Pittsburgh Business Times
Smaller firms might have to permanently pass on costs
The red-hot steel prices that propelled steelmakers to profitability in 2004 continue to suppress the fiscal well-being of many manufacturers.
“Things are worse now than ever in terms of prices for steel. The manufacturers for which the costs of steel and other metals comprise the biggest percentage of the overall cost of production are the most affected,” said Cliff Shannon, president of SMC Business Councils in Churchill.
“If you are making relatively smaller, complex metal pieces for which the cost of metal is very much secondary to the cost of skilled labor and machining needed to meet exacting tolerances and specifications, material prices affect you much less.”
Mr. Shannon said second- and third-tier manufacturers may be able to bolster their bottom lines by passing some of the increase along to their customers.
Jonathan Hall, president and CEO of Hall Industries Inc. in Ellwood City, Pa., noticed the price of steel beginning to climb three years ago. He said the increase was about 10 percent in the first two years, but topped 20 percent in 2004 with the cost of thick-plate products skyrocketing by more than 50 percent.
“The last three-year price trend has been hard, especially since we experienced a very stable market price for steel products during the previous five years,” said Mr. Hall. “For the most part, we’re trying to pass the price increases on to our customers. However, this is very difficult, if not impossible, on fixed-price contracts.”
Hall Industries manufactures equipment for the mass transportation, aviation, architectural and bridge industries.
“Higher prices generally mean lower demand, depending on how elastic the particular product is to price,” added Mr. Hall. “In today’s market, some of the larger companies are requiring their vendors to adopt a ‘no price increases’ policy. In the current environment of steel price increases, we are seeing a lot of business being lost — some to China.”
Wayne Atwell, managing director at Morgan Stanley in Purchase, N.Y., said steel prices bottomed out in July 2003 and started to go up the next month. The increases were noted in all product lines with the biggest hike being reported for flat-rolled steel.
“Hot-rolled bottomed in June 2003 at $266 per ton, peaked in September 2004 at $816 and is now at about $689,” said Mr. Atwell.
The higher prices for steel and scrap metal have been driven by a weak U.S. dollar, booming international demand from countries, such as China, and a tight supply of raw materials, primarily coal and iron ore, used to make the steel. Over the past month, iron ore prices have climbed by more than 70 percent. Over the past three quarters, coal prices have jumped 125 percent.
“This is the strongest pricing environment for steel in 50 years,” said Mr. Atwell.
Pittsburgh Business Times