AISC Issues Background Information on Structural Steel Supply and Availability
July 27, 2006 From American Institute of Steel Construction, Inc.
AISC has received several inquiries regarding structural steel supply issues. These inquiries correspond to reports we have received of extended delivery times on a limited number of projects throughout the United States. The issue presenting itself is not an actual shortage of structural steel in the marketplace but more of a supply chain adjustment issue.
The current situation has its roots in early 2005 when the structural mills relied on early commercial construction data that showed a relatively flat market. In response they throttled back slightly on production. Up to this point their “on the ground” inventories had significantly increased and most orders from fabricators or service centers were being met from inventory rather than from future rollings. At that point rolling cycles were between 4 and 6 weeks for the major structural mills and any shapes not in inventory were readily available in the next rolling cycle.
At the same time the service centers let their inventories drop below typical levels (down to about 2.4 months). This was a direct result of many fabricators buying directly from mill inventory and receiving rapid delivery rather than purchasing from service centers.
As it turned out there was an unexpected increase in demand starting in mid-2005, particularly from the petrochemical, power and industrial markets for structural material. This demand rapidly depleted mill inventory and fast track projects again looked to the service centers for material. The impact on rolling cycles was exaggerated by the service centers stepping in to increase their inventories back to typical levels (3 months of stock) and fabricators now purchasing from future rollings rather than mill inventory.
During the first quarter of 2006 demand in the building sector increased by nearly 20% as a result of increasing construction volume in square feet and a 3 point jump in structural steel market share. This placed further pressure on the structural mills pushing the next open rolling cycle for most shapes out to 12 to 16 weeks. At the same time the service centers began aggressively purchasing mill material in an attempt to increase their inventories making it difficult for individual fabricators to meet project demands. Interestingly the tonnage level of service center inventories has increased significantly to record levels, yet inventory measured in months of supply has remained flat at around 2.8 months as a result of increased orders from fabricators.
This really is not the same thing as the “hoarding” of rebar by general contractors that occurred in 2004. In that case the material was being stockpiled by specific contractors without an immediate need for the material thereby removing it from the open market. In this case, the material is still available in the marketplace from the service centers that have purchased it.
The net effect of all of this is that medium sized projects have been most impacted. Large projects typically have design and detailing lead times that allow for ordering of mill material within the current lead times for open rollings. In addition the larger projects benefit from a higher degree of sophistication and understanding in terms of managing material acquisition in today’s market. Smaller projects that are typically supplied from service centers are unaffected. But the mid-range projects that have been relying on mill supply are now facing the dilemma of either switching to service center supply with a corresponding increase in cost or delaying the project until material is directly available from the mill. Some fabricators have optimized their material handling and production process for service center delivery offsetting a significant portion of the increased cost, while others have optimized their process for mill delivery.
Another component impacting the current situation is that since the increase in prices in late 2003 the early authorization for ordering of all the structural steel for a project in order to “lock” material pricing at a given level has been encouraged. The marketplace is now embracing this concept which has created a bubble in the order process. Where large projects used to spread the material orders out over time spanning multiple rolling cycles, the mills are now receiving complete orders for projects at the start of the project. This will eventually balance itself out, but until then it does increase demand at the mill level.
Imports have increased over the past year (Q1 2006 was roughly double that of Q1 2005) however as the global price for structural shapes is about $20 per ton higher than the domestic price before shipping costs (approximately $80/ton) we are not seeing a rush of foreign suppliers into the US market.
Where is the market headed? Most probably steel supply conditions will continue in this mode through the end of 2006. 2007 will see an additional 600,000 tons of domestic production coming on line (Steel Dynamics in Columbia City, Indiana is adding a second rolling mill scheduled to be in production in late 2007). Global pricing variations may create a renewed interest from global suppliers in the US market much of which will end up flowing through service centers. Service center inventories are beginning to catch up to demand and surveys of service centers indicate a return to more traditional order levels. Ultimately the situation will relax itself and delivery times will decrease during 2007.
The bottom line is that current capacity can meet the current demand level. There is an adequate supply of structural steel. However, the dynamics of the supply process have changed where that supply is located impacting the cost-schedule balance of material for some projects.
During this period early fabricator involvement, reservation of steel in rolling cycles as soon as possible in the design process and up front material orders remain critical for the optimum project management.
For more information on this issue, please visit our press release on "Structural Steel Industry Moves to Ensure Supply Meets Demand."
For more information contact:
VP of Communications
American Institute of Steel Construction
The American Institute of Steel Construction, headquartered in Chicago, is a not-for-profit technical institute and trade association established in 1921 to serve the structural steel design community and construction industry. AISC’s mission is to make structural steel the material of choice by being the leader in structural steel-related technical and market-building activities, including: specification and code development, research, education, technical assistance, quality certification, standardization, and market development. AISC has a long tradition of service to the steel construction industry of providing timely and reliable information.
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