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The Escalating Price of Steel:
How Will Increases Impact Self-Storage Development?
By Jennifer LeClaire
Self-storage industry players understand that steel is a volatile
industry with continually changing prices. So it came as no surprise
when United States-imposed tariffs on foreign steel led to
significant price increases from domestic suppliers last year. But
who could have predicted post-tariff double-digit increases in the
first few months of 2004?
Self-storage steel suppliers are more than a little surprised by the
exponential price hikes the industry is witnessing. Steel prices
jumped up nine percent in January. Suppliers reported another price
increase on February 15th. And prices could increase an additional
21 percent-or more-in early April, according to industry watchers.
That may be just the beginning of what many are calling a landmark
event in the world steel market.
"Everyone is surprised at the price increases we are seeing come
down," says Dave Cook, CEO of Tacoma, Wash.-based Tech-Fast Metal
Systems, Inc., a resource for planning and developing self-storage
facilities. "I have been buying steel for 25 years and this is about
as volatile as it gets."
Rumors of steel allocation are already making their way across the
self-storage industry, according to Rick Dodge, vice president of
sales and operations in the Rossville, Tenn., office of Rib Roof
Metal Systems, Inc., a leader in the design, manufacture, and
installation of metal roofing and building systems. "The last time
the price of steel increased so dramatically was in the early
1980s," he recalls. "During that time, if you ran out of steel, you
couldn't get any more until your next scheduled shipment. I hope it
does not come to allocations, but that could realistically happen."
Although the global steel industry is operating at about 97 percent
capacity, experts say there is an official steel shortage that is
bound to get worse before it gets better. New orders in the U.S. for
steel sheet and plate have been surging in the past months and
pricing power has clearly shifted into high gear for U.S. steel
sheet mills, according to World Steel Dynamics (WSD), an Englewood
Cliffs, N.J.-based organization that tracks the steel industry. U.S.
mills' backlogs are extending well into the first quarter.
What is going on? There is no single culprit for the increase in
steel prices. Some say inflated prices are a backlash from
U.S.-imposed tariffs on imported steel, while others point to
China's unquenchable demand for the product. Some cite the excessive
hikes in scrap steel exports while others point to the critical coke
shortage. Still others blame the weakened U.S. dollar while others
point to skyrocketing energy prices, trucking regulations, and
increased demand in the U.S. appliance and automotive industries.
The bottom line is that multiple factors are causing the steel price
increases and experts say it will take multiple factors to drive
them back down. Only one thing is certain: this is a dangerous
combination with no immediate end in sight. It all boils down to
global supply and demand issues, and right now supply is low and
demand is high.
The Tariff Factor
There is no getting around the tariff factor in the steel equation.
President George Bush implemented safeguard relief on March 6, 2002
after the non-partisan U.S. International Trade Commission
determined that imports were a substantial cause of serious injury
to domestic producers of flat-rolled steel. This led to short-term
steel price increases of about 30 percent that were frowned upon by
the self-storage industry.
The self-storage industry got what it thought was good news when the
steel tariffs were lifted in December 2003. Most steel suppliers
logically expected steel prices to decline, but the duties relief
did not result in pricing relief.
"We thought lifted tariffs would open things up," says Caesar
Wright, president of Carlsbad, Calif.-based Mako Steel, Inc., a
leader in the self-storage construction industry. "But the U.S.
markets got greedy and we think they are price gouging. U.S.
companies, particularly U.S. Steel, the leading producer of steel in
our country, have begun to sell to China-and that's a first."
U.S. Steel did not return calls seeking comment on this allegation.
However, U.S. Steel Corporation and Nucor Corporation spoke out
against President Bush's decision to lift the tariffs in individual
press releases. U.S. Steel Chairman and Chief Executive Officer
Thomas Usher said the decision will "only make it harder to deal
with the underlying problems distorting the global steel market."
And Nucor Vice Chairman, President and Chief Executive Officer Dan
DiMicco said "the future of U.S. manufacturing, in large part,
depends upon the Bush Administration's willingness to hold the world
trading community accountable for its unfair and illegal trading
practices."
