This was supposed to be a "big recovery" year for purchasing of steel beams and other structurals. But the unprecedented eruption in structural steel prices has slowed planned activity by building contractors involved in both private and public construction. That has put a brake on the purchasing growth-rate for construction steels.

As part of the 2004 overcharge of the steel-buying community, beams have risen to almost $560/ton in April from $300/ton a year earlier. That's almost an 87% inflationary jolt to the steel-buying system, and it may explain why analysts say beam buying may not arise as robustly from a three-year recession as they initially had forecast.

Supply isn't an issue: The average leadtime so far in 2004 is 4.2 weeks, compared with 5 weeks in 2003. Still, the steel mills have continued to play marketplace-pricing games with basis fees and scrap surcharges.

Demand isn't an issue, either: Most optimistic estimates put beam use this year at 5.6 million tons, a 12% gain over the average 5 million tons in 2001-03. Other forecasts aren't so bullish. In fact, the unprecedented doubling of structural steel prices over the last six months is crushing demand in some regions—along with the profit margins of distributors, fabricators and building contractors.

Since steel suppliers will only hold a quote for contractors for three days, some major construction jobs are being deferred. For example, the CSM Group, a construction-management firm in Galesburg, Mich., says customers are putting building projects on hold because of rising steel prices. "They're going to wait to see what happens," explains Curt Petersen, a project manager.

"Suppliers are saying steel is selling at market price right now," says Ken Simonson, chief economist at the Associated General Contractors of America trade group based in Alexandria, Va. "However, construction-grade market prices seems to rise day by day."

So builders accustomed to 90-day price protection windows for such steel products as structural beams and wide flange are finding that period cut to a week or less, forcing them to back off some business decisions. Thos. S. Byrne Ltd., a construction giant in Fort Worth, Texas, says prices quoted for steel by its suppliers are only good for seven to 14 days. And that is happening throughout the country, says John Avila Jr., president. "This is very, very abnormal."

The business pain inflicted by high prices has become acute and the uncertainty about future prices is making it almost impossible to plan more than 24 hours ahead. "My bid is only good for the day," said Ed Hinkley, owner and president of Fabricated Steel Services Inc. in Portage, Mich., a steel supplier to local manufacturers and building contractors. Fabricated Steel's bids used to be good for 30 days, but with steel prices rising so rapidly, Hinkley has had to allow for day-by-day changes to protect his firm financially.

"Fabrication contracts are killing us," agrees Kevin Larsen, corporate sales manager for Graham Steel Corp. in Kirkland, Wash. "The price of raw materials exceeds the price of a lot of our contracts these days." Graham Steel buys steel beams and reinforcing bar, then bends and welds it to the specifications of its customers, the contractors.

Prices have been rising so unpredictably that many fabricating companies have abandoned fixed contracts, and now are trying to add escalator clauses to adapt to the price of steel at the time of shipment. "You don't know what the prices of steel will be until a week and a half or so from delivery, and that's always a surprise," Larsen says. "It's something we've never seen in this industry. It affects the metal stud guys, the metal decking guys—anybody that has anything to do with steel and construction. We're all being affected by this market."

The National Steel Bridge Alliance has petitioned the Federal Highway Administration to encourage state departments of transportation to permit material price escalation in steel bridge contracts. Steel bridge fabricators face devastating losses on previous bids, as well as intolerable risk on new bids, caused by spiking prices of plate steel, says Conn Abnee, the Alliance's executive director.

Current practice places steel bridge fabricators in an untenable position, he says. "Fabricators must firmly bid the cost of making steel girders, forcing them to guess at the price of steel plate and rolled steel for months in advance of its order and delivery. If the price of plate steel rises steeply and unexpectedly, which describes current conditions, they must absorb huge losses that threaten their existence."

Material price escalation, which has precedent in the industry, would tend to insulate fabricators from abrupt price movements, Abnee explains. "We think we can work out a fair formula that shares the risk among all the contracting parties, rather than unfairly earmarking just one." Alliance members realize that bridge designers have the option to switch many of their new projects to concrete girders and many will, Abnee says. But that could lead to shortages of concrete and rebar, further boosting the volatility of bridge material pricing and damaging the long-term price stability needed for accurate bidding.

In a different sector of the steel supply chain, executives at Seattle-based structurals and plate distributor Seaport Steel Inc. are struggling to meet the needs of customers, some of whom are foundering. "We've seen a lot of people hurt very badly, where they're committed to jobs and they have no option but to complete their commitments, and suddenly they're hit with a 50% to 100% cost increase in raw materials," says Rodger Parr, director of purchasing and sales manager. "This is an unprecedented situation; there have never been increases this large imposed this rapidly."

Across the country in Jacksonville, Fla., for developers in the very early planning stages of projects, steel prices also are a big question mark in their business plans, despite talk that the increase will level off. Auld & White Constructors' director of business development, Brian Franco, is finding it tough to negotiate steel supply for new projects with only a seven-day price lock-in from his steel supplier. And for builders with projects already under construction, the steel pricing crunch already is hurting the bottom line. "It's stretching our budgets real tight," reports Steve Arnold, vice president of design and construction at Flagler Development Co. "That means the profit margins go down and the contingencies get eaten up at the very beginning."

O'Neal Steel is one of the nation's largest construction-grade steel distributors. Prices have been changing so quickly that the company says it cannot change its base pricing for customers fast enough. So it is trying to pass the increases along through surcharges of its own on carbon steel products previously immune to such practices. Executives in the Birmingham, Ala., headquarters suggest the company is not necessarily benefiting from the higher prices, as the money needed to bring in the inventory is straining the company's cash flow.

One solution for some contractors is to buy all their steel for a project at once, and accept the cost of storing it in exchange for eliminating the risk. Fear of shortages and continuing price hikes have some customers buying ahead. Hinkley said that after one customer watched the price of the steel he needed for a construction project rise from $71,000 to $80,000 in three weeks, he decided to buy early to lock in a price. Of course, such early purchasing creates a false demand echo in the marketplace by artificially driving up steel costs even further.

So, some construction companies are looking at international markets for steel beams, which may explain why first quarter structural imports were 30% higher than a year ago.