Steel Prices Surge,
Causing Problems
For Manufacturers

Companies Stockpile Goods
To Head Off Volatile Market;
Weak Dollar Partly to Blame

By PAUL GLADER
Staff Reporter of THE WALL STREET JOURNAL

Monday, February 23, 2004
 

U.S. steel prices have jumped at least 30% in less than two months and continue to rise with such frequency that suppliers can't predict them from week to week, causing buyers to stockpile supplies, scrounge for less-expensive alternatives and look for other ways to offset rising costs.

The increase, which comes amid rising prices for many other raw materials, is causing havoc for distributors, buyers and contractors down the supply chain. It comes at a delicate time for those who buy and bend steel, from appliance makers to toolmakers to commercial construction companies, whose businesses were just beginning to pickup. With the economic recovery still uneven, many steel users find they must absorb the costs because their customers refuse to accept higher prices.

Steel customers didn't expect this outcome when they successfully lobbied President Bush last year to drop tariffs on imported steel. Economists and industry experts point to a weakened dollar, which makes foreign products more expensive and has helped keep imports at bay, and consolidation among U.S. steelmakers. Other factors boosting prices in both the U.S. and many global steel markets include increased demand for steel and its raw materials, largely owing to China's booming growth.

Economists say that, broadly speaking, rising steel prices alone won't derail budding economic growth. But they affect manufacturers still struggling to emerge from the sector's three-year slump.

Some companies are stocking up in anticipation of even higher prices. "I bought a tractor trailer full of nails because I was afraid I would be paying more next month," said Bob MacDaniels, president of Oncore Construction LLC, a concrete contractor in Bladensburg, Md. During the past year, his cost of steel nails rose to $25 a box from $12. Prices also have nearly doubled for other materials, such as wire mesh and reinforcing bar, or rebar, used to support concrete. Rebar now costs Mr. MacDaniels $800 a ton, compared with $425 a year ago.

[Steel Surge]

Last month Mr. MacDaniels won a $7 million bid to lay the concrete framework for a 12-story downtown Washington office building. His steel supplier informed him that his steel costs, which were $1.72 million in his bid, will rise $30,000. "I have a fixed cost with my customers. I can't pass costs onto them," he said, which means tighter margins for his 300-employee company.

Prices have risen across most steel-product lines. The spot-market price of hot-rolled steel -- an industry benchmark -- runs about $500 with surcharges included, up 30% to 50% from a month ago, according to various steel buyers. And the prices are escalating. Nucor Corp., of Charlotte, N.C., increased its surcharge on sheet steel for March 1 to $100, up 67% from the $60-a-ton surcharge announced for February. In Europe, analyst Peter Fish of MEPS Ltd., a British steel-market-consulting firm, predicts prices will be at an eight-year high during March. Other analysts expect prices to keep rising before moderating over the next few months.

One reason for the higher prices is a shortage of raw materials, as steel-hungry China consumes more world supply. Weirton Steel Corp., whose assets will be acquired out of U.S. bankruptcy-court protection by International Steel Group Inc., idled a blast furnace last month because of a shortage of coke, the processed coal used to make steel. A group of steel consumers and producers is considering petitioning the federal government to limit exports of steel scrap, which is used as a raw material to make new steel products.

Many larger companies buy steel directly from steelmakers at prices set by long-term contracts, but the mills in recent months have added surcharges that they say reflect rising raw-materials and transportation costs. Appliance maker Maytag Corp. said last month it expects to offset rising steel costs in part with savings from a new contract with unionized employees. General Motors Corp. has resisted paying the surcharges. "It's pretty clear from our end that we have agreements with these companies. When the agreements were signed, everybody knew what the price would be," said GM spokesman Tom Wickham.

Toyota Motor Corp., the Japanese auto maker, said the rise in steel prices since 2002 has raised its cost to produce a vehicle in North America on average by more than $100. Daniel Sieger, a Toyota spokesman in Erlanger, Ky., said the company has set up teams of engineers at its plants to "figure out ways to effectively and efficiently use the steel we buy," including efforts to reduce the amount of steel scrap and consider alternative materials to produce vehicles.

Small and medium-size companies are more vulnerable to price increases. Letters from steel providers listing new prices continue to pile up on the desk of Nels Leutwiler, chief executive of Parkview Metal Products based in Chicago. Many service centers, which buy steel from steelmakers and sell it to customers, aren't committing to one-year contracts because prices are rising too rapidly. "We are scrounging near and far, looking for steel," says Mr. Leutwiler, whose staff has to call more centers to locate the types of steel the company needs. He plans to tell his customers parts he builds will be repriced to reflect steel prices at delivery, instead of at the initial order.

Mr. Leutwiler, who is chairman of the 1,200-member Precision Metalforming Association, said member companies managed to survive the recession, but "this sudden run-up in steel prices will be the last straw for many of them." Mr. Leutwiler said he already has cut back employment at one of his Chicago facilities, bringing the company's total employment to 420, down from 500 a year ago, partly because of price increases.

The commercial building industry also feels the pinch. "It is impossible for the fence contractor to estimate the cost of his materials because the entire industry is in a state of turmoil and panic," says Don Crawford, president and chief executive of steel distributor Orlando Steel Enterprises Inc. and owner of a Florida-based fence contracting company.

Mr. Crawford says he will have to pay 30% more for steel this year, with price increases and surcharges combined, and absorb $450,000 in extra costs on $7 million of fence contracts. Past tactics, such as threats of switching to a new vendor for a more-competitive price, have flopped, he says. Steel companies and service centers have "been real clear," he says. "They are saying: 'This is the price. Take it or leave it.' "

So, Mr. Crawford has started asking customers to pay more money than the contracts specified, an idea that only a few government customers have been receptive to. On new bid proposals, he has disclaimers that prices are good for only seven days.

Washington-based Danaher Corp. is feeling the crunch in its division that makes ratchets, wrenches and socket sets for the Sears Craftsman brand. Steven Babcock, who directs metal supplies for Danaher, said proposed surcharges would increase the company's steel costs on 50,000 tons by seven figures this year. He buys steel on long-term contracts and at this point is telling the steel-makers his company isn't paying surcharges.

"We are resisting as best we can but I think a day of reckoning is coming," he said. His greatest concern is that his customers will begin outsourcing hand tools overseas. "We don't want to give Sears Craftsman a reason to take off their 'Made in the USA' label."

--Norihiko Shirouzu contributed to this article.