Steel Crisis

Increased Prices Drive Up Construction Costs

By Debra Wood

While contractors expect fluctuations in material costs, a steep increase in steel prices caught the industry by surprise and has affected all aspects of the business.

"It's been a perfect storm situation, with a slow economy trying to pick up," said John Howard, vice president of Allstate Steel Co. of Jacksonville, Fla. "The scrap price is sky high because China has been gobbling it up. But eight to 10 factors have come together to affect it so quickly."

China is buying huge quantities of scrap to feed its booming growth. It has purchased scrap at prices not justifiable to other processors and is consuming 30 percent or more of the world scrap supply. Mills use scrap to make about 30 percent of U.S. steel. About 41.5 percent of all steel produced goes to the construction industry.

"Scrap metal has gone from roughly $125 a ton to $300 a ton," said Glenn Sherrill, president of SteelFab's Georgia division in Atlanta. "China is emerging as a first-world economy, building power plants, roads, dams and office buildings. China is the largest producer of steel in the world, and they don't have enough scrap metal to feed their steel mills."

Other factors are also affecting prices. Coke, the raw material for making steel, has been in short supply, and fuel prices keep rising, increasing shipping costs.

The price problem has affected all steel products, including structural steel, metal studs, decking, rebar and ductwork. Bars and columns have gone up $200 a ton and structural plate $400 a ton, Sherrill said. Metal studs have increased 60 percent to 90 percent, said Dan Shaw, president and CEO of ABC-Florida East Coast Chapter in Coconut Creek.

The rising prices have affected fabricators, general contractors and owners as each segment of the industry tries to pass the charge up the chain. Many firms have lump-sum contracts without escalation clauses, but that hasn't stopped steel mills from placing a surcharge on steel delivered to fabricators.

"Our margins are still very slim due to our coming out of a recession, especially for office buildings," said Sherrill, adding that fabricators cannot absorb the extra cost.

One large Kansas fabricator has filed for bankruptcy, and about eight have closed, said Sherrill, who expects more will follow by year-end. In addition to the pure cost increase, the prices are stretching companies' lines of credit.

"It's a pretty serious situation in the fabrication industry," Sherrill said. "I think by year-end, you'll see 20 percent to 25 percent of the steel fabricator market gone, out of business or Chapter 11. At SteelFab, we'll be fine, but it is stressing our limits. We've been in business since 1955 and have maintained a profit even in economic downturns. Smaller fabricators and fabricators with just one division to depend on, I don't know how they are handling it."

Fabricators are trying to negotiate with general contractors to assume some of the cost, but Sherrill said most are refusing. He also tries to include an escalation clause in new contracts.

"The general contractor says, 'take the job with no escalation or we'll go somewhere else.' Usually we take the job," Sherrill said.

Howard said some deck suppliers are holding off on shipping unless the general contractor agrees to pay the increase. That leaves the contractor free to shop for a better price, but with everyone in the same situation, better deals are hard to find.

"Nine times out of 10, they are better off [with the original subcontractor] because that guy has detailed it and knows the job," said Howard, adding that the steel price increase is not something fabricators created. "It's out of our control. We are crunched in the middle."

On a similar note, general contractors have been placed in the same bind. Some owners do not want to pay more once they have agreed on a price.

"We're trying to cover our risk with escalation clauses, but at the same time we're trying not to scare owners off," said Stacy Wyatt, purchasing agent for Turner Construction in Atlanta. "We'd like the work but also have to manage the risk."

Bovis Lend Lease of Orlando and Atlanta has experienced better luck with its owners. It has made a conscious effort to keep owners informed about the situation and has added steel costs as a separate line item on early estimates.

"We had one project that experienced a 2 percent to 3 percent increase in the total project cost," said Chris Moeller, director of technical services for Bovis. "Most of our owners are health care and those owners are going to go ahead with what they've got and take the lumps and go forward. Owners that operate differently are developers, developing for a profit."

A 2 percent increase may not work with a developer's pro forma, forcing cutbacks in other areas or shelving the project until prices stabilize. Sherrill said commercial spec jobs, without committed tenants, have already been put on hold.

Wyatt said he was not aware of any Turner jobs that have been canceled by owners due to the prices, nor have any Bovis projects been withdrawn.

Shaw, the president of ABC-Florida East Coast Chapter, worries that escalation clauses may scare owners into backing away from projects still in the early stages.

"We're afraid it will affect developers," he said. "If it lasts six to nine months, which hopefully won't happen, we'll start to see people put projects on the shelf."

The outlook for lower prices may come as early as the end of the second quarter or the end of the year. But no one knows for sure. Sherrill said it will take some time for mills to find a substitute for scrap. He said it's more likely that China's demand will curb.

Organizations such as ABC, AGC and the American Road & Transportation Builders Association are working with federal and state officials to obtain some relief, including emergency escalator provisions for federal highway jobs. But not everyone is optimistic the government will step in to solve the overall problem.

"I don't expect Congress or the president to react," Shaw said. "They prefer to see the free market correct itself."