Rising steel prices rattle builders

When Dohn Construction bids on a commercial building contract, the company typically tells customers it can hold the bid price for 60 days.

That means as long as the customer accepts the bid in that time frame, Dohn Construction knows what it has to pay for the materials and can guarantee the price.

Those rules have changed.

Wildly escalating steel prices, which have pushed up the cost of steel construction materials at least 30 percent since early December, have forced Dohn Construction to put disclaimers on its bids.

“We can only hold our bids for sometimes less than two weeks,´ said Doug Dohn, president of the Fort Collins company.

Dohn is experiencing the fallout from a worldwide surge in steel prices. The steel phenomenon, coupled with spikes in lumber prices, is inflating the cost of new buildings and could threaten to leave some projects on the drawing board.

“If it continues to escalate at 10 percent a month, just the viability of projects is a concern,” Dohn said. “There comes a breaking point.”

Industry experts are attributing the spike to China’s ravenous appetite for steel products to feed its construction demand, which is leading to tight supplies.

The International Iron and Steel Institute reported that China consumed 257 million metric tons of steel in 2003, up 22 percent from the prior year. That figure could grow another 13 percent this year.

One way China has reached that level is by importