Transcript

Lexi: Hello, and welcome to another episode of Metal Minutes by Cornerstone Building Brands. My name is Lexi and I will be your host. Today with me, I have Heather Gillbanks. She is the director of customer experience here at Cornerstone Building Brands.

Lexi: Hi Heather.

Heather: Hi, thanks for having me.

Lexi: Yeah, of course. So today is a topic that I think we are all feeling very strongly. Today we’re going to be talking about the all-time high steel prices and some of the forces at play behind that.

Heather: Yeah. You know, it’s just crazy how high that peak has gotten and they genuinely are all time high. Even when you adjust for inflation, going back to World War II. It’s like chart topping, right? When you look at what that’s doing, it’s really creating disruptive waves throughout, not just our industry, but obviously ours… a lot of others are impacted as well in automobiles and other things. The steel market update folks, a couple of weeks ago, sent out a note saying that hot rolled steel, so for those who might not know, there’re different ways that steel is sold, you can roll it up in a hot roll or a cold or galvanized, there’re different ones. So one of the benchmarks that we use as the hot rolled steel. That hit $1,500 per ton for the first time ever. And it shows no sign of stopping. They sent out a note this week that said; “hot rolled steel prices have been on the rise for 40 weeks in a row. They actually hit 1570 recently.” And then they kind of jokingly said, “at least until next week when they’ll probably set another new record.”

Lexi: So it’s probably safe to say by the time this podcast gets published and makes it out to the public, it might have already risen from the time that we’re recording now to the time that the listeners are actually listening. Correct?

Heather: Yeah, the way things are going, it’s almost certainly going to go up. They’ve been tracking prices since the nineties and they’ve never been this high.

Lexi: Well, let’s dive into that then. So I know that a lot of people think to blame the COVID-19 pandemic, but from what I understand, there’s a lot of other things at play here. So can you give us a background and where we would kind of draw that baseline?

Heather: Yeah. There’s probably three or four other factors that we can talk about. So the pandemic is definitely a contributing factor. We’ve had shutdowns at plants, quarantines in different places. If you go back to April 2020, that global outlook was looking pretty uncertain, would things be better in a month? Would it be six months? Would it be a year? Nobody knew right. Many of the steel mills, they predicted a drop in demand. So they did actually reduce their labor forces. And so supply did decrease a little bit due to the pandemic. So there was some initial price tightening, but then it became clear really quickly that people were doing remodeling projects, building projects were still going ahead. People were figuring out safe ways to work with social distancing and masking and other PPE, personal protective equipment, being added to site.

Heather: So the pandemic really hasn’t been the major driver. If we go back in history a little bit, there’s a group called the CRU group. They’ve been tracking steel prices and they use April 1994 as a baseline. So April 1994, they assign a value of 100. Anything above that up to like 200, 250 is kind of normal. Anything below that would be really unusual that hasn’t happened in a really long time. But if you go back to like 2018, 2019, we were seeing prices like 200, 240, 280 ish, right? It got up to 300 and people started getting a little antsy. Then it would drop back down a little bit. So a hundred to 200 is normal. We’re at right around 320 now. So it’s a lot, lot higher than it has been. Over the last year, the prices have more than tripled, not just in steel, but other things, softwood, lumber, plywood, other things, but what’s really driving that?

Heather: A lot of it is tariffs. There’s something called Section 232 that the Trump administration put in place in an attempt to protect the US steel industry. Unfortunately what’s happened is… That means that there’s only a certain amount of steel that you can bring in from each country. And the tariff becomes so high that it’s just not worth it. So, while the goal of that tariff was to really support domestic steel production in the US, some other unpredictable forces meant that domestic production couldn’t keep up with the demand. A few countries, fortunately were exempted from the tariffs, including Canada and Mexico. But even despite that, according to Reuters, the US steel prices are about 70% higher now than the global market. And they’re twice as high as China, by the way. So if you could import that steel effectively from China, you would actually probably see a… well, you would see a significant price drop.

Heather: The other thing that happened well, there’s two more. One is in mid February, there was winter storm URI, which those of us who were in Texas at that time, remember. 170 million people were placed under winter weather alerts and another 10 million, including those of us in Texas had blackouts for multiple days. There was accumulated ice. There was stress on the power grid, burst pipes, unusually low temperatures. So those blackouts, were actually the worst since the Northeast blackouts of 2003, what that meant and why this matters to steel is that the refineries went without power, cutting off the supply of fuel needed to fire the steel furnaces.

Heather: So you’ve got the pandemic, you’ve got the tariffs, now you’ve got a weather related incident. And then just about a month later, everybody knows now about the Ever Given, the ship that got stuck in the Suez Canal, blocked traffic for about a week. And a lot of that traffic was carrying steel. Like a lot of the containers on that ship had steel inside of them. So you’ve got all these different things that are going on at the same time that are driving the price of steel in the US just insanely high.

Lexi: Wow. So it’s like one bad news after another.

Heather: It really, has been, it has been just insanely… You could anticipate maybe one or two of these things in a typical year happening, which is why you do see price volatility in steel over time. But when you start looking at what is that, what are we up to like four things, right? That have all happened at the same time. It is creating a very unusual situation in terms of the pricing.

Lexi: Right. And I believe earlier, you had mentioned that all of these things have not only affected the steel market, but other markets as well?

Heather: Yes, if you look at the producer price index, the PPI, they call it, in April softwood lumber was 121% higher year over year. So, that’s the two by fours that people use to build a house. Plywood is up 70% year over year. And they use that a lot in roof decking and flooring like underneath your floors, particle board and OSB are up 105%. Those are also often used in construction of homes. So all of that adds up to, for an average home builder, you’re seeing 26 to $30,000 of additional cost, hard cost that’s going into, whether it’s residential or commercial, actually. I don’t have the numbers easily to hand on concrete, but concrete is similarly skyrocketing and so is drywall. So when you add all that together, if you were going to build a house last year versus this year, you’d be paying $30,000 more, but not getting anything more for it.

Lexi: Okay. That makes sense. So I know that we’ve touched on the main four reasons, and I think that the tariffs are pretty straight forward, but can we dive into each one of the other three reasons as to actually how these events played a part in the steel industry? So like for example, with the pandemic, I think we all know what that did to the economy, but specifically with the steel mills and demand and labor force. How does that all work in?

Heather: Yeah, it’s a great question. So for a lot of months, people were stuck at home, whether it was locked downs or they were afraid of being exposed to COVID-19. A lot of people had to look after their children trying to figure out virtual learning while they worked, or they might’ve been working remotely. And then suddenly, you had to really look at your surroundings, right? You’re in your home more than you ever have been probably before. And a lot of people decided it was time to do renovation, remodeling, or updates, whether that was maybe replacing a shed, maybe they’re upgrading appliances, they’re looking at a new outbuilding out in the back. So a lot of businesses really decided to take advantage of that downtime to build new structures or expand current ones.

Heather: So when you’ve got homeowners, making lots of changes and businesses making lots of changes all at the same time, as you’ve also got pressure on the labor market where people are wanting… They’re afraid to go to work. This is not a recipe for lots of supply, right? So all of that led to an uptick in the demand, and eventually the production started ramping back up. So actually in August 2020, we had a low price of 138. So remember we talked about 100 was the baseline 200 is typical. So steel was at a low in August 2020 of 138. So, that’s a less than 10% of what it is.

Lexi: So we’re seeing all this uptick in demand and before production ramps back up, there was a huge drop in the labor force. I’m assuming?

Heather: Yes, because there were a couple of things going on. There were extra payments that were being made to people. So some folks were opting to just stay home, where they might have normally gone back to work a little bit more quickly after being furloughed. And then when the weather cooled, the holidays rolled around the COVID infection rates started to spike, then labor was reduced again, quarantines go back into effect and the production decreased.

Lexi: So that’s where we kind of see that tightening from the pandemic in price because of the deficit between demand and supply.

Heather: Yes.

Lexi: Got it. Okay. So then, with the freeze out in February of this year, 2021, where did the price fluctuation come from the freeze?

Heather: Yeah, it’s an interesting thing that so much of the nation’s energy needs are filled through the Gulf Coast. I don’t want to quote a number, but it’s a significant portion of the energy, anything that’s fossil fuel base, gasoline coal, that goes to a lot of the power plants and the blast furnaces, the steel is made in great big furnaces that consume an enormous amount of energy and the fuel that is needed to fire those, comes primarily from the Gulf states. So Texas, Louisiana, and Texas was the one that was hardest hit by that winter storm. Most of the businesses were out for a minimum of three days and some were much longer if they had damage from the storm. So, when you’re in a Southern climate, for those who might be in the north may not be aware of this, they don’t necessarily winterize their pipes. So you get first pipes in the plant, and now you’ve got, weeks of cleanup, assuming you can get material to repair. So, that really had a significant impact on the supply chain with all of that going down.