What's Up with China?
Speaking of the world trading community, much of the world's steel
is going to China-a country that is now consuming 31 percent of the
world's steel compared to the 25 percent consumption by the U.S.
This is first time since that statistic has been recorded that China
has taken a lead over U.S. consumption.
During the initial stages of the price inflation of U.S. steel,
Asian countries were experiencing an economic slump and therefore
not using as much steel. That slump is now over and China, along
with Russian and other Pacific Rim countries, have a seemingly
insatiable appetite for steel as they enter rapid infrastructure
building mode. "China has now opened its closed doors to outside
companies that operate there and this has increased China's domestic
steel usage to more than double," says Brian Perry, of Steel Storage
Asia/PTE Ltd. "Therefore it is not exporting anywhere near the
tonnage it was before this boom. This of course has a major
influence on prices. China's consumption of steel will not slow for
at least 10 years. There will, however, be occasional easing."
The International Steel Review reported that the Chinese
government's State Development & Reform Commission did issue a
warning last August to the country's steel industry not to be too
enthusiastic about building new production capacity, indicating that
the commission is concerned that irrational expansion could create
oversupply.
Excessive Scrap Metal Exports
The Steel Manufacturers Association (SMA) points to the economic
impact of excessive scrap exports as a critical problem. SMA
President Thomas Danjczek says U.S. ferrous scrap consumers are
facing an export crisis. Between January, 2002 and December, 2003,
six million additional metric tons of ferrous scrap exports left the
U.S., compared to the annual export level reached in 2001.
Once again, it is Pacific Rim countries gobbling up the scraps.
China and South Korea are now purchasing greatly increased
quantities of ferrous scrap from the U.S. economy. Together they
accounted for the purchase of almost six million tons, or an
estimated 49.6 percent of the 12 million tons of scrap exported to
more than 50 countries in 2003.
"Under any statutory definition, this may be construed as excessive
foreign demand for a key commodity in demand, worldwide," says
Danjczek. "This recent record-breaking level of exports demand has
had a profoundly negative effect on the average U.S. domestic price
of ferrous scrap and scrap availability."
Scrap prices rose considerably in January again. Danjczek says
things will change when China's appetite slows and, as a result,
most steel companies have instituted scrap surcharges. "Please do
not think steel companies are benefiting," he says. "We, like our
customers, are caught in a margin squeeze. It does no good to kill
our customers."
Additional Factors
Another factor in the rising steel prices is a coke shortage. WSD
reports the scramble for coke in the U.S. has become intense with at
least eight steel plants experiencing a shortage. At the same time,
Japanese coke exports will be sharply lower in 2004. All this is
expected to hinder steel production in the U.S.
The value of the U.S. dollar versus the Euro is not helping the
plight of U.S. steel consumers, either. "The value of the U.S,
dollar compared to the Euro and the major Asian currencies has
fallen far below the value of the tariffs," says Dodge. "Therefore,
foreign steel producers are not interested in selling steel in the
U.S. since when they convert their revenue back to their home
currency they make less money in the U.S. versus selling the steel
in Europe or Asia. The opposite is true for U.S. producers. They
have a strong economic incentive to export their steel out of the
U.S. rather than selling in within the U.S."
Additional factors include the rising cost of energy as it relates
to steel production, the increased consumption of appliance
producers as a result of housing demand, and the continued strong
demand for automobiles in the U.S.
"On top of all of this is an additional cost that all companies that
ship over the road are now forced to bear due to the changes in the
trucking regulations," adds Dodge. "With the reduced hours truckers
can drive under federal regulations, transportation companies cannot
turn around their trucks as often and are passing those increased
cost along as well. All these factors are creating a 'perfect storm'
that will to continue driving prices upward."
The Impact on Self-Storage
There is no getting around the steel price increases and there is no
telling when prices will drop again. What does this mean for
self-storage developers?
Steel suppliers to the self-storage industry are attempting to price
protect by stockpiling steel, but these precautions can only go so
far in the midst of a steel shortage. Still, most predict business
as usual for larger developers.
