Finance, Marketing & Operations
~ an update ~
By Bill Ray
Steel price continues in a downward trend. Cement price is responding to renewed shortages again this year. This is the time to review vendor pricing. Get commitments from your steel vendor. Check cement price risks on your long term contracts.
A brief review: Early last year
steel prices shot up to very nearly double the earlier levels. That was
followed closely by a shortage in cement. We have come to discover
that the US is dependent upon foreign supplies of both steel and cement.
Where does this stand now? What is the outlook?
Steel
- After some initial hoarding problems, there is now an adequate supply.
- There were quality problems. A good receiving check is still wise.
- Prices are over $.40/lbs for cut bar in many markets. Price has been in a shallow decline since the peak late last year.
- Many producers are carrying a 30 day supply of strand, rebar and mesh as a matter of practice.
Price outlook 2005:
For now steel price has been flat to declining,
but price rise will likely resume.
Cement price is again in short supply
with rising prices.
Cement
- Shortages are already seen in import dependent areas such as the Florida, and Texas. Shortages have resumed and will ripple through the system in 2005.
- I have not talked to a producer that actually lost production last year. But late cement deliveries; wrong Type; hot cement; all required adjustments and make up shifts.
- Most producers have added a second cement vendor, and are glad they did because they needed them.
Contract Issues
Last year, many producers found themselves
upside down on contracts. Where this was survival-threatening, accommodations
were reached, typically through a value engineering solution. Some
private work was renegotiated. Renegotiation is not allowed on DOT.
Last year there was a good deal of discussion of price escalators in the contract. This has not become a common in practice.
- DOT allows it on new work. Some states have included it; most have not.
- Lending agreements on private work make it difficult to include escalators in contract administration.
- I have talked to producers who were able to treat steel as a stored material. Due to this provision, they were able to stockpile the steel needed for the job.
- Escalators based on a price index are not very accurate, stay away from them. The better way to go is to be allowed to submit a steel invoice variance.
- Despite a lot of talk, there is no futures market in steel that makes it practical to hedge price risk.
Price Forecast
Both steel and cement in the USA depend
on imports. The American appetite for imported oil and Chinese manufactured
goods has resulted in a huge imbalance of trade. 
The
US dollar will continue to weaken and drive up the cost of imported goods,
including steel and cement.
Steel The consensus view last year that price would decline modestly toward the end of year was accurate. Rebar price today is flat to declining. But, worldwide supply and demand balance remains close. Today's high prices are attracting a lot of new steel capacity additions. The cost of iron ore and fuel are at record highs and will continue to push steel prices up. The consensus view is that price will remain about where it is for now, then continue to go up.
Steel and Cement Price graphs from Engineering
News Record, 20-City price average.
Rebar price had been in a modest decline
since the high point last September.
Cement price has been increasing steadily
with only slight pause.
Cement Prices have been creeping
up, one increase at a time. The special tariff on cement from Mexico
has been in intense negotiations in Washington DC. It looks like
an impasse to me with a roll back a long way away. Prices
continue to be lowest in port cities. That indicates that international
supply exceeds demand. But, delivery to port cities continues to
be hampered by a shortage of bulk carrier ships. The forecast of
cement prices near $100 ton still seems possible. 
Problem or Opportunity
Every problem is an opportunity.
Last year some producers had very serious problems with fixed price contracts.
The smart producer benefited from cultivating alternate vendors for both
cement and steel. At this time of temporary price weakness
in steel, I recommend you take tactical advantage. Ask for a price
review. Ask for price guarantees to match your longer run contracts.
This is the time. If you have not cultivated another cement vendor,
do it now. Review your mix designs.
The silver lining This is also the time to make some changes in your operations and marketing.
- There are good opportunities to reduce steel in underground products such as septic tanks, manholes, and RCP by the use of synthetic fibers in the mix. The biggest savings is in labor and productivity improvement.
- There are good opportunities to reduce mix cost through better controls in the batch plant. For many producers there is $5/yard waiting to be found.
- Bridge producers have seen an improvement in their competitive standing compared to their chief competitor, steel bridge beams. This is a larger market.
- Structural producers have seen their competitive position improved compared to steel building systems. This is the right time to be looking at market initiatives for total precast systems
-
There is an opportunity to demonstrate the
superiority of precast to masonry and cast in place. The horror
stories in the cement shortage have been in these competitive building
systems.
US is very dependent on foreign source steel and cement
The precast advantage. Finally,
remember that among our greatest strengths are:
- Speed of erection, and one-stop shopping. Steel construction has a checkered history of missed dates and fabrication delays. Now jobs are being delayed by block and readi-mix. Consequently, trades coordination has been a big problem. Precast has a solution.
- On time completions. Most precast producers can point to a good record of on-time completions,
- Engineering We provide excellent job engineering support.
- Turnkey lump sum contracting is a big advantage you can offer.
- Requests for quotation. Seek out business that benefits from our new competitive position. There are new markets you could enter. Ask your contractors and specifiers for ideas.
- This is the time to sell the complete package of benefits.
Structural
steel continues to be much higher priced than a year ago despite recent
flat prices. Readi-mix continues under adverse price trends.
The precast advantage is real.