Lexi: So it was the actual manufacturing and the supply of the steel that was affected in the freeze?

Heather: Yes. So basically it went, power goes out, refineries are not producing, steel mills aren’t getting fuel, so they can’t make steel.

Lexi: Got it.

Heather: So in February you got this crazy weather thing. And then in March, you’ve got this bottleneck of bottlenecks as people called it, right? Where you got one of the largest container ships in the world that Ever Given. It gets stuck in the Suez Canal, it blocks all traffic. And not only did it have a significant amount of steel on it, but there were other ships that couldn’t get through because of it being stuck. So any of the steel that would have been coming through, even happily paying those tariffs, now it’s stuck. So it can’t even get here.

Lexi: Okay. So then another issue with the supply of the steel. This is all tied up.

Heather: Yeah.

Lexi: Got it. Okay. So then at the end of the day… The huge spike in the steel prices at the end of the day, we just can’t get enough of it?

Heather: Right? Yeah. And it’s going to continue for the foreseeable future, with 40 weeks in a row of increasing prices, it seems likely that it will continue going up at least for a little bit. Obviously we all hope it drops back down. Goodness. I mean…

Heather: We, feel the pain as much as our customers do. Right?

Lexi: Right.

Lexi: So we’ve covered how we’ve gotten to these all-time high steel crisis. But can you talk about what the process is for absorbing these costs and how it compares to past instances of increased steel costs?

Heather: Yeah, that’s a great question. So the steel market is typically pretty volatile. It goes up, it goes down. In the past few years, it’s been unusually volatile. If you look at 2019 as an example, the CRU group, remember those are the guys who use that 100 baseline, they recorded a steel price low of just around 150 and a high of 190. So that’s, on a percentage basis, a fair bit of volatility, but nothing like what we’re seeing now. It’s around 25% over the course of that year. So 25% is a lot for a manufacturer or a customer to absorb, but it’s a fairly normal fluctuation that the market is used to absorbing. So that’s 25% is in that sort of normal range and the manufacturer takes a little bit of a hit, the intermediate customer, like our builders take a little bit of a hit and the end user takes a little bit.

Heather: So it’s not too painful for any one party within their transaction, so you can kind of spread out the pain a little bit across the three groups. But then over this last year, the price tripled. If you look at last August, the CRU group, put that price at 138 and then not much after that, it’s 318. That means that for any project, any building or any set of components, just the bare-bones, initial cost of steel is like three times what it was 18 months ago.

Lexi: So basically in the past, when we’ve seen an increase in steel prices, it’s been able to kind of spread between manufacturer, builder/contractor and the end user so that not a lot of pain is felt between the three, but now there’s just no way that we can spread it in a place that is not painful.

Heather: Yeah. Yeah. When you’re looking at absorbing five to 10%, that’s kind of doable, right? But when you start to talk about 30, 40, 50%, now that starts to really hurt every party in the transaction. And it starts to cause people to question, do I build now, or do I wait a little?

Lexi: Got it. Well, this has been great. I know that this has opened my eyes a lot and allowed me to better understand where all of this is coming from, especially in a time that this, I think you mentioned chart topping, record breaking kind of steel prices.

Heather: Yeah, literally. Yes. They are saying… The National Association of Manufacturers, they do a quarterly outlook survey. They’re predicting that manufacturing/production will be back to pre-pandemic levels in the next little bit. They also found that a lot of manufacturers are either somewhat or very positive about their company’s outlook. So, that is good news and coupled with domestic steel production being up, we got to believe that at some point, those prices are going to come down.

Lexi: Right? Well here’s to hoping.

Heather: And patience. This is the time that patience is a virtue, it’s going to prove itself true.

Lexi: Exactly. But in the meantime, any, and all of our brand’s representatives would be more than happy to provide guidance and idea generation, project management, to help get everyone through this particular event. Do you have anything else that you want our listeners to know about this particular topic?

Heather: No, I think you said it all. Our folks are equipped to help you try and navigate this extra tricky situation and we hope you’ll reach out.

Lexi: Awesome. Well, thank you so much for joining me today, Heather.

Heather: You’re welcome. Thanks for having me.