Steel prices hammer local industries

In December 2003, AFCO Steel out of Little Rock, Ark., was awarded the bid to supply about 3,000 tons of steel for the construction of the new federal courthouse building on Independence Street in Cape Girardeau. The contract was signed, and the budget locked in at the current rate of cost for steel.

Then the steel market went due south as steel supplies plummeted and prices soared to historic levels.

Four months later, AFCO Steel was left staring at the prospect of supplying steel to the project at about 60 percent more than the price they bid at, with the price of some steel parts more than doubling from the previous year.

But as is the case with many local contractors, fabricators, distributors and manufacturers who deal in steel, they didn't have much of a choice.

"We had to eat it," AFCO project manager John Olette said.

Most area business people who have a hand in the steel industry are having to eat their share of the extra costs in a market that is still in tumult.

"It's very crazy right now," said Daniel Todt, president of Southeast Fabricating Inc. of Cape Girardeau, a fabricator and supplier of steel.

Todt said the rising cost of steel has made prices for his customers hard to hold and harder to predict. Normally, he could quote a contractor a price for the following 15 to 30 days. But in the current climate, the prices he's able to give are sometimes day-to-day, reflecting the fluctuating price he pays the mills.

Area businessmen and national experts seem to agree that the reason the mills are charging more is because of China. They say that due to the country's rapid industrialization, China is buying up much of the world's scrap metal, which is used to make a good portion of U.S. industrial steel. This has created a domestic shortage of scrap, putting a premium on the supply of steel rolling out of the integrated mills.

To compensate, the mills simply pass their cost on by adding a surcharge to the recycled steel they sell to the distributors. Olette said it's these surcharges that have put companies like AFCO in the crunch.

AFCO vice president of purchasing Carrol Vestal said that the surcharges her company has been paying for its steel have ranged anywhere from $23 to $112 per ton. She added that when the surcharge is lower, it's usually because the base price is higher, meaning the essential cost to the company is the same.

Building contractors have also been affected. Phil Penzel, president of Penzel Construction Company of Jackson, said a project that would have cost $100,000 last year would run a price of about $160,000 now because of changes in steel prices. He added that while his company was fortunate to have bought and committed most of its steel before prices took the sharp turn upward, many contractors were taken by surprise and have had difficulty adjusting.

$1 million more for stadium

For instance, the St. Louis Business Journal reported that when St. Louis' Alberici Corp. asked Hunt Construction Co. to stretch the budget for an additional $1 million to compensate for the increasing cost of the structural steel work on the St. Louis Cardinals' new baseball park, it cost them the $25 million contract. A few construction companies have instituted price escalators in their contracts to guard against the threat of the unsteady steel costs. But, Olette said, often contractors are left with few options.

"They can either push the job out of budget or look to other materials to build with," Olette said.

Penzel said that the latter is often the case, but that the rising price of steel has caused a reactionary bump in the cost of lumber. Furthermore, those that choose to go the route of concrete still have to deal with the cost of steel supports.

"It's affected our whole industry," Penzel said.

Locally, the developers of the new Holiday Inn Express at 3257 William St. say that they've been watching the steel market. John Drury, vice president of construction for MidAmerica Hotels, said that although the decision to move plans for the structure from a concrete design to wood came before steel prices began to soar, the company has tried to avoid using steel as much as possible.

Construction isn't the only local industry affected by steel prices. Manufacturers that use steel are feeling the crunch as well.

Larry Dillon is the plant manager of Dana Corp.'s Torque Traction Manufacturing Technologies Group facility in Cape Girardeau. The plant uses castings and forgings made of steel and aluminum to make automotive parts for distribution to companies such as General Motors. Like Olette, Dillon said that it's the surcharge on steel that is squeezing his business.

Dillon said that a certain 13-pound steel casting that was contracted at an 83-cents-per-pound surcharge a year ago, is now up to a 93-cent surcharge. That extra dollar per casting can be multiplied by the roughly 75,000 pounds of castings that go through the plant in a month. Taking castings and forgings together, Dillon said this has resulted in $125,000 to $150,000 of surcharges per month.

Absorbing the cost

Since the companies Dana is selling to won't take up any of the extra cost when purchasing the parts, Dillon said his company is forced to absorb the extra cost. Though Dillon assures that the extra costs aren't threatening jobs at his plant because of the high demand for automobiles, it is cutting severely into the profit margin.

Similarly Olette said that his problems with surcharges will not affect AFCO's work on the courthouse in Cape Girardeau. But Vestal said it will affect the company's bottom line.

Fortunately, many in the industry say they've seen signs of the market stabilizing in recent days and even hints that the price may soon drop a bit. Rick Blattner, owner of General Machine and Supply in Cape Girardeau, said he's seen scrap prices drop from 10 cents to five cents per pound, signalling the possibility of a residual drop somewhere down the road. But he warns that right now, the market is still tight.

Penzel and Dillon too said they believe the market will let up a little, but they don't expect a large downward swing anytime in the next year. Todt has heard similar rumblings, but he said as unpredictable as the market has been, it's really anybody's speculation.

"As things are, projects are going to be put on hold," Todt said.

trehagen@semissourian.com

335-6611, extension 137