Why are steel prices so high?

[begreen]

Stove prices are going up quickly due to the dramatic rise in manufacturing costs. Steel has gone up a lot this summer. I have been trying to figure out why and what it would take to bring them back down. I came across this article explaining the problems. Does it ring true or are there flaws in his argument?

Steel prices: How we got here and what could happen

Scott Buehrer, president of B. WalterandCo., makes his case to eliminate the Section 232 tariffs on imported steel and aluminum.

www.thefabricator.com

 

[EbS-P]

That was a good read. Can’t find any flaws. Good reference to the short term history. I am in now way an economist but tariffs on raw goods have always seemed counter productive for the economy as a whole. I can see an argument for tariffs on finished products. What I think is missing is the discussion of speculation and the futures markets. This was written in may, so the idea of the infrastructure bill was present but not passed. Now we have a $ amount and a good chunk of that amount will be spent on steel. How many stoves worth of steel does it take to build 1 new bridge? We are going to be building lots of bridges. Tariffs or not the price is going up. Meanwhile we’re told to expect no more than a 2% raise with this years new budget. Last raise was over 3 years ago. Inflation is going to start to squeeze certain populations and certain economic sectors.
Evan

 

[begreen]

Yeah, I don't see how we are going to go gangbusters on infrastructure without lowering the price of steel. Do you expect the tariffs to be dropped?

 

[EbS-P]

I expect any negotiations to attempt to start at levels in place as of Jan 1 st 2017. Globally we have conceded considerable influence since then. Markets and supply chains have readjusted to lessen our influence. Some markets may take longer to recover. Increasing Steel tariffs as the article pointed out are really political decisions first and not made to help the larger US economy. Backing out of the TPP only benefited China, who produces half the worlds steel.
But again the price increases are being dominated by supply and demand not tariffs (but they are helping). It may now be more profitable to produce US steel but what is left of that infrastructure and how quickly production could increase I have no idea.
Example after example have show tariffs don’t work long term (I’m sure there are specific examples where they have helped a very narrow product regain price competitiveness) but America First is a persuasive policy, so we keep trying.
A trillion dollars is a lot. Cost of steel is probably 1% to pick a number so if price doubles we really are looking at 20 billion. I think that would be budget able. Question we need to ask is who is really making money? Wilbur Ross???
Evan

edit. I missed a zero in my 1% example. It’s definitely going to affect the infrastructure spending but 1% is really a wild guess.

 

[ABMax24]

I think it's pretty spot on. As with lumber, the only real end result of tariffs is to make the supply chain in-flexible to swings in demand.

The one thing I want to note is the global shortage of steel, here in Canada we aren't subject to the same tariffs and can import steel from elsewhere to make up the shortfall, unfortunately that steel doesn't exist elsewhere in the market and we too are facing shortage and weekly price increases. Our main steel supplier has noted that their regularly scheduled mill orders are being bumped by months, citing that new buyers are moving in offering to pay mills a premium for already sold capacity, forcing long term buyers like my supplier to the back of the line.

I work at/run a welding/fabrication shop, our pressure piping is still welded with 6010 and 7018-1 stick electrodes due to high weld quality and superior mechanical test results. The brand of welding rod we previously used was made in Canada and the US, the steel core for the welding rod was made in a Canadian mill, it was then shipped to the US (in which a 25% duty was applied) to have the flux applied to the core and was then packaged, this rod was then shipped to Canada (receiving another 25% duty) and distributed to our supplier. Our price of welding rod went up over 50% in very short order, this forced us to explore other options. We settled on a product made in Europe that we continue to use to this day, resulting in both the US and Canada losing market share.

 

[EbS-P]

We settled on a product made in Europe that we continue to this day, resulting in both the US and Canada losing market share

Similar experiences in the ag commodities as well. Russia Brazil and Argentina were happy to sell to China. Don’t see that market returning any time soon.
Really free trade seems to be a better solution.

 

[EatenByLimestone]

You asked a specific question, "Why are stove prices so high?"

While steel is the major part of new stoves, I doubt it's the highest cost item in the manufacture of the stove. I'd put my money on labor.

Labor is 50% of my expenses. Welding is a skilled trade and I imagine the good ones command a good price.

If steel doubles in price, I'd bet the cost to make the stove only would increase 5-10%.

 

[tlc1976]

Steel has skyrocketed in the past. Like around 2010 give or take. I don’t know what scrap is now, but I was getting $240/ton for tin and there was competition on roadside junk. Compared to $30/ton some time after, wasn’t worth my gas alone. I still see appliances sit on roadsides today, so I don’t think it’s what it used to be. I don’t remember the speech, but our plant manager gave an explanation why steel prices were the president’s fault.

