In March, Inside Self-Storage spoke with Kelly Ginn, president of MBCI (Metal Building Components LP), and Wayne Dickinson, the companys executive vice president of sales, about the escalating cost of steel, what it means to the storage industry, and when prices might stabilize.
What factors have led to the increase in steel prices?
Dickinson: There are many factors contributing to these steel increases but, basically, it boils down to supply and demand. Contributing to these increases are worldwide shortages of raw materials (coke and iron); the weakness of the dollar, which makes it unattractive for foreign steel producers to bring product into the United States; the demand for steel in China, and what it will pay for steel and raw materials; U.S. and foreign mills operating at capacity levels; and surging ocean freight costs to get foreign steel into this country.
China has been somewhat of a vacuum of the worlds steel supply. It is continuing the strong expansion mode in which it has been for several years. China outbids everyone else on raw materials and finished steel because it wants to keep the supply coming into the country. That has driven much of the increase.
When the steel-import tariffs were imposed a couple of years ago, foreign steel was pretty restricted in the United States. China, being in this incredible expansion, was purchasing all the steel it wanted. In December, when talk about lifting the U.S. import tariffs began, most people thought that would bring U.S. steel prices down. In fact, thats not the case at all. China is still a more attractive market. The value of the U.S. dollar is weak, making us a less attractive market.
How much have prices gone up?
Ginn:
Since October 2003, some products have increased as much as 110 percent. Some are in the 70 percent to 80 percent range. The value-added products are lower, in the 30 percent to 50 percent range. Its been an unprecedented increase.
How has MBCI and its subsidiaries been affected?
Ginn:
MBCI and its subsidiaries are concerned with the short notice from the mills. We are trying to be empathetic to our loyal customers and work with them through these unprecedented times. Because of the instability of prices and the mills not giving us much notice before new prices are in effect, it has been extremely difficult to bid projects or to hold customer pricing through delayed or long-range projects. The demand for hotrolled material has made it impossible to build inventory. In other words, the mills order books are filled.
How is the company addressing price increases and material shortage?
Dickinson:
We are counseling our customers on the state of the steel industry. Additionally, we are suggesting to our customers that they find ways of protecting themselves in their contract language. Weve had to pass substantial increases on faster than we would have liked. Weve had to work closely with customers and suppliers to save projects where the end user just refused to pay an upcharge. Weve had a lot of these customers for 20 years or more, and our customer relationships are truly important to us. They know they can depend on us.
How can the self-storage industry address the issue?
Dickinson:
Unfortunately, the answer to this question is not a pretty one. It can take as long as three to four months to quote, contract, design, detail, permit, order and deliver a mini-warehouse project. With the mills adding surcharges and price increases when they want to and the extent to which they dictate (i.e., prices becoming effective at the date of shipment), it is impossible to project costs that far out. Going forward, contractual language needs to give developers the opportunity to raise prices. The American Institute of Steel Construction recently endorsed escalation clauses in contracts. Without the clause, a developer could end up losing money with these kinds of increases. This could really change the way contracts are written.
Will there be a problem meeting demand in the near future?
Dickinson:
In the short term, I would say yes. Until the mills get more capacity or the demand slows down, we can expect material shortages, particularly for hot-rolled products. We feel our position is strong. For years, MBCI has been the fourth largest customer of most of the domestic mills, behind Ford, GM and Chrysler. The mills recognize the product needs in the construction industry, but they have declared and predicted more shortages within the next 60 days. There will definitely be some availability issues.
How will the increase affect self-storage development?
Ginn:
Most of the feedback Im getting from customers is it really hasnt slowed development. That could change in the next 60 days. Interest rates could be a big factor. As cheap as money is right now, the increased costs in the overall project really gets diluted to single digits, especially when you add in concrete, security systems, the land and everything else. One of our fears as a manufacturer of steel products is that until steel prices stabilize, end users will seek alternative methods of construction.
How long do you predict this situation will last? What do you see for the future of steel?
Dickinson:
Its hard to predict. Until the mills either increase capacity or the demand slows down, and some of the other factors mentioned earlier are reversed, we can expect it to continue. The top people at the domestic steel mills have given sound reasons why nothing should really change this year. Hopefully, there will be some stabilization in prices in the next 90 days; but as far as a downward trend, they dont see that happening this year.
SSA Weighs In on Steel Crisis
A statement from the Self Storage Association
The Self Storage Association is aware of an industry-wide crisis involving the decline in the availability of steel in the United States and, as a result, a staggering increase in steel prices for metal-building components. We have a deep concern for selfstorage properties currently under construction, for our industry suppliers of property and metal-construction components, and for the potential economic fallout that will certainly occur in all of the build communities and their secondary markets if an immediate resolution is not found to this critical situation.
Inasmuch, the SSA is reaching out to multiple industries and trade organizations to seek discourse and an active resolution. As of further note to all SSA members and industry professionals, please understand that this crisisand the resulting increase in priceshas not been brought on by metal-building companies that have long supplied this industry well and faithfully. The root of the crisis is coming from the absolutely overwhelming increase in demand from international markets that have cornered U.S. steel inventories. In these challenging times, be assured the SSA is doing what it can to keep its members informed. We will be posting more information in the coming days and promise to bring you the latest information on this issue as it progresses.