ISS: Why are steel prices so high?
Cook: Steel prices are going up because of political consideration as impressed upon the Bush Administration by domestic steel-production manufacturers. For a number of reasons, steel manufacturers find themselves in a decline in a noncompetitive circumstance with offshore, modern, steel-production facilities. Domestic steel producers went to the Bush Administration and it employed import tariffs on foreign steel. It does that in two ways. The first is by increasing the tariff rate for the ton of steel that's being brought in. The second is to limit the supply of steel to tighten the ability for a foreign steel producer to dump. What has occurred almost overnight is steel prices are inflated, not to do with production costs, but more to self-imposed supply and tariff rates.
Dickinson: When President Bush imposed tariffs on steel products used in our industry, his reasoning was to level the playing field between steel supplied offshore vs. steel supplied by our domestic mills. Since almost all of the fully integrated domestic mills are having financial difficulty, this was a way to allow the domestic mills to raise their prices and hopefully restore some profitability. Unfortunately, the domestic mills' problems are tied to several areas like legacy issues, union issues and technology issues. I do not believe these tariffs alone are enough to "save the day."
Dodge: The price of steel has increased because the current administration has imposed tariffs on import steel. This allows U.S. steel producers to increase prices so they don't get run out of business and are forced to shut down their mills due to inefficiencies and poor management. There is also speculation that the steel industry can't fund its retirement programs any further since it tapped those out years ago and now needs to repay them.
Owens: Basically, there are 32 domestic steel mills in some type of bankruptcy right now. The steel mills went to Congress and said, "We need help." Part of the underlying problem is they need to be more competitive. The government tried to give the industry breathing space from import competition. After 30 years of nonstop protection, it's finally catching up with our steel mills.
Wright: President Bush imposed a 30 percent tariff on all slab steel. The reason being steel prices were at a 20-year low, and more than 30 U.S. steel mills have filed for bankruptcy in the last four years. In many people's opinions, the U.S. steel companies have tried to take advantage of the tariff by raising their costs.
ISS: How has this affected your company?
Cook: Every design-build company in the self-storage industry is affected. The question is, where does it end? Because there is really nothing to predict that. The biggest concern we have in our company is the developers' willingness to shoulder the costs and still make their project feasible. What we're doing, as others are, is predicting and backlogging steel. We're concerned about supply and shortages. But if you plan and backlog your steel, supply really shouldn't be an issue. It's not going to be a problem to go out and buy a building. And through this calendar year, those building costs are fairly fixed and predictable.
Dickinson: The "rapid fire" increases we have received from the mills (about every 45 to 60 days) do not give the manufacturer, contractor or owner enough time to turn a project around without incurring additional costs. It can take a contractor four to six months to contract, engineer, detail, assist with permits, order material and build the project. It is not inconceivable that one or two increases might have to be absorbed before the project is finished. This makes everyone extremely nervous and could force projects to be put on hold until steel prices stabilize.
Dodge: It has affected us to the point where we have little control over our product costs right now, and can't give our customers solid answers because we can't get any ourselves. We can only speculate what it will do and then hope we are right. This situation does not just affect the steel buildings of a project, but also the hallways, doors, electrical, masonry and concrete costs as well because of the steel products used in these parts of the construction of self-storage. This is a serious issue. This could also be a deal-breaker for some projects.
Owens: It hits our profit margin. A lot of times you try to split it, but it's gone up so much, you can't do it because it will eat up all your profit margin and then some. Another problem is, for people who want proposals right now, we're trying to figure out how we can alert them so they can plan for increases. We're putting in four prices per quote. We're trying to forecast increases so they can plan. You're in a business where eight- to 10-week lead times are not unusual. And there could be a price increase in that time.
Wright: It has not yet really affected my business. I'm constantly working with my suppliers to make certain I'm buying at the best available price. I've seen two price increases since March 20. My suppliers tell me they are concerned the steel we use for our storage projects is getting tougher for them to source. If that truly is the case, it can potentially have a tremendous affect on my business. Currently, in this extremely busy market, we are still meeting all delivery schedules.
ISS: What, if anything, can people in the industry do about the increase in costs?
Cook: As an industry, we should use the Self Storage Association's lobbying group to be a watchdog and a counterpoint to the Bush Administration. There's a limit to how much we're going to be able to take before development stops. It's appropriate for the Self Storage Association to come out and take a position. And it's appropriate for individual builders, designers and clients to take a position primarily with their local representation. I encourage everyone affected by this-and everyone in our industry is--to lobby their local representation.
Dickinson: Since we are pretty much being dictated to by the domestic mills, there isn't a whole lot we can do except wait it out. My fear is projects will be put on hold or alternate methods of construction will be considered, which, of course, hurts us as a manufacturer of steel products. I do believe the health of the domestic steel mills is important to our country from an economic and long-term national security standpoint.
Dodge: Right now, the best advice is to assume the worse--expect higher pricing. Consult with your construction team and get your costs locked in as early as possible. Keep your communication lines open, and discuss frequently what is going on with your project so you don't get any unwanted surprises.
Owens: I wouldn't wait. The prices are not going to get any better for a little while. All we can do is try to tell people what we think it's going to cost in the next six months. The price increases are not absorbable. As a metal-building company, you can't absorb the price.
Wright: I don't really see much that we can do. My attitude is to continue to keep a close watch on the tariff. The Bush Administration just assumed people could eat these increases. That certainly has not been the case. As prices rise, supply is reduced. The administration's intent was to curb imports without ruffling domestic steel users. That has not happened.