News Details

The only thing standing between you and your goal is the bullshit story you keep telling yourself as to why you can't achieve it.

The Steel Tariff and Construction Cost Putting It Into Context

https://archinect.com

On March 8, 2018, President Trump signed an order to place a 25% and 10% tariff on steel and aluminum imports, respectively, effective March 23, 2018. The new tariff granted a temporary exemption to certain countries including Canada, Mexico, Argentina, Australia, Brazil, South Korea, and the European Union until May 1, 2018, as discussions continue.

Now that the steel tariffs are in place, the question everyone is asking is “What does this mean to the cost of my construction project?”  While this is a straightforward question, the answer may not be as simple.

US Steel Import Volume

The United States is the world’s largest importer of steel, importing approximately 35 million metric tons in 2017, which accounted for 33% of the total steel used in the country.

Nearly 60% of this total imported volume originates from five countries, including Canada and Mexico which alone accounted for 25% of the total imported volume.

Putting It into Context

Raw steel is used in the construction of a number of different building components including reinforcing steel in structural concrete, structural steel framing, and miscellaneous metal framing and supports. Although the tariff will affect all these components, the single biggest impact will be on structural steel in steel framed buildings.

The cost of structural steel is typically composed of four main components – raw material, fabrication, delivery, and erection on site. While the cost of these can and will vary over time and by geographic location, raw steel has historically been around 30% of the total cost per ton for structural steel.

According to ENR, prices for raw steel currently range between $700-800 per ton, meaning the 25% tariff would result in an increase of $175-200 per ton.

To put this cost increase into context, we can use two typical construction projects as examples:

Example I: A new 100,000 GSF academic building with a structural steel frame of 15LBS/SF located in the Mid-Atlantic Region

Example II: A new 500,000 GSF high-rise residential building with a structural steel frame of 30LBS/SF located in Southern California

These examples illustrate the relatively minor impact that an increase in the price of raw steel would have on the overall building construction cost – in most cases, less than 1%.

Note that all of the above refers to construction projects using raw steel. Imported prefabricated steel products, such as those used in certain types of modular buildings, are not considered raw steel and therefore not subject to the tariff.

 

How The Steel Tariff Will Impact Construction Costs

The tariff is anticipated to impact construction costs in two ways:

Increased Production Overhead

First, the increased price of raw steel from the tariff will disrupt the supply chain for domestic steel manufacturers, most likely straining production capacity in the short term.

Currently in the US, the capacity utilization rate for steel mills is around 75%, or 30 million tons of annual idled capacity. The goal of the tariff is to increase this to 80%, which is viewed as the minimum rate for long-term viability of the industry. However, production is unlikely to ramp up overnight.

According to Michelle Applebaum, a steel industry analyst, “the U.S. steel industry should be able to meet most demand, but even plants like Granite City and Ashland, which have been kept ready to restart, take four to six months to be ready for production.” Likewise, it also takes time for fabricators who historically use imported steel as raw inputs to build business relationships and switch to domestic suppliers.

Assuming the increase in production capacity can be achieved, it will likely push the cost of domestic steel up due to additional overhead costs for hiring more workers, increased plant operation cycles, and potential start-up costs for reopening mills that are currently closed.

Uncertainty

Second, as the industry learns how to respond and adjust to the steel tariffs, price uncertainty will elevate the level of risk that contractors and subcontractors face when bidding on projects.

Contractors and subcontractors will be especially vulnerable to price fluctuations between the time they submit a bid to when they are awarded the contract. The most likely response to this heightened risk will be an increase in bid prices to cover the risk of fluctuation, and/or the addition of a clause to limit the amount of time a price can be held. However, this situation will likely resolve itself over the next several months as fabricators work to lock in prices and potentially alternate sources for raw materials.

Recommendations

As with all materials, market demand will continue to play the leading role in actual material price increases. Assuming the US construction market and demand for steel continues to remain robust, the tariffs will likely result in further steel cost increases.

Current indicators suggest that the present level of construction across the US will continue strong through the remainder of 2018 and into 2019. Many of our contacts in the industry have reported that they expect this volume of construction to level off and slowdown beginning late 2019 to early 2020. Once this happens, demand should reduce, effectively alleviating price pressure points for steel as well as other materials.

In the meantime, developers, architects, and contractors are recommended to take the following measures to manage the risk of material cost increases on their upcoming projects:

For Projects In Planning Or Design

For Projects Bidding Within The Next 6 Months

As the effects of this policy unfold, we are getting more clarity on the full extent of the tariff’s impacts. Stay tuned for updates.

  • Chat Start Here!!!
  Connect With Us