Steel Costs remain volatile due to the outbreak of the war in Ukraine and other macro-economic factors.
In this Market Update, we highlight some of the key factors impacting today’s steel prices and what to watch in the future.
The outlook for steel prices and supply & demand for 2022 and 2023 is highly uncertain. The expectation of a continued and stable recovery from the pandemic has been shaken by the war in Ukraine, rising inflation, supply chain challenges and geopolitical instability.
The geopolitical situation surrounding Ukraine poses significant long-term implications for the global steel industry. Among them are a possible readjustment in global trade flows, a shift in energy trade and its impact on energy transitions, and continued reconfiguration of global supply chains.
Domestic buyers placed orders for large quantities of imports in January and February. Import costs were favorable to domestic costs, but after the war in Ukraine broke out on February 24, import orders decreased significantly. Therefore, we expect to see lower import volume arriving in the summer and fall of 2022.
The global labour shortage is expected to challenge production and delivery costs for steel mills and fabricators throughout 2022 and 2023. The mills have also increased their offerings of spot purchases at discount prices in May. Historically, rapid changes in steel mill costs are often followed by a market correction. The market has a history of overreacting to changes in the supply and demand dynamics that drive steel costs, so price corrections are common, particularly in the US.
Spot prices for Galvalume have not decreased as much as other steel categories. Galvalume costs tend to be more volatile due to the smaller number of buyers and sellers in the market.
The TRQ for The UK went into effect on May 31. Five-hundred thousand tons imported from the UK will enter the US tariff-free, but all additional tons will be subject to a 25% tariff. The goal is to ensure strong domestic capacity utilization. Britain is a relatively small supplier of steel to the United States. The 500,000-ton quota for finished steel exceeds average UK shipments to the United States in 2018 and 2019 and is considerably smaller than the EU quota of 4.3 million tons and Japan’s quota of 1.25 million tons. The UK tariffs will also expire in 1 year.
Some suppliers offer AZ35 rather than AZ50 grade Galvalume. However, AZ35 does not meet the code requirements for metal roofing, and it does not meet the definition of Galvalume. Quality metal roof paint coatings are not designed to be applied to AZ35. AZ35 is significantly thinner than AZ50 and has no corrosion warranty. Using AZ35 substrate leaves the installers and manufacturers vulnerable to litigation when roofs leak and rust.
Trucking costs are at an all-time high due to a combination of inflation, driver shortages, and market demand. Overall freight rates excluding diesel fuel are up 34% from 2020 and 15% from 2021. In addition, the recent diesel volatility and the uptick in fuel prices have put extreme pressure on the transportation industry, causing prices to surge since March 2022. The current national average for diesel fuel is up 53% from January 2022, resulting in the highest fuel cost ever across the US. Freight demand remains strong across the US and will add further pricing pressure going into Q3 & Q4 of 2022.
The outbreak of the war in Ukraine on February 24 had an instant effect on steel prices and will most likely keep costs relatively high for the remainder of 2022. If the war was to end immediately, it would still take several months for market conditions to return to normal and an end to the war will not necessarily result in the removal of sanctions.
In this Market Update, we highlight some of the key factors impacting today’s steel prices and what to watch in the future.
Steel prices and supply and demand will continue to be volatile due to factors influenced by the war in Ukraine, interest rates, inflation, supply chain challenges, geopolitical instability, and transportation shortages.
The surge in global steel prices has eliminated the cost advantage that imports had over domestic steel.
The replacement of the Section 232 Tariffs gave import prices a significant advantage over domestic prices. However, the effect of the war in Ukraine has since had a major impact on the European market which offsets the cost advantage.
The war in Ukraine has had a significant impact on domestic steel production.
Conflict between Russia and Ukraine has resulted in cost increases for the raw materials used in steel production.
The following cost increases have been realized between February 24 and March 24:
Federal Reserve officials voted to lift interest rates a quarter point and signals more to come.
The Fed voted to lift interest rates and penciled in six more increases by year’s end, pointing to a consensus funds rate of 1.9% by year’s end. This act is the most aggressive pace in more than 15 years, in an escalating effort to slow inflation that is running at its highest levels in four decades. The Fed will raise its benchmark federal-funds rate by a quarter percentage point to a range between 0.25% and 0.5%, the first rate increase since 2018.
