The heavy steel arena is operating under a new paradigm: Demand is strong, supply is tight, costs of energy and scrap break records monthly, current transaction prices are higher than ever before and future prices could be even higher. Even buyers see further inflation ahead with 75% of those polled in May forecasting higher late-summer prices for steel plates and structurals.

"The demand pull from our customers, especially the buyers of heavy structurals, remains pretty strong," says Mario Longhi, CEO of steelmaker Gerdau Ameristeel in Tampa, Fla., which now operates Chaparral Steel, the second largest producer of structural steel products in North America. "There's a lot of purchasing activity from the power, chemical and other nonresidential construction markets, as well as the export business," he tells analysts on a recent conference call.

"Overall end-market activity in the first three months of 2008 remained healthy," says Michael Goldberg, CEO of service center firm A.M. Castle & Co. (Castle Metals) in Franklin Park, Ill. He adds in a statement that "demand for plate products from the oil and gas markets and the heavy equipment and infrastructure markets was especially strong in the first quarter (and) we haven't seen any significant recessionary impact in our business."

As with most other steel mill products this year, demand for plate and wide-flange beams is solid and apparently immaterial to prices. Steel plate purchase prices through April were 33% higher than the last cyclical low in October, 2007, while wide-flange beam prices were 47% higher than the last nadir in August, 2007. Yet, it appears that purchasing will be in excess of 20 million tons for the third consecutive year.

The market is rotating around high costs of energy and raw materials, delayed deliveries from domestic mills, paltry supply from foreign mills and reduced inventories at the service centers. In fact, with first-quarter imports down 7% from a year earlier (and 12.5% from the first quarter of 2006), supply is so tight that it's taking a month and a half for distributors to process and ship orders for plates and structurals.

Interestingly, with energy and raw materials costs for iron ore, scrap, coking coal and alloys high and still skyrocketing, some mill sales executives are as bewildered as buyers about the future market environment and when prices might peak.

"I can tell you about the June order books and what we're charging," says Steve Lundmark, vice president of sales and marketing at steel plate mill Claymont Steel. "But, I can't even guess where demand is going this summer or where prices will be in three, six or nine months." In a nutshell, says Lundmark, "demand for our plate isn't a whole lot greater than last year's tonnage but costs are just going nuts."

"Given the current conditions in the North American steel markets, the prices are expected to remain high in coming months," writes the Steel Monitor Group in London. "Increasing raw material prices should allow mills the opportunity to increase prices, while a lack of imports will continue to limit downward pressure on prices."

Market economist John Anton at Global Insight's offices in Washington agrees that "the tight inventory—a million tons for plate and less than 775,000 tons for structurals, at the latest reading—has allowed extreme price increases since December."

Imports are sliding, as expected, with license applications to import discrete and coiled plate in April at 176,800 tons, according to U.S. Census Bureau data. In March, the U.S. had imported 185,351 tons. Also sliding in March were imports of heavy shapes at 63,050 tons, down from 102,625 tons the month before.

Price increases are driven more by cost and supply than demand these days. Inventories are low, exports of plate greatly exceed imports, and raw material costs are setting records. Low supply is allowing steel producers to pass along cost increases. So, since prices of ores and scrap have moved to record highs, Anton believes steel plate prices and output will both be high until inventories again outweigh demand.

However, independent Chicago-area steel analyst Michelle Applebaum reckons that wide-flange beam prices "may show a less significant increase (this summer) since distribution-industry inventory levels remain slightly higher than normal and leading indicators of non-residential construction demand have weakened over the last two months."

The plate and beam market is difficult to read because of conflicting spending and steel tonnage use trends. Based on available government data, public and private nonresidential construction spending expanded in 2007 while residential construction expenditures plunged. At the same time, steel plate and structural tonnage use dipped by 3% in 2007.

Now, even though tonnage shipments to contractors are rising again, the latest monthly construction spending data now shows further declines in private nonresidential construction. Also, the availability of financing for commercial real estate has tightened sharply, while the need for extra retail and office space is diminishing. In the state and local government sector, revenue growth is slowing and financing has become more expensive—usually a recipe for sharp cutbacks in outlays for public construction projects.

However, during the first quarter of this year, construction spending amounted to a healthy $241.6 billion because of still-strong federal, state and local infrastructure construction. This may change as the year progresses, though. Moody's/REAL Commercial Property Price Indices show that, for the time being, a large gap persists between what buyers are willing to pay and what sellers are willing to accept—putting downward pressure on builders for any new construction and that isn't expected to change anytime soon. Moody's analysts continue to expect commercial property prices to fall about 15–20% before bottoming out.

One of the target markets cited by steel mills for plate and structurals is wind-farm energy. Wind towers typically use steel plate while wind turbines use a wide range of steel products for propellers, engine and tower. The price of structural grades of steel used to make the plates and beams accounts for up to 40% of the total cost of making and installing an operational wind-turbine tower.

But there are risks. The sharp increase since the start of 2008 for the required steels has forced energy giant Royal Dutch Shell to withdraw from the United Kingdom's largest offshore wind-farm project, to be built off the English coast with 341 turbines generating up to 1,000 megawatts of electricity, enough to meet the electricity needs of 750,000 homes.

"The rising price of steel and the cost of wind turbines has certainly been a factor in Shell's decision to withdraw from the London Array wind-farm project," Shell tells Platts Steel Market Daily newsletter. Instead, Shell will focus on embryonic U.S. onshore wind-energy projects.