Steel Prices “Exploding” ABMA Hears

By Wagman, David

If the United States economy is in recession, then it’s an unusual one, said Thomas A. Danjczek, president of the Steel Manufacturers Association, speaking at the American Boiler Manufacturers Association summer meeting in San Diego last month. That’s because unlike other recessions, steel industry is not the first to see a downturn in economic activity. U.S. STEEL MARKET PROJECTIONS (MILLION TONS)

Instead, the industry remains highly profitable and is operating at around 90 percent of its annual production capacity of about 110 million tons. What’s more, the U.S. steel industry is currently one of the world’s lowest-cost producers, a function of readily available metallics and transportation. Efficiency improvements in recent decades have “de-engineered labor out of the equation” meaning that labor costs are lower than they were 30 years ago. In the 1970s, for example, production required 12 man-hours per ton of steel. In 2008, the requirement is less than two man-hours per ton.

But recent price explosions for steel and other commodities threaten to make heavy construction all but unaffordable in the United States, said Fred Lyon, an attorney who quoted Ken Simonson, chief economist for the Associated General Contractors for America. Steel is a major component in power plants, used for everything from boilers to structures.

Danjczek said his organization’s biggest potential threat is the loss of its customer base, in particular what he said were labor- intensive items made of steel. Since last year, prices for key raw materials have soared. Using 2007 as a base of 100, he said that iron ore this year is now at around 175; coking coal is around 300; and scrap steel (heavily used by his members) is around 250.

“Higher raw material prices have placed substantial cost pressures on NAFTA (North American) steel producers,” he said.

Lyon said the risk of rapidly rising raw material prices should be passed on to steel customers, who are “ideally suited” to pass the cost on to end-users.

“This is a bitter pill for end users,” he said, but sustained consumer demand means goods simply will cost more.

“We should ask no one above the end user to absorb the cost,” he said.

Inflation may soon be a problem if the price pressures continue, Danjczek said. “My surprise is that (the United States) is only running at a 2 percent inflation rate.”-David Wagman

Copyright PennWell Corporation Jul 2008

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