had his own adjectives (and even expletives) to offer about how the rise was affecting them. Some knew why the prices were going up, and all had formulated some way to deal with them.

The fact is, as pointed out by a contractor from Iowa, the U.S. steel industry is making a ton of money selling steel to the Chinese at the expense of other U.S. industries that rely on steel for their production and, ultimately, the U.S. consumer. But who can blame the steel industry for playing the game the way it is played?

“If they can take the raw product and make the same profit from it as if they were selling the finished goods,” explains the Iowan, “without having the investments needed to make those finished goods, how could a company that is answerable to its stockholders not take advantage of the opportunity? The flipside of the coin is that it is really hurting us all locally. I don’t think I am out of line in saying that some of our suppliers are doing the same thing. I think they are profit-taking, and I can’t blame them. I don’t like it, but I do understand it. If we had been on the ball, we could have safeguarded ourselves by taking stock in these companies and made our money back that way. But we were all caught off guard and never saw it coming. Nobody ever thought our domestic steel would find its way overseas.

“Maybe we figured the Chinese demand would be taken care of by foreign steel—not our own people. With no high tariffs to pay for importing into the United States or reciprocally, into China, the Chinese market opened up for U.S. steel manufacturers. It’s called ‘free enterprise,’ and there are times we don’t like free enterprise, and this is one of them. But you can’t pick and choose when to apply free enterprise. Truth be told, steel-stud manufacturers and drywall metal people have been left out of the real profit-taking that the drywall manufacturers and insulation industries have enjoyed for a long time. These industries geared their inventory to orders about six years ago. That’s why the price of drywall has risen significantly across the nation over the last several years. They have maintained that without the highs and lows because they have controlled production.”

Some believe that the steel manufacturers could have provide everyone with a heads-up and a predictable series of price rises. That would have been an optimum solution for all concerned. Instead, they have created a lot of tense moments for the U.S. building industry, as one contractor from Arkansas said. As another contractor from Arizona noted: “This is one of the shakiest periods our industry has ever experienced—with general liability costs and coverage, litigation, construction defects, and now huge price increases that not even a crystal ball can help us with. It’s very risky.”

Who Needs
Satisfied Customers?

So what has been the result of the less-than-optimum approach by the steel manufacturing industry? All contractors reported price rises over the last half year of between two and three times the earlier rate. These rises were not driven by increased production costs, but solely the knowledge that manufacturers could charge more.

“The greater challenge is not pricing but availability,” says a Colorado contractor. “The product manufacturers order coils from steel manufacturers to come in on a railcar, and ask for say 3 5/8ths 16-gauge studs. While they used to be able to say they were expecting a rail car on Thursday and could send product to us in six days, now they don’t know if they’ll even have any 16-gauge coils on that rail car when it turns up weeks after being ordered.”

All contractors reported lead times used to be between three days and two weeks. These figures are now up at between eight and 12 weeks. Why? Some say it’s because the steel industry didn’t increase production when it knew demand was going to be substantially higher with the opening of the market in China.

The steel industry also did not provide adequate notice of rising prices, “… leaving us with our pants down on jobs we had already bid on and started,” as one Nevadan puts it. The warnings were inaccurate, too, in that the rises were stated in January to be 10 percent for each of February, March and April. But just before the rises were initiated, the figures were changed to 20 percent, 20 percent and 25 percent, according to a Colorado supplier. This left subs throughout the country locked into delivering on contracts that had bid steel priced way too low, and having to pay the higher prices. That’s a bit like cleaning up your own yard and throwing all the trimmings into your neighbor’s yard.

No reports existed mid-April of any sub going under as a result of these increased prices, but the Iowan says of some of his competitors, “The one thing I am concerned about is that we will lose some very good up-and-coming construction people because they don’t have deep pockets and cannot take any more material cost increases on ongoing projects. They are working on jobs now where all their profit has disappeared into making up the shortfall in their estimates after steel prices rose. If there are any more hits, they’ll go under, and they are the future of the industry.”

The Price? It Depends.

Perhaps a key change forced on subs is they have to act like they are in the Future’s market, gambling and best guessing where the price of steel may be half a year from now. “We check the current price and inflate it and hope and pray that that works out to cover future increases,” explains a Georgian.

Suppliers cannot shoot themselves in the foot by giving price guarantees, so they don’t offer them anymore. “In the old days,” says an Arkansas man, “we would be given a rate that would apply to the whole project. Now, the rate is not guaranteed for the whole job unless you purchase all the steel up front.” Agreeing with him is a Colorado contractor who points out that “the bottom line is that for all the years we have been a contractor, it has been a luxury having suppliers lock-in the prices for us up to a certain period in time, and honor those prices even when they faced minor increases. We have been protected until now.”