Steel has more than doubled for us lately. We build bulk loading equipment, so the steel outweighs the labor. Projects we quoted in November we are now losing money on. I work in engineering, it’s out of my control. Of course we are busier than ever and I won’t see a Christmas bonus. But one thing different now, is there are real shortages, not just high prices. We are having to use 12 ga instead of the 11 ga we designed for. We use a specialty hose that fits 6 OD tubing, but we can’t get that tubing. So we have to redesign it for 6 SCH 40 pipe going through, and make end stubs of the 6 OD we have left in stock. So even more loss in labor.

I think it’s because suppliers shut down during the early days of the pandemic, thinking they would have oversupply. When in reality, the only thing that really stopped was the in-person dining/leisure/entertainment industry. Homeowners had time to do projects, industries had time to do plant upgrades, businesses had to do renovations to be pandemic compliant when they did reopen. Once we emptied out about a years worth of back stock, we started seeing the effects, and I think it will take a long time to get back to where we were. It’s gonna get worse before it gets better.

 

[Corey]

Its not so much that "things are getting expensive" it is more that your dollar is becoming worthless.

 

[clancey]

The federal government needs money so they just print some more and like the graph says--surging..we are in trouble with future economics.., save your pennies and store food and heat for this winter--I believe we are in for a ride..clancey

 

[begreen]

I doubt it's the highest cost item in the manufacture of the stove.

SBI recently responded that it was the steel prices that have caused their sudden increases in price. That is what prompted my search.

Osburn price increases

Osburn 3300 went up 300 around April.now today on their website looks like it's gone up another 500.retails for 3499 cad now.glad I bought mine in June. That's a huge increase.800 in a matter of a few months. Wonder if all the other brands increased this much?

www.hearth.com

 

[clancey]

Its very very political and I could address it my way but I won't because I am holding my tongue and you should be "proud if Me" ,,But everything is raising especially steel..clancey

 

[begreen]

Instead of introducing political opinions, one should note that SBI is a Canadian company and this inquiry is about what is happening to steel prices globally and in this case, in Canada.

 

[clancey]

Yea I realize that same goes for Australia as well...old mrs clancey

 

[bholler]

Yea I realize that same goes for Australia as well...old mrs clancey

Did you actually bother to read the article that was posted? Did you fact check it against the economic data from the time periods in question?

 

[ABMax24]

Another factor in this is the departure from "cash in hand purchases" to the majority of purchases being made on credit, at least for the individual consumer. The laws of supply and demand worked a lot better when price increases priced some consumers out of the market, or forced them to wait until prices returned to normal or enough additional money was saved to make the purchase.

Vehicles in particular this is quite evident with, a fully loaded 1 ton pickup used to cost $15k to $20k less than MSRP. With the current Covid shortages pickups are being sold at MSRP, and every dealer in town has a list of customers waiting for a vehicle to arrive on the lot. The 20% price increase in the span of a year doesn't phase many people, because it's spread out over 5 or so years worth of payments. Other customers are replacing vehicles early, being concerned that a new vehicle may not be available when the time to replace arrives, or that the price may have jumped again, which it is sure to do with the current metals pricing.

The inflexibility on the demand side makes these scenarios much worse, necessitating the response to come from the supply side, unfortunately steel mills can't be built overnight which allows pricing to increase unabated.

 

[EbS-P]

Another factor in this is the departure from "cash in hand purchases"

But at the corporate level companies have unprecedented cash reserves right now. Business and markets have been good to many of them but the uncertainty of when and what will happen when the fed starts to pull back on the monatar easing policy has then reluctant to make in large investments.

 

[clancey]

Everybody takes it from a different angle yes I read all the postings and the graph as well--prices are increasing 2 trillion a year..It affects all kinds of things --downside and upside...All the points people are making all have validity to them but I look at it all a different way that's all and nothing more...I enjoy the postings and the different takes on ---supply and demand and labor market and shipments and the very very rich and of course the graphing and all the different postings that begreen brought up as well as his wordings and they are all valid from the prospectives that they are bringing to the table... I just look at all of this another way...but have my stronger agreements as well..Now why BH why do you make me type out all this when I do not have my wifi and working "hard" the old fashion way with a scroll pad..shame on you....lol kidding clancey

 

[ABMax24]

But at the corporate level companies have unprecedented cash reserves right now. Business and markets have been good to many of them but the uncertainty of when and what will happen when the fed starts to pull back on the monatar easing policy has then reluctant to make in large investments.

There are some taking that approach. I know in Canada at least there are well known examples of corporations receiving government Covid handouts that didn't require them, just to hold that money within an account, or turn around and hand that money out in dividends or worse yet as bonuses to executives.

What I am seeing though is the opposite, corporations are in a rush to spend their money while it is still worth something, knowing that high rates of inflation are upon us. As of the second week of Q3 the flood gates opened and our clients are spending money like no tomorrow, all our competitors are in the same boat. We are once again back to a labor shortage, and are turning down work because of it. Wages are increasing in effort to find employees, and our charge out rates are rising accordingly, which of course doesn't help the spiral of inflation.

