Why Construction Steel Prices Have Skyrocketed

Structural steel prices have risen 91% since Q4 2020. Today I am going to share four contributing factors behind the unprecedented price increases.

Even as the U.S. steel industry aims to keep tariffs in place, the construction industry suffers an ongoing struggle as rising materials prices, and steel, in particular, eat away at profit margins and slow or stop some projects due to out-of-control construction costs. And it looks as though relief is unpropitious to come in any form promptly. 

Many top economists think the industry is on the edge of the precipice, with a drastic rise in demand as the U.S. market opens considerably and continues to drive up material costs.

Steel has seen unusually dramatic raises over the past year, with price growth expected to continue for the foreseeable future. According to the Q2 2021 update from Gordian's Construction Cost Database, structural steel price has risen 91% since the fourth quarter of 2020 and is up 45% in the past quarter alone. A poll conducted by S&P Global Platts of 91 participators in its Steel Markets North America (SMNA) virtual conference showed more than half expect the U.S. finished steel rates to remain at their current highs or rise considerably in the coming six months. 

Of the 44% who expect to see domestic finished steel prices increase, 22% expect prices to rise by more than 10%. According to Gordian, the structural steel price has risen 91% since the fourth quarter of 2020. Gordian's Construction Cost Database

Four Contributing Factors

Gordian routinely collects, validates, and analyzes North American construction material prices to maintain RSMeans data, its construction costs database. Its data team has identified four contributing factors for the unprecedented price hikes in steel: 

1. Steel Fabrication Costs: Fabrication costs are largely influenced by wage rates and the energy required to shape, cut, drill, and weld. While some steel used in the U.S. is manufactured overseas, most of it is made domestically. This indicates that fabrication wages for most domestic steel products will follow the rise and fall of the national working wage rate, which is increasing. And while green technology is starting to reduce energy costs for many businesses, steel fabrication facilities command an extraordinary amount of power to operate.
2. Installation Labor: Installation expenses, like fabrication costs, are directly joined to wages, and domestic wage rates are projected to extend their hike upward. The current employment levels in the U.S. have also produced a shortage of available labor. This means that businesses are paying extra to secure and keep workers on staff. Areas more influenced by the labor shortage will likely see a correlating increase in installation costs.
3. Transportation Costs and Tariffs: Over its life, steel is moved from the mill to the fabricator then on to the job site. Every mile the material moves will add more to its price. In addition to driver fees, transportation costs – including fuel, machinery maintenance, and insurance coverage – tend to rise year over year. The providers will unavoidably pass those costs along to the end-user in the form of material price increases. Import taxes and duties, which include tariffs, also factor into transportation costs. The U.S. is currently carrying 25% tariffs on steel imports against numerous nations.
4. Supply and Demand: The pandemic impacts industrial corporations and factories hard, especially those that depend on workers whose jobs cannot be carried out remotely. The effect of public health requirements and COVID-19 outbreaks was a pause or delay in production and thousands of jobs lost. Through the worst of the pandemic, the U.S. saw thousands of iron and steel production jobs disappear nationwide. With businesses starting to ramp up operations, there is a nationwide clamor for commodities such as aluminum, drywall, and wood. The high-demand nature of the pandemic recovery has emptied stressed supply chains and increased costs at a rate we have not seen in modern years.

While some believe that steel demand, and prices, will taper in the upcoming months as more production comes online, others see no clear end in sight as domestic suppliers stumble in restoring capacities. Imported suppliers take a dual hit from tariffs and jump in ocean freight costs. In a recent economic webinar hosted by the National Fluid Power Association (NFPA), James Meil, ACT Research, foretold year-end 2022 as a possibility for starting to see demand settle and supplies catching up, with a corresponding decrease in steel prices.

But should enhanced infrastructure funding legislation come to be passed, prospects for ease in pricing could be pushed out even further into the future and add to the question of how high rates could go if the resulting steel demand can't be met in a timely and cost-effective manner?