"If developers have their ducks in a row, then in the immediate
near-term they will try to get projects in place at lower steel
prices before they go up too high," says Steve Reiners, president of
American Steel Building Co., Inc., a building system manufacturer in
Houston. "But there will also be projects that go out of budget and
exceed what people can afford. This could kill some jobs, delay
them, or force developers to rework them."
Dodge says the price increases will have the biggest impacts on
smaller developers, while larger players like Shurgard and Public
Storage plow through and pass on the price increases to customers.
"The price increases may eliminate some of the developers that are
working on the skinny margins and do not have the best interest of
the industry in mind," he says. "At the very least it may force them
to raise their rental prices to something more reasonable instead of
undercutting the market."
Wright agrees. He says price increases might deter smaller
operators, but companies like Public Storage, Extra Space, and
Shurgard are focusing first and foremost on getting good land deals.
"I don't think the affect on the self-storage industry will be too
detrimental, especially on the West Coast because the market out
here for storage is still very healthy," he says. "Steel is still
the best, most economical way to build these facilities, even with
these increases."
The fact of the matter is that self-storage is an income producing
real estate business and developers can't make money until a
facility is built and open for business. With the availability of
financing in today's market, experts say it still makes more sense
to build now than to hold off until interest rates increase along
with steel prices.
"Take it for what it is. It's a surprise and it's come down quickly,
but it's not a deal breaker," says Cook. "No one wants to see a cost
increase, but it's not going to stop people from building. The
tariffs last year didn't stop people from building. Now that they've
removed the tariffs, the supply and demand issue is not going to
stop them."
Examining the Numbers
When you look at the big picture, the financial numbers are not as
frightening as the statistics make them out to be. Let's say you are
building a $2 million project. The steel might cost $200,000 for the
building. Dilute that with labor, insulation, concrete and the total
cost of the building starts to creep up into the $500,000 range. But
the cost impact is limited to the $200,000 steel price. If steel
goes up 20 percent, then your total price increase is $40,000. That
equals a two-percent overall increase.
"When you are talking about a two-percent increase, these are the
kind of impacts that developers should be planning for and prepared
to deal with on an ongoing basis in the construction industry," says
Cook. "Whether it's another $40,000 in steel cost increase or
another $20,000 in site cost increases or regulations and
entitlements and permitting, those costs are just part of dealing
with construction. There are always some unknowns out there."
Looking at it from another perspective, if it costs $30 per square
foot to build a facility from the ground up and steel prices go up
21 percent, then that will run up the cost per square foot to
$30.85. That equals $85,000 on a 100,000 square foot project.
"I don't think an additional dollar per square foot is going to stop
development," says Buster Owens, spokesperson for Rabco Corporation,
a self-storage building systems manufacturer in Ocoee, Fla. "The
only fear I have is that this will open up opportunities for
developers to look for alternative systems to light gauge steel."
Is it possible that the industry would look to something other than
steel to build self-storage facilities? Reiners says you never know.
"Increasing steel prices means the cost of our products made out of
steel goes up which puts us at a disadvantage," he says. "We may not
be able to compete as well with people who build their walls out of
block or wood. The other construction materials may become more
competitive dollar-wise."
But Tech-Fast's Cook and Mako's Wright are not worried. "The
increase in steel prices is nothing compared to increased price in
specialty metals or wood products," says Cook. "Those products are
all over the board and can increase as much as 30 to 50 percent at
any given time."
Price Predictions
Is there an end to the steel pricing madness? Industry watchers are
expecting additional price increases to continue through the third
quarter of 2004.
"These are world events and supply and demand is basic economics,"
says Cook. "When it comes down to it, what goes up will eventually
come back down. As demand softens, so will the price of the product.
As capacity decreases as a result of less demand, then the prices
will soften there also. The prices will level off because the demand
won't be sustained. There's a limit to the offshore demand. I
believe it will level off but no one is predicting when or at what
point. But it's nothing to panic about."
Jennifer LeClaire is a freelance writer based in Hollywood, Florida,
and is a frequent contributor to the Mini-Storage Messenger
magazine.
(Reprinted with the permission of Mini-Storage Messenger
magazine)
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