 

[Corey]

Another factor in this is the departure from "cash in hand purchases" to the majority of purchases being made on credit, at least for the individual consumer. ...

The problem is - the system is rigged so it is almost foolish not to use credit. With any decent credit rating, loans can easily be had in the low single-digit percent range. Conversely, investing money in a bone-stock / utterly simple DJ index fund returns an average of 10% per year....even averaged over the past 40 years! Diversify that a bit and it could easily be 13-14% growth annually.

So why spend dollars 'today' when you can take a loan for 4-5%, make 10+% on the invested money you don't spend, and pocket the 6, 7 or 8+% extra money? Plus you're paying in the future when there will be even more worthless dollars! Obviously there is 'bad' credit out there, too...not much way to recover a 20% interest credit card.

 

[Sawset]

You asked a specific question, "Why are stove prices so high?"

While steel is the major part of new stoves, I doubt it's the highest cost item in the manufacture of the stove. I'd put my money on labor.

Labor is 50% of my expenses. Welding is a skilled trade and I imagine the good ones command a good price.

If steel doubles in price, I'd bet the cost to make the stove only would increase 5-10%.

At one time I worked as an estimator for welments, metal and tubing assemblies. We were competitive for the domestic market. But if we were handed something that had been outsourced offshore previously, and asked to match or beat, removing almost all labor costs brought us in line. Of course we lost those bids. We had access to the same worldwide metals market as anyone else.

 

[ABMax24]

The problem is - the system is rigged so it is almost foolish not to use credit. With any decent credit rating, loans can easily be had in the low single-digit percent range. Conversely, investing money in a bone-stock / utterly simple DJ index fund returns an average of 10% per year....even averaged over the past 40 years! Diversify that a bit and it could easily be 13-14% growth annually.

So why spend dollars 'today' when you can take a loan for 4-5%, make 10+% on the invested money you don't spend, and pocket the 6, 7 or 8+% extra money? Plus you're paying in the future when there will be even more worthless dollars! Obviously there is 'bad' credit out there, too...not much way to recover a 20% interest credit card.

Normally I would agree with you, but given the current economic climate I'm not convinced loading up with debt to bet on the stock market is the correct answer. There are warning signs everywhere that the stock market is overvalued and headed for another correction. As world governments move out of Covid and begin to control rising inflation interest rates are bound to rise.

I wasn't alive to see the recession of the early 80's, but my parents were, Canada was hit hard and Alberta in particular. My mom worked in a bank at the time, and remembers an almost unending stream of customers coming in dropping the keys to their houses on the counter and walking out. Inflation in Canada peaked at 12.5% in 1981, to counter this the Bank of Canada raised interest rates as high as 21% in that year to reel in inflation. Upon renewal many peoples mortgage payments quadrupled or more, making them impossible to pay. I see many of the same conditions setting up at the present time, the economy is precariously perched atop policies like quantitative easing and mass social assistance programs to cope with Covid job loss. In theory there is a way out of this mess that doesn't end in disaster, such as sky high interests rates and GDP contraction, but unfortunately it is at exactly times like these that Murphy's wretched law rears its ugly head.

 

[SpaceBus]

The only way out of this without crushing inflation, interest, or GDP contraction is to produce. Doesn't matter what the product is as long as people want it. I think this is the true impetus behind the Infrastructure Bill among other government initiatives. The Maine government is dong everything they can to help the tourist industry and other small businesses. For the most part this seems to be working with only a few restaurants closing in my whole county, with some of them being bought immediately and reopened. Even in Portland and other cities there are relatively few businesses closing. Maine is a bit of an outlier being that most of the economy is tourism, it's pretty easy to produce vacations. Other states like PA, WV, and others who don't have the tourism or other industries to fall back on and don't really have anything to produce right now. Hopefully some infrastructure development will help bolster the manufacturing and mineral states.

 

[Corey]

Normally I would agree with you, but given the current economic climate I'm not convinced loading up with debt to bet on the stock market is the correct answer. ...

I think that is the thing, though... there never is a "good" time to start. We're always in some upswing or bubble that is ready to burst, or the market is flat and not making any returns, or it's in a downturn and no one wants to throw money away, or it is in some pit with allegedly no hope of recovery.

I believe it was Confuscious who said, "When in doubt, zoom out." Sure there were some pretty bad times to jump in... early October of '29 ...early October of '87, early 2000, early 2008, etc. But long term 'investing' vs short term 'betting' does seem to eventually win out in the end.

 

[EbS-P]

The only way out of this without crushing inflation, interest, or GDP contraction is to produce

Well said. Encouraging this with bond buying and low interest rates and now a big bump in infrastructure spending will increase steel prices no doubt. I have not seen any realistic alternative approach presented anywhere.