And what were the subs being protected from? The current scene of having to estimate the cost of steel at the time they will take delivery of the steel—a couple of months after they have been awarded the job, assuming the steel manufacturers make the steel available. Estimate the steel price too high and, they risk losing the contract to a competitor who estimated too low. Estimate too low, and the sub finds he is working for nothing as his profit goes straight to the steel supplier. This is not good for estimators’ nerves, to be sure.

Suppliers, for their part, have to pass on actual costs. There were reports of some eating the increases during the early days and honoring their earlier price guarantees, but right now, price guarantees range from none at all to just a one-day lock-in rate, all the way up to a 30-day guarantee reported by a sub in Kentucky. If he did not confirm that he had the job and needed the steel within 30 days, the price would not be honored. And if the delivery of the material, in the control of the manufacturer, went beyond the expected delivery date, then the manufacturer would charge the rates existing at that time.

What to Do?

Hoarding, or buying whatever they can get their hands on is the way some contractors have responded, storing the material on the work site, in their own yards, or in the case of one contractor from Arkansas, in the back yard of his own house.

Says one enterprising Nevadan, “We’ve been digging and scratching to find the material we need to keep going. We are just depleting resources available in the states around us and when the reserves are gone, we’ll be hurting.”

As an Illinois contractor points out, the downside of hoarding is that the prices may go down and a sub left with a pile of steel that is too high-priced to win any contracts on. He drew the comparison to the time when “drywall was in such tight demand and it was on allocation. People would buy a bunch of drywall and store it in a facility. If you had drywall, you could do the work and get the contract. It’s the same with steel now. But the risk is that if you buy 2.5 inch 25 gauge stud, which used to go for 14 cents a foot, at an inflated 35 cents, and the next day, the manufacturers sorts out the supply, you are left holding 35 cents a linear foot in your inventory and everyone else is buying it for 14.”

The likelihood of this happening is very slim for two reasons, apparently: First, there isn’t enough steel available to hoard much supply, and second, the likelihood of the price of steel going down significantly is pretty slim.

“If you don’t plan ahead, you will lose your shirt,” an Idaho contractor asserts, expressing a philosophy that allows him to report “I just picked up steel for some jobs we will not start for five months.” Obviously, he has pretty good supply lines in place. Like him, most contractors are ordering steel the minute they are awarded contracts in an effort to have it available when it is needed.

Multiple reports were received from subs of projects being delayed as a result of this long lead-time—principally with ongoing projects where orders for steel were based on the usual lead times, not the extended two-month time frames that are now the norm. “Jobs have been delayed big time,” according to an Oregonian, “because when we [metal framers] are held up, everyone else on the project is held up.”

An Indianan confirms delays are already happening. “We have already seen a couple of four- to six-week delays on projects because steel is not available, and that’s affecting all the trades, not just walls and ceilings guys. It’s not so bad yet that people will be going out of business, but I expect to see jobs being shelved by the summer. One job here was already changed from steel-stud framing to all-wood because of availability and pricing.”

Subs are now guaranteeing bid prices for between three and eight weeks, depending on the contractor and what his supplier is telling him about prices. “I am writing the same restrictions into my proposals that I am getting from my suppliers,” states an Idaho contractor, such as “The lead time is three weeks before the price goes up 25 percent. The GCs and owners have no choice but to accept the terms, because nobody can do any better.”

One silver lining has appeared, in that GCs and owners are motivated to assign work as soon as they can, which means that instead of waiting months before releasing subs on projects, they are now, in the words of a Californian, “releasing us early and working well with us—the owners are paying for us to order materials ahead of time. Right now, we have material for a job that is starting in three months, which will save the owner 20 percent to 45 percent on the steel.”

As a Georgian points out, this approach is not possible with the snail’s pace at which government contracts move, where it can take a year after a bid for metal framing work to begin.

Another problem area is design-builds, as a Colorado contractor points out: “When they are developing the design as the building comes out of the ground, and especially where they ask for an unusual product, we have to tell them we may not even have material for eight or 10 weeks. We have a project like that right now. But the engineer has been giving us options so we just call to see which material will arrive the fastest and hope that it is the most economical, too.”

Some subs are using escalator clauses in their contracts, so that whatever the price of steel is on delivery day, they are covered. The Californian’s story was typical of those surveyed: “We have to forecast prices during the bidding process for what they will be when the job starts, say four months down the line. We then add disclaimers that if the job goes longer before we can stock it, we will not be liable to material price increases. We are not receiving any guarantees from our suppliers. If they say they will be able to bring in steel in June and it doesn’t come until July, then we are stuck with July prices. They are telling us that they are not able to lock in their numbers.”

According to a Colorado contractor, “state- and federal-level highway projects are considering telling individual bidders they can put individual escalators into their contracts. The other side of the coin is that it opens the door to a feeding frenzy as steel manufacturers realize they can charge whatever they want. It’s a tough call. I was playing a board game with my 12-year-old son, and I remarked that business is just like this board game. I roll the dice, I land on ‘Chance’ and pick up a card, and whatever it says, I have to do.”

Another way of dealing with the rising steel prices has been adopted by some subs, although it probably leads to the most tension with GCs: Refuse to sign contracts, reports a Kentucky contractor. “If they don’t have a bid bond, they can’t be held to it. Some subs are saying they cannot enter a contract because they have lost money and can’t afford to lose any more. If the owner or GC won’t work with them, they have to bring in another contractor who will re-quote with escalators anyway.”

A Colorado supplier reports that some subs and GCs are close to litigation, with subs walking away from contracts because they cannot afford to buy steel at higher prices than those upon which they based their bids. But subs can’t take a loss on it, no more than the product producers or suppliers can.

The Colorado contractor gives the basic successful response to the situation: “We have stayed in constant contact with our suppliers and the manufacturers to stay abreast of the latest developments so that we can somehow predict what the market is going to be. We have also talked to our contractors and given them prices based on the tier level of what the increases will be for as far out as we can estimate the price increases based on the percentage of increase the suppliers and manufacturers feel they will be facing. Constant communication with all players is the key.”

The Iowan adds, “We just have to adjust our margins and make sure everybody else does. Some people are too hungry; they want to take everything and they are not looking at the 20 percent increase last month and the likely 20 percent increase next month. They are bidding too low and being awarded the job. As long as everyone adjusts their margins, our industry can survive this and we won’t lose any people.”

As for the Future

Anyone’s guess, at the moment, is valid when it comes to what lies ahead. The general scuttlebutt seems to be a leveling of price rises in August.

“Grid manufacturers and accessory products, which are behind the curve, will still be dealing with very moderate increases through the end of the year,” predicts the Indianan.

The most pessimistic estimate, from the Kentucky contractor, was end of the year for price increases to level off. The best estimate was from the Colorado contractor who is “guardedly optimistic, from the few things I have read and heard, that we may see the escalating of prices leveling around June. A couple of months with no increase and then 10 percent increase. Which is a lot better than the 20 to 25 percent increases we have been seeing each month. Deliveries will remain unpredictable, however, and I haven’t had a good explanation for why this is and will continue to be the case. I may call up for 18-gauge and be told that they have all the 14-gauge I need but no 18-gauge. So the question then becomes, ‘Do we have to incur extra costs by ordering a heavier gauge in order to get it to the job right away?’”

While the higher prices and long lead times have resulted in avoidable hardship and lost profits, nobody reports subs going under or projects being shelved, but many subs expressed concern that they would be seeing these elements occurring if prices keep going up. One Arkansas company that provides construction workers for job sites around the country reports that “we have seen a considerable slowdown in construction. Only the projects that have to be done by deadline and are demanded by contract to be completed, are being done right now. New projects are not being picked up. The normal attitude in the industry has been ‘arrive on the job site today and the project has to be done tomorrow.’ We have always requested at least a 50-hour week for our guys to make it worthwhile for them to travel distances. Over the past four years, they have actually been working 60- to 70-hour weeks. Now, because the slowdown from steel, we are lucky if we can get 40 hours for them right now.”

As a Colorado supplier points out, U.S. steel manufacturers will sell their steel to the U.S. market once prices reach the same level manufacturers charge in China, but what happens if the Chinese are willing to pay more, or shortages prompt China to drive up the price? We are in for another rollercoaster ride. We are dealing with world economics now, not national economics.

If such further increases do look likely, then there is no reason whatsoever that the U.S. steel industry might want to consider giving sufficient notice to its customers, and drive the domestic costs up in a way that the construction industry can deal with. This way, it is only the project owners and ultimately, the consumers, who are being hit with a higher cost of living.

But there is another force waiting in the wings that may well be raising prices further. “Steel prices may level off in the second half of this year, as thought,” reports the Arizonan, “but I really don’t think so. I am more worried now about the rest of our building products rising in price as a result of rising fuel costs for production processes and transportation. Gypsum board, for instance, will be following steel’s lead and increasing prices dramatically after the first of the year.”

In a nutshell, steel yourself for the possibility of more of the same—but this time, you have been alerted, so let’s not see anyone’s pants down around their ankles!

About the Author

Steven Ferry is a free-lance writer based in Clearwater, Fla.

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