Buying hasn't improved, so prices are starting to slide

Nonresidential construction's lethargy has kept structural supply high, prices down

Tom Stundza, Executive Editor -- Purchasing, 6/2/2005

Riding the raw materials wave of 2004, wide-flange structural steel beam prices crested at 31% ahead of the 2003 average. So far this year, however, the beam price average is 6% below last autumn's peak. Demand this year is described by suppliers as disappointing. Extremely high production rates and a boost in imports has brought more supply, and allowed stocks to replenish. That's why industry observers, noting the sluggish demand, have been predicting a period of flat prices through this winter.

Despite finagling with base prices and raw materials surcharges by the electric furnace steelmakers who dominate supply of structural steels, market price averages for wide-flange beams have remained flat lately. Price growth has been slowed by what analysts at Locker and Associates in New York describe as "a languid market and growing competition" between domestic and foreign mills.

And, if buying trends don't improve soon, the market mavens say they won't argue with Purchasingdata.com's forecast of prices slipping from an average $557 in the first quarter and an estimated $538 in the second quarter to $510 in the fourth quarter.

Structural steel purchasing has been falling steadily since 2000; lately, buying has collapsed and supply has expanded— as evidenced by mill leadtimes slipping to 6.5 weeks (compared with nine weeks in late 2004) and service center stockpiles stuck at three months of demand. "It appears that the brakes have been activated once again on major capital expenditures," says the purchasing manager for a machinery manufacturing plant in Wheeling, Ill. That's why "beam customers are buying hand-to-mouth," says Phillip Casey, president and CEO of supplier Gerdau Ameristeel Corp. of Tampa. Reason: A key consumption sector, nonresidential construction, has yet to emerge from a five-year recession.

"Nonresidential construction has long been the weakest of the major steel-consuming sectors, and is just now starting to show some improvement," says analyst John Anton at Global Insight's office in Washington. He maintains that, without real demand growth from capital construction last year, there was no marketplace justification for the record 31% rise in 2004 beam prices; so, he has been "anticipating a retreat" in structural transaction prices this year.

"Nonresidential construction activity has declined by more than 25% since 1999, with most of the shortfall coming in the commercial/industrial categories," admits Kermit Baker, chief economist for the American Institute of Architects (AIA). Layoffs and business failures in the last couple of years caused weak demand and soaring vacancy rates in nonresidential construction markets, with the commercial sector being the hardest hit, says Anton. "While an economic recovery has been in progress for months, its failure to translate into significant job gains has hampered a rebound in commercial construction," he adds. "Growth in commercial demand will initially be driven by retail construction and supported more strongly by office activity."

Actually, nonresidential construction spending in total finally is improving this year, says economist Baker. The AIA Consensus Construction Forecast Panel is projecting a 5.5% increase in nonresidential construction activity in 2005. He has forecast gains of close to 6% in commercial buildings, almost 14% in industrial facilities, and more than 2.5% for institutional buildings. However, annualized first quarter growth in overall nonresidential construction was only 3.5% and buyers polled in early May describe nonresidential building activity as "soft and tentative."

That's why steel-mill executives are complaining that contractors appear to be sourcing slowly and from offshore sources with lower prices. "Storm clouds are hovering above the steel- beams market caused by a price conflict with some of the imports coming out of Spain and Poland," admits Casey of Gerdau Ameristeel.

Actually, some buyers still are receiving domestic beams under so-called foreign-fighter programs that were a reaction to import offers earlier this year and that could be shipping through May. These foreign-fighter prices are estimated in some cases at a discount of about $40 per ton under published mill lists. The early underpriced import quotes came in large part from Germany, Poland, Spain and South Korea.

Buyers said no new foreign-fighter pricing programs have been implemented for summer deliveries, although spot prices are sliding and buyers say a new wave of foreign offers could trigger a response from domestic mills, given their apparent determination not to relinquish market share.