The implications of the war in Ukraine for the U.S. economy are highly uncertain but are likely to create additional upward pressure on inflation and weigh on economic activity.
Freight disruption has further delayed deliveries and lead times in the market.
Freight cost increases affect every partner in the value chain, ultimately impacting delivered costs. Like many other suppliers and service providers mills too are experiencing increases in energy costs, import freight cost, material transfers and other indirect costs.
The oil market has been extremely volatile. Oil was expected to increase to ~$300/barrel when the war broke out, but that no longer seems likely. Costs will remain elevated in 2022 because of low oil supply, the war, and a shortage of truck drivers. None of those factors are likely to be resolved in the short term, but we will be closely monitoring the situation.
The imbalance between supply and demand was without a doubt the main driver of the US steel price increases in 2021. With limited capacity—both planned and unplanned—the scales were firmly tipped in the mills’ favor. However, lead times, service center inventories and mill production capacity have recently returned to normal levels adding downward pressure on steel prices. There is broad uncertainty around what 2022 holds and whether those factors that fueled demand last year will continue.
In this Market Update, we highlight some of the key factors impacting steel prices today and what to watch in the future.
Demand for steel will be more fluid than supply due to variability in key macroeconomic factors such as interest rates, consumer sentiment and disposable income. These factors will be influenced by inflation, supply chain challenges, geopolitical instability, labour shortages, transportation and of course, COVID-19.
As of January 2022, the Section 232 Tariffs on steel imported from the EU were replaced by a Tariff Rate Quota system. Under the new system, the first 3.6M tons of steel imported from the EU will be exempt from any tariffs, but not all steel qualifies for the exemption.
Steel imports are at a six-year high, increasing now four months in a row. As tariffs are dropped and international supply puts pressure on domestic supply, we expect an impact on steel prices over the next several months.
Mills are facing high input costs in a declining price market, after posting record-breaking sales numbers in 2021. Because of the influx of imported steel mentioned above, there is uncertainty around capacity utilization and the potential that prices will adjust downward.
The commercial construction outlook for 2022 is positive despite facing the highest rate of inflation since 1982. In December, the PPI for inputs to nonresidential construction was up 23% year over year and generally prices continue to march higher. This includes prices for key building products like bar joist, clips, fasteners, as well as insulation and paint where supply constraints are still prevalent.
Labour shortages are now recognized as the biggest challenge businesses are facing, and it doesn’t seem to be going away anytime soon. The availability of labour to produce goods will directly impact production capacities, keeping prices high despite declines in raw material costs.
The American Trucking Associations (ATA) estimates the current driver shortage at 80,000 and believes it will double by 2030. The shortage stems from high driver turnover, an aging workforce and barriers around regulation. This, combined with already high shipping rates (up 14% year over year) and infrastructure challenges, are leading logistics companies to project double-digit growth in contract rates in 2022.
Based on the announcements made in January by Fed Chief Powell, money won’t come as cheaply as it did in 2021. The US government will attempt to reverse the spiking inflation rate, increasing rates for the first time since the pandemic started. While the specifics about execution were left undecided, the intent was clear: efforts will be taken to slow rising inflation and over time, prices should drop.
January ended with a Brent crude barrel close to $90 and some analysts forecast summer prices at $100 or more, the highest we’ve seen since 2014. The most notable contributing factors to the price hikes are low inventory levels and production combined with increasing energy demand as the worldwide economies reopen despite Omicron. Relief from OPEC and its cooperators is questionable, and if tensions at the Ukrainian border do not de-escalate, we could see major supply disruptions and even higher energy prices, impacting both inflation and discretionary spending.
Our Market Updates are brought to you by Cornerstone Building Brands subject matter experts and are curated for the purpose of creating awareness of economic factors that may potentially impact pricing, supply and demand affecting our customers. Any forward-looking statements are based on reasonable assumptions; these statements are not guarantees and undue reliance should not be placed on them. All views or opinions herein are solely those of the author(s) as of the date of this communication and are not to be relied upon as authoritative. Nothing in this communication should be considered to constitute investment, legal, accounting, or tax advice or other advice of any kind.
Become part of the powerful Star network. We invest in builders who understand the value of results and provide support that develops strong relationships between you and the entire Star team.
Your building is the cornerstone of the community where people live, work and play. Find a local Star Authorized Builder and let us help you bring your vision to life.