Shortages of everything from steel and lumber to tanker truck drivers and computer chips are afflicting the United States as the domestic economy reopens. In the cases of steel and lumber, rebounds in demand since mid-2020 have caught both industries off guard.
In May 2021, the price of US benchmark hot-rolled coil steel hit an unprecedented high of $1,519 per ton, up from a low of $447 per ton in 2020.
Demand for steel is on fire as the economy reopens and vaccination efforts are in full swing. It is demand for steel, rather than tariffs, that has been underpinning soaring steel prices in 2021, says Cleveland-Cliffs CEO, Lourenco Goncalves. Cleveland-Cliffs is the biggest flat-rolled steel company and the largest iron ore pellet manufacturer in North America. As a domestic producer, Goncalves has a lot to gain if the Biden administration upholds tariffs on steel coming from China despite shortages.
The Coalition of American Metal Manufacturers and Users has requested that President Biden eliminate these metal tariffs. The coalition argues that if the US government chooses to roll back tariffs, it could eliminate supply limitations to some degree and cause a reduction in steel prices. It is unclear, however, whether new environmental regulations in China will curb China’s steel supply. The country has committed to limiting crude steel production in 2021 to cut emissions. According to Goncalves, investing in US production of steel through Biden’s infrastructure bill is the most effective way to remedy steel shortages.
Random-length lumber futures reached a high of $1,711 per 1,000 board feet (MBF) in May 2021, up from a low of about $252 per MBF in April 2020. Lumber prices have increased by a factor of nearly seven in just over a year.
Sawmills halted lumber production at the onset of the pandemic last spring to prepare for a residential real estate slump. That slump never manifested and now there simply is not adequate lumber to sustain the frenzied housing market. An uptick in existing home renovations and enlargements is also elevating demand for lumber. The origins of this lumber shortage can be traced back to the bursting of the housing bubble in 2008, which resulted in a large number of sawmills going out of business. At the onset of the coronavirus pandemic, sawmills reduced output as they dealt with restrictive health regulations and the possibility of another downturn. When purchases of homes skyrocketed later in 2020, sawmills were unable to adequately reopen capacity. In addition to the low number of sawmills, tariffs on lumber from Canada, a low number of truck drivers to transport lumber and a particularly severe winter in the southern United States restricted production.
The lumber shortage is obstructing construction of new homes, impeding renovations and causing dismay for buyers as they discover sky-high housing prices. According to the National Association of Home Builders, rising lumber prices have boosted the average cost of a newly-built single-family house by nearly $36,000. Builders are passing down these additional costs to consumers. In March 2021, the median selling price of existing homes increased by 17.2% to reach the highest price recorded since 1999, when the National Association of Realtors started recording prices. The lumber shortage and price increases are so severe that home builders are reporting that lumber is being stolen from their work sites.
The US steel production capacity that was idled in the pandemic has since been restored, so some analysts believe that the shortage will resolve and steel prices will correct themselves shortly. However, steel demand could be elevated by a long-lasting economic boom, keeping prices high and necessitating either greater domestic capacity or greater import penetration. When it comes to lumber, industry leaders are anticipating market corrections in the next year and a half as sawmill capacity increases.
The rising costs of steel and lumber are creating winners and losers. As the United States looks to fortify infrastructure, it will likely discover that its budget affords the country far less than it did a year ago. Railways, electricity grids and buildings, which are all on the list for Biden’s infrastructure bill, are going to require a lot of raw materials, including steel and lumber. Many believe that current prices are unsustainable, and they’re waiting to see what is going to give.
By: Remi Nathanson
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