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Will rising ore pricing impact the price of structural steel?

April 5, 2010 from American Institute of Steel Construction

(Chicago, IL) - Will rising ore prices impact the price of structural steel? Rising ore prices should not impact the cost of fabricated structural steel in the U.S.

Just hours after the world’s largest mining company, BHP Billiton, and most of its customers announced a new pricing structure for iron ore, the AISC Steel Solutions Center began receiving calls and emails asking how the new ore prices would impact the cost of structural steel used in buildings and bridges.

The short answer: It should have little-to-no impact. While most media outlets treat steel as a homogenous industry, the fact is the steel used in automobiles is different than that used in beams. Both the raw materials used to make the different types of steel and the processes used are different. Topping it off, less than half the steel produced in the U.S. even uses iron ore as its primary feedstock. The reality is that 62% of all domestic steel—and almost 100% of beams and columns—come from ‘mini-mills’ using recycled steel scrap as their feedstock (and virtually no iron ore at all). These mills melt scrap in electric arc furnaces (EAF) producing products with a recycled steel content in excess of 93%. Therefore, while a rise in the cost of scrap might impact the cost of beams, the increase in ore costs should mostly impact steel produced at integrated mills using basic oxygen furnaces (BOF). And fortunately, the large majority of steel used in the U.S. building and bridge industry (including almost 100% of beams and columns and 80% of the plate used for bridge construction) is produced in EAF mills.

As the chart below illustrates, there is a near direct relationship between scrap prices and structural steel pricing, while there is almost no relationship between iron ore and structural steel pricing.

Figure 1 – Pricing Trends for Ore, Scrap and Structural Steel
Data Extracted from Bureau of Labor Statistics

Additionally, individual mills produce specific types of steel. A mill designed to produce sheet steel for use in the automobile industry cannot produce structural steel sections for use in building construction. And a mill producing reinforcing bar for concrete does not produce plate steel for the ship building industry.

The cost of steel is typically driven by a number of factors, including the price of the raw material, the price of energy, and the supply/demand relationship for that specific type of steel. If there is a shortage of automobile sheet, it would drive up the price of automobile sheet steel but would not necessarily impact the price of beams and columns.

Finally, it’s important to remember that end-users need to be more concerned with the price of the entire steel package and not simply the cost of the raw material. Typically, the cost of materials represents only 25%-30% of the total structural steel package for a building. The remaining 70%-75% of the cost is fabrication and erection. Even a 20% increase in material costs (which is certainly not anticipated at this time) would only result in a 5% increase in the cost of the steel package.

So when a recent caller to the AISC Steel Solutions Center asked if increasing ore prices would result in their community being unable to afford a new school building, we confidently answered they could still move ahead with the project and that their choice of structural steel as the framing material was a wise one.

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For more information contact:

Tasha O'Berski
Communications Department
(312) 670-5439
oberski@aisc.org