Higher Steel Prices Loom On The Horizon

May 16, 2002
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Hvacr manufacturers are preparing for the possibility of future price increases on their products. This increase can be directly attributed to the current economic climate in the steel industry.

According to Glyn Richards, chief operating officer for Pacesetter Steel Service Inc., the price of steel has gone up dramatically in the past six months. Pacesetter is a steel distributor serving several hvac manufacturers and contractors. Richards says that there are a few concrete reasons for this shift in pricing, and that the current prices are inevitably going to be passed down to its hvac customers.

PINPOINTING THE CAUSE

Richards says that in the fourth quarter of last year (December 2001), steel prices were at the lowest they had been in 20 years. He explains that hot rolled coil, the most basic form of steel, was selling for $200 a ton. Now, five months later, hot rolled coil is selling for about $330 a ton.

So why is the cost of steel rising to record levels? Richards says that it comes down to simple supply and demand.

“The supply of steel in the U.S. has been dramatically reduced in a short period of time,” he said.

Richards believes there are two big reasons for this dropoff in availability.

The first came in the form of tariffs on foreign steel put into place by the Bush administration. The tariffs, which went into effect on April 20, are meant to help domestic steel companies strengthen their production without having to compete with foreign markets. This, according to Richards, has played a huge role in the shortage of steel. With the introduction of the tariff, some foreign suppliers have backed off, including Japan, Russia, and Brazil.

Richards says that another reason for the increase is the fact that “domestic steel producers are in financial trouble.” He cites LTV Corporation as an example. On Dec. 4, LTV closed down after filing for Chapter 11. The closing of LTV is significant because the company provided 9% of the type of steel used by the hvacr industry. This 9% of steel has yet to be reintroduced into the industry.

Also, steel mills are beginning to feel the pinch of the economy and have been forced to either slow down production or shut down production on certain product lines.

Service centers, the middlemen between the steel companies and the hvac contractors, have not been able to provide all of the steel their customers need. This may cause the companies to raise prices.

IS THERE RELIEF?

Relief from the prices and slower production of steel may still be some ways off. The foreign steel tariff is meant to stay in place for a total of three years, but President Bush has the authority to repeal the tariff in 18 months if it is apparent that steelmakers are still struggling.

Currently, Richards says that companies are still running into trouble. “Steel mills are still not making money,” he said. One example is US Steel, which lost money in the first quarter of this year.

As for the hvacr industry, manufacturers are preparing for price increases that will be passed down to their customers.

“Such a large proportion of our production is in steel in terms of raw material,” said Tom Clark, marketing manager for Reznor’s hvac division. Clark explains that Reznor’s products rely heavily on steel, and that the company has been forced to buy steel at higher than contracted prices.

“We’ve been having to buy steel at market price due to availability issues, and that is hitting us a little,” said Clark. “We’re kind of at the mercy of the whole [steel] industry.”

Clark further commented that if steel prices continue to go up, no hvac manufacturer would be able to absorb all the costs, and some would be passed on in the form of price increases.

Richards said that results in the short term do not look very positive. Future steel prices will be dependent on whether the tariff can jumpstart steel production.

Publication date: 05/20/2002

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