The truth about steel prices
Steel, obviously, is a crucial component of material handling equipment, and unprecedented inflation in the price of steel has manufacturers, distributors and end-users up in arms. Price increases that are normally on the order of a percentage point or two have been greater than 100 percent in some cases this year.
Reasons for the increase in steel prices have been well-documented:
- Higher raw material costs. The three main raw materials used to make steel—iron ore, coal and scrap—all cost more than normal. Spot prices for iron ore rose from $80 per ton to over $200 per ton early in 2008. Global demand for coal pushed up prices from around $200 per ton to $520 per ton. Some scrap bundles are trading nearly twice as high as they did in 2007. Additional costs include alloying elements, fluxes, energy and transportation, each of which costs considerably more in 2008.
- Foreign influences. The Chinese steel industry is the largest producer of steel products, now producing nearly three times the volume of the United States. Also, Middle Eastern countries and other developing nations, including India and Brazil, are increasing their demand for steel products.
- Market consolidation. Over the past five years, steel producer consolidation around the world has reduced the number of producers that offer prices and availability to the general market.
- Decreased imports. U.S. steel imports dropped dramatically in 2008. According to American Metal Market, the United States consumes approximately seven million tons of steel long products (bar, rebar, wire rod, etc.) each year. In past years, as many as four million tons have been supplied by offshore producers. In 2008, these same producers are supporting less than 50 percent of that amount.
First, the Bad News
Obviously, for material handling suppliers, these trends are troublesome. Timothy Selhorst, president of J&L Wire Cloth, says, “When we did our business plans at the beginning of the year, we didn’t account for that type of inflationary pressure. That obviously puts pressure on earnings. You can’t cut that kind of cost out of your operation, and it creates a lot of uncertainty.”
Craig Chamberlin, CEO of AWP Industries, concurs. “The uncertainty of steel prices makes it more difficult for the end-user to justify their equipment investment,” he says. What can be done? Not much, according to Chamberlin. “There is no one buyer in the material handling industry that can have any impact causing the steel industry to slow down and not raise its prices. None of us is large enough,” he explains. “The steel increases are just a fact of life. We can’t manage them away. That leaves but one choice, and that is to do our best to offset the higher prices with marketing efforts and productivities where we can find them.”
A Reason for Optimism
Easier said than done, of course, but that seems to be the consensus. Many manufacturers have made a point of making personal visits to their supply base to keep tabs on the situation. Selhorst says J&L Wire Cloth uses about 150,000 tons of steel per year, mostly wire rod, and has seen increases on the order of 80 percent to 90 percent over 2007. That prompted him to visit his supplier to make sure there was enough steel to keep operations running. “Paying a lot for the product is one thing, but not having it at all is entirely different. That’s when you send people home, and that’s not good,” says Selhorst.
The good news for the material handling industry, according to Selhorst, is that the pace of inflation appears to be slowing down. “We saw unbelievable increases through the spring and early summer, but the pace of those increases has subsided,” he says. “I don’t know that we’ll see any return to where the pricing had been a year ago, but the upward pressure on pricing is diminishing.”
Education of end-users is the best way to handle the situation, says Selhorst, who passed out a flyer about the situation during MHEDA’s Convention. “We’re attempting to get a level of understanding in the marketplace. The more people understand, the better off we all are.”