Steel is an essential part of commercial construction, and stability or volatility in pricing can have an outsized effect on the construction industry as a whole. In the aftermath of the COVID-19 pandemic, we are currently seeing mostly encouraging signs for our sector regarding the steel market.
During the pandemic, the construction industry as a whole was upended just like every other area of our society. When one employee on a job site tested positive for COVID, the entire project was shut down for at least 30 days, and sometimes for 60 days or more. Everything seemed to grind to a halt.
Post-pandemic, conditions have improved and projects are getting built. According to the most recent report from the American Iron and Steel Institute, an industry trade group, August’s steel shipments were unchanged from July. As for year-to-date figures, shipments are down 2.1 percent from the same period in 2021. This is good news.
This year, of course, rising interest rates have caused a lot of concern that they would hamper the construction sector, causing buyers and developers to stall on projects. Historically, that’s been the case. So far, however, it seems that there is still strong demand to get projects built, with owners and developers locking in their money now before rates rise further.
Pricing Is Stable—So Far
As for steel pricing, we’re seeing stability, which is welcome. The mills are notorious for grabbing every scrap of extra profit that they can, pushing the prices up to the point where projects either get cancelled or don’t move forward. That makes it challenging for our clients, typically steel erectors and construction companies, to bid projects with confidence, and leads to owners asking constructors for risk mitigation if steel prices rise.
We naturally want to make the most of the current positive market trends, as we know the steel industry tends to work in 10-year cycles. Around three years ago we saw the low point, or “rock bottom” of that cycle, and no steel was moving. The mills had taken advantage of strong demand, raised prices, and saw potential customers pause. Demand stalled, and that led the mills to cut back production to deal with crashing prices—some of the lowest we’d seen in 20 years. At that time, China announced that they were ramping up production, further flooding the market with steel when demand was weak. They were ultimately charged with dumping, as was India, and hit with tariffs. This is a global market and U.S. demand only moves the needle so much.
Apart from China and India dumping steel in the U.S. market, steel pricing is based strictly on supply and demand. Another supply-side indicator is scrap prices. As we head into winter, scrap in the Midwest will be going offline due to weather conditions. We can’t get scrap out of the yards when it’s a frozen mess, and we can’t ship on the Great Lakes in the winter, so the raw ore doesn’t move either. Therefore, we expect to see prices go up a small amount due to this supply constraint. Then during the winter, when some steel-construction tasks go offline due to weather, we see the price drop a small amount, before rebounding with demand in the spring.
People in the steel industry, builders and industry professionals, always check the Friday announcement from one of the major steel companies, Nucor Yamato. This company has huge power and always releases their pricing on Friday night. We always check to see if there’s a price adjustment that will affect current and potential projects. The smaller mills, also, nearly always follow Nucor’s lead in their pricing.
One interesting twist of the last couple years is the influence of Amazon and Walmart on the steel industry.
The Impact of Amazon and Walmart
At this point, supplies appear to be sufficient to meet demand. One interesting twist of the last couple years is the influence of Amazon and Walmart on the steel industry. Amazon, in particular, has been so active in buying and building its warehouse and distribution facilities that it affected all parts of the market for industrial space. That includes refurbishing existing space as well as building new facilities, both of which require steel.
This article gives you more of the story, but here are the relevant details:
“One national steel producer has reported that orders for construction projects related to Amazon in 2021 comprises effectively 33% of their national capacity and has increased lead times to a 20-year high.
National industrial contractor, ARCO Design Build Industrial, has issued guidance to their customers to expect additional cost increases for joist, girder and deck material. It is estimated that these increases alone will equate to an additional $1.30 per square foot in overall construction costs and it is likely that additional price increases will be coming.”
Clearly Amazon buying 33 percent of the output of one producer had a huge effect on the market as a whole. And that’s just one steel company. We’ve heard about both Amazon and Walmart meeting with the steel companies and asking if those companies would be able to keep up with the demand for their projects. We’ve been told that both received assurances that their demand would be met, and that certainly seems to be the case.
During the pandemic, both Amazon and Walmart saw their business do quite well, to say the least, but now we see indications that Amazon is pulling back:
“The company now is working to cut back on its warehouse expenditures after overbuilding, after Amazon spent approximately $18bn on fulfillment center warehouses in the 12 months leading to 31 March.”
What’s Next
We would expect that development to have an impact on the steel market, but as the August numbers show, it hasn’t so far. We know, historically that we’ll see some seasonal price fluctuation, as I mentioned above, but so far, indicators look good and I hope we continue on this steady track.
