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Tariff Talk

Construction ramps up as steel, aluminum prices rise

Tariff Talk April18 1

Following tariffs announced by President Donald Trump in March of 25 percent on imported steel and 10 percent on imported aluminum, prices of those commodities have increased. The effect on contractors, manufacturers, suppliers and others in the U.S. metal construction industry will vary over the short term as well as long term.

In the short-term, there’s been a run on supplies as product manufacturers and contractors report rushing through orders ahead of further increases. To meet growing demand, domestic steel and aluminum producers are expanding operations. One steel mill is preparing to reopen in Illinois and there have been several reports of other steel and aluminum production facilities either being reopened or established in Missouri, Kentucky, South Carolina and Florida.

After the initial effects of the tariffs, manufacturers, contractors and others are concerned about market conditions. They worry about accessibility of materials, heightened prices and the potential for a downturn in construction. Economists say, long-term, the significance of the tariffs will be influenced by broader economic conditions including other costs, availability of credit and the cumulative effects of global trade restrictions.

For the last several years, the construction market has been growing. Anirban Basu, chief economist at Associated Builders and Contractors (ABC), says one question he often hears is, how long will that growth last? “I think one of the effects of these tariffs ultimately will be to shorten this economic expansion cycle; it will be shorter than it otherwise would have been if we had not passed the tariffs,” he says.

Immediate Increases

The initial impact of the tariffs was increased demand for domestic materials, which caused prices of all steel and aluminum—not only imports—to increase. “Anecdotal information is suggesting that those who supply steel to metal building product manufacturers and others in the construction industry are increasing prices in the range of 5 to 15 percent,” Basu says. “I’ve heard various numbers, but already people are paying more for that steel. All things being equal, that cuts into profit margins.”

It’s the uncertainty of what’s going on right now that’s probably the big killer.

David Koubek, president and general manager at Chief Buildings

Steel and aluminum prices have been on the uptick since the end of 2017, when politicians began discussing the tariffs. As a result, property owners and developers fast-tracked projects to lock in current prices. The implementation of the tariffs increased that activity.

Arthur Hance, vice president at Metal Builders, Contractors & Erectors Association (MBCEA), and president of Washington, N.J.-based Hance Construction Inc., says, “I have three jobs right now that all ordered in the last two months because of this tariff situation. We are aggressively warning clients that they’ve got to be careful about price increases that are coming.”

Metal building manufacturers are busy too. David Koubek, president and general manager at Chief Buildings in Grand Island, Neb., says, “[The tariffs have] an impact in the short-term of bringing a lot of businesses to the door because everybody wants to beat the price increase. Owners can sit on the sideline or they can jump in. And I think a lot of them are going to jump in now. We’ve had as many new contracts come in the door in the last two weeks as we’ve had in a long time.”

David Beard, president at Iron Workers District Council of St. Louis and Vicinity, which has members that erect buildings and work in metal production facilities, says it’s unknown how much of the growth is attributable to the tariffs. “Whether that’s all from these tariffs, no one really knows,” Beard says. “Many of the projects that are starting now have been in planning for a long time.”

Steel and aluminum producers also are expanding operations to meet increasing demand for domestic materials. A steel mill in Granite City, Ill., is set to reopen, and new steel and aluminum facilities in southern Missouri and southwest Kentucky are being discussed, according to Beard.

Peak Prices, Supply and Downturn

One of the biggest concerns members of the metal construction industry have is how high steel and aluminum prices will get before leveling off. In the short-term, price spikes can strain project financing. Kenneth Simonson, chief economist at Associated General Contractors of America (AGC), says contractors who expected lower prices may see the increases cut into profits. “The most immediate impact is on contractors that have already signed contracts to build a project, but have not bought the steel or components containing steel or aluminum, such as curtainwall assemblies. They are likely to be hit with higher prices that they’ll be unable to pass along.”

We’re now talking about a potential trade war between some of the world’s most important economies.

Anirban Basu, chief economist at ABC

Managing prices becomes an essential part of the industry response to the tariffs. Koubek says Chief Buildings is doing multiple things to manage the volatility of steel pricing. They are educating customers about what’s happening, communicating with mills and other suppliers and purchasing as much steel as possible at current prices. “And then we’re adding protection to our quotes until we see how this all shakes out,” he says. “We’re going to do our best to protect both contractors and Chief Buildings.”

After the initial influx of construction projects spurred by the tariffs and other factors wears off, some contractors are concerned there will be a supply shortage. The shortage could be exacerbated by reductions in imported steel and aluminum.

“The steel mills are already talking to their primary users about allocation,” Hance says. “I’m worried because what’ll happen is the price of steel will continue to climb against those allocations until it reaches a point where it offsets the tariffs. There’s going to be a gap between price and supply.”

At the same time, if prices reach levels so high that construction activity dries up, a downturn might occur. Koubek thinks the transition period between the current construction expansion and its next reduction will be short. “When we talk about long-term, the big concern is if everybody rushes to get their projects initiated now, and steel prices continue to go up, at what point do owners stand on the sideline, and suddenly demand begins to diminish?” he says. “At some point as these price increases get implemented, there will be people postponing projects.”

Beard says it’s too soon to tell whether the initial increases in metal construction activity and employment will be followed by a lull caused by inflated material prices. “In the short term, it looks like we’re going to see some jobs; that’s great. Are we going to suffer from it in the long term? I don’t believe anybody really knows.” He says the initial upswing in steel and aluminum production and building could continue through 2018. “Within the next year and a half, it’ll probably start peaking,” he adds.

Long-term, Koubek says stable prices can be more impactful to economic growth than the presence of tariffs. “It’s the uncertainty of what’s going on right now that’s probably the big killer. But once the pricing levels off, there’s enough supply to meet demand, and costing or pricing is stabilized, whether the tariffs are in there or not, owners and contractors will be able to move forward with more certainty on budgets and costs.”

Trade War

Reactions from other countries to the U.S. steel and aluminum tariffs may also factor into the state of the metal construction industry. “If trading partners adopt retaliatory measures, then export, transportation and logistics businesses and ports are also likely to reduce their purchases, including construction,” Simonson says.

“We might be on the tip of a trade war iceberg,” Basu says. “We have yet to see the complete response by other nations to these trade restrictions. The Trump administration has not stopped with steel and aluminum. Further tariffs regarding products from China are being announced. We’re now talking about a potential trade war between some of the world’s most important economies. And that would have the effect of slowing global economic growth, increasing the prices of all types of goods and services, including among developers and their financiers, and potentially bringing what has been a very nice construction expansion to a screeching halt.”