What Is Up With The Cost of Steel?

This post orginally posted on Newberry Tanks.

The price of steel is at levels not seen since 2008, just before the market crash. And according to MarketWatch, the peak is not yet in sight. As a manufacturer of steel tanks, this is unwelcome news to us, as we know it is to our customers.

We recently reached out to Sean McGahan at Shamrock Steel, an STI affiliate steel distributor who has worked in the business for two decades, to get a better understanding of why steel is spiking so dramatically.

The first thing he did was show us a letter he’d sent to his own client, explaining how his own company had been affected by the 96% increase in the cost of steel since June 2020.

COVID and Tariffs

McGahan explains, “One of the reasons for the spike is, of course, COVID.  The uncertainty led to steel distributors letting their inventories get too low, and steel mills reducing their production in anticipation of slow sales.”

The fact that steel mills shuttered a full third of production from March to June of 2020 is well known. Manufacturers tried to protect their crews from COVID and shore up production as markets predicted an economic downturn. That created an immediate shortage.

But what’s less known is just how wrong that forecast turned out to be: as interest rates dropped to historic lows, new construction boomed. Business Insider summed it up: “The hottest pandemic purchase is a house, as more and more Americans take advantage of low mortgage rates to attain spacious backyards and more comfortable work-from-home locales.”

Another major contributing factor to the spike in steel prices was tariffs. McGahan continues, “The tariffs enabled steel manufacturers to raise their prices without fear of foreign competition, at least to a point.” The steel tariffs have helped U.S. steel mills compete domestically against foreign companies since 2018. However, they have simultaneously hurt manufacturers downstream of those tariffs. According to a recent study by Columbia University, about half the cost of the 25% tariff on foreign steel is passed along to domestic steel distributors, which gets passed along again to us, the steel tank manufacturers.

The combination has driven the price of steel “off the charts,” as McGahan describes it.

So when does it end?

There is reason to hope that prices may peak or decline in the second half of 2021 due to new steel mills going online. However, putting a date on a calendar is — at best — imprecise: new infrastructure initiatives, combined with a still-booming real estate market means we may have to endure this situation a bit longer.

Equally, distributors worry about buying too much steel while the price is at an all-time high and getting stuck with the inventory, so the tug of war between supply and demand continues for all of us. As McGahan explains, “These rapid increases in steel pricing make it difficult for estimators to stay ahead of the curve, and they are frustrating to everyone except maybe the steel mills.  In times like these I try to keep my customers informed as best I can, but it’s very hard when the increases come one after another.”

We’re trying to keep you informed, too. Let’s hope the situation rectifies sooner rather than later.