Steel Yourself For Price Increases

Unprecedented increases in steel costs have been rocking all segments of construction this year. HVAC contractors are among the most vulnerable because steel makes up a high percentage of their cost of materials and equipment.

A variety of factors have contributed to the increases. Robust economic growth in the U.S. (inflation-adjusted gross domestic product grew at a 6% rate in the second half of 2003, the best half-year rate since 1984) China, and other countries has pushed up demand for steel worldwide. The fall in the value of the dollar has made the U.S. a cheaper place for foreigners to shop while making imported steel more expensive. Meanwhile, the slack markets of the past three years drove many steel mills out of business.

Steel can be made either from scrap or iron ore, limestone, and metallurgical coal. Unfortunately, the Pinnacle mine in West Virginia, the leading supplier of “met” coal, had a disastrous fire last year that put it out of commission for a year or more. China has been buying all the steel scrap it can find ships for, forcing mini-mills to pay ever-higher prices for their raw materials.

The mills, in turn, have been passing these increases along to fabricators and final users in the form of “scrap surcharges,” even on existing “firm” contracts. With inventories so low that suppliers won’t even guarantee delivery dates or quantities for their next orders, they know contractors and equipment manufacturers are in no position to shop elsewhere for shipments they need immediately.

Some industry analysts believe the run-up in scrap prices is about to ease. But nobody is predicting yet how long the fabricated products will remain in short supply. And the increase in world economic activity, along with the sunken value of the dollar, strongly suggest prices will not retreat to 2003 levels for a long time.

Kenneth Simonson is the chief economist of the Associated General Contractors of America (AGC), Alexandria, VA.He can be reached at 703/837-5313 or [email protected].

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