The Truth Behind Steel’s Hype

The Truth Behind Steel’s Hype

Steel is an essential U.S. commodity. It is arguably the most valuable engineering and construction material used in everyday life, from roads and buildings to household appliances and utensils. Its ubiquity means that the value of steel is reflective of our economy’s health as well as our future.

Unlike recent lumber market volatility, the bullish U.S. steel market has maintained consistently low inventory and soaring demand across critical markets over the past six months. The strong rebound in steel has pushed the U.S. capacity utilization rate to hover at the 80% level for the first time since March 2020—underscoring how current labor shortages and pent-up demand impact the price and supply of steel production.

The chart below illustrates steel output in thousand tonnes of steel units over the past five years. Though production has not yet reached the same level of December 2019, current market conditions will continue to push steel prices as output correlates to price.

2016-2021 Steel Output

Steel's hype

source: tradingeconomics.comWhy steel’s 80% benchmark matters to its price.

The capacity utilization rate is an important metric that measures the steel industry’s overall health, which is determined by actual production compared to the maximum production possible. In mathematical terms, it is the percentage calculated by the actual output divided by potential output.  Historically, an 80% capacity utilization rate corresponds to robust market fundamentals, meaning that the industry is producing near its full potential with correlating high prices. For example, lower capacity utilization rates, as was the case throughout 2020, equate to lower steel prices versus today’s surge and return to 2019 market production levels. The price surge always feels more aggressive than the fall because escalation happens, regardless of the short-term market volatility.

All of this is to say that steel’s skyrocketing prices are not surprising given the current market drivers. Both the automotive and construction sectors have resumed industrial activities, fueling post-pandemic steel consumption. The pandemic’s lingering global supply chain issues continue to slow the U.S. steel and lumber markets despite being domestically produced and used. The resulting construction material and labor shortages lead to material stockpiling, which also affects the price. Additionally, steel consumption achieved a new record with the recently passed $715 billion bipartisan infrastructure spending plan—securing stability in steel futures. As such, the U.S. capacity utilization rate for steel will likely edge higher as the country reemerges from the pandemic.

Yet, even with strong current and future market conditions, steel fabrication lead time remains inconsistent throughout the country, ranging from 6 to 12 weeks depending on the type and shape of purchased steel.

What is the average lead time for steel fabrication?

Rolled steel production is now commonly 6-8 weeks after order placement. While the disparity in lead time is primarily due to unpredictable labor conditions, the new rolled steel fabrication should not take more than 3-4 weeks after rolled steel delivery, depending on the fabricator backlog.

However, any metal fabrication can change daily, depending on local market conditions and seasonal weather. Many factors affect lead times, which is why it is best to refer to an Independent Cost Estimator (ICE) for realistic timelines during the bid process. An ICE will work with construction partners during the planning process to maximize budgets and determine adequate timelines, including steel fabrication. For example, if owners are told that steel will take an atypical amount of time, it indicates that local vendors are overloaded. Working with an ICE expert will bypass unreasonable delays to help identify opportunities that improve procurement from all market sectors—local to global.