As originally published in Construction Executive’s Managing Your Business
In March, the price of steel in the United States hit record lows, bottoming out after several years of volatile declines. In fact, during the past three years alone, ProcurementIQ estimates the price of steel has dropped at an annualized rate of 7.1 percent.
Declining steel prices can be traced to China, the world’s top producer of steel. In the midst of rapid economic expansion during the past decade, Chinese producers churned out huge quantities of the metal. However, growth in the Chinese economy has recently slowed. Faced with a glut of steel and weak domestic demand, Chinese exporters have flooded international markets with low-priced steel.
The effects of easy access to cheap steel have reverberated across the U.S. construction sector, which accounts for 20 percent of steel product purchases. American steel producers have struggled to compete with the rash of imported steel from China, benefiting U.S. buyers. Namely, a variety of steel building materials and steel-based construction equipment have exhibited favorable pricing trends during the past three years as a result.
Although price trends have been favorable for contractors and construction firms, these trends and prices are expected to shift in 2017. Buyers of heavy equipment and steel construction materials should consider purchasing now to avoid higher prices.
Heavy Equipment and Steel Materials Prices in Decline
As the price of steel has declined, production costs for heavy construction equipment such as bulldozers, front-end loaders and excavators have dropped. In turn, ProcurementIQ estimates the prices of bulldozers, front-end loaders and excavators have decreased 5.7 percent, 5.7 percent and 0.5 percent, respectively, in 2016.
Additionally, buyers of steel-based construction materials have experienced favorable pricing trends during 2016. For example, sheet metal prices have fallen 0.2 percent this year, and the average price for industrial welded carbon steel pipes has decreased 5.2 percent.
Rebounding Price of Steel
Since steel’s low point in March, U.S. prices have more than tripled, reaching in excess of $300 per metric ton in September. This return to health has been fueled, in part, by trade cases brought by beleaguered U.S. steel producers negatively affected by Chinese imports. Stemming from these cases are import tariffs designed to protect American steel producers, with some duties as high as 266 percent.
Additionally, Chinese steel production has fallen and Chinese consumption is rising. Together, these factors have resulted in falling U.S. imports, allowing U.S. steel suppliers to raise their prices and generate profit. ProcurementIQ estimates the price of steel will rise at an average annual rate of 5.2 from 2016 to 2019, bringing to a close one of the most favorable periods for buyers of steel and steel products in recent history.
As the price of steel rises, production costs will follow suit. As a result, construction firms and contractors can expect prices for heavy equipment and steel-based construction materials to demonstrate price growth in 2017. Prices for bulldozers, front-end loaders and excavators are slated to rise 3.1 percent, 3.1 percent and 2.1 percent, respectively, in 2017. Faster rates of growth for these products will make for a more challenging purchasing environment for buyers.
Prices for steel-based construction materials also will return to growth. Sheet metal is expected to grow 3.4 percent and industrial welded carbon steel pipes are forecast to shift direction and begin to increase by 3.1 percent.
Preparing for Higher Prices
Prudent buyers of steel and steel-based products must consider how rising steel prices will affect their procurement expenditure and take measures to plan accordingly, including locking in prices now through long-term supply contracts, pursuing bundling discounts or reducing total costs of ownership. By locking in current prices for an extended period of time, contractors can prevent paying higher prices in the future and save valuable resources.
Additionally, construction firms may be able to reduce prices and achieve favorable negotiation outcomes by bundling multiple purchases together from a single supplier. With larger overall contracts, suppliers are usually more willing to reduce prices per item.
Finally, total ownership costs can be trimmed by investing early in safety and operation training, procuring energy-efficient machines, as well as avoiding crippling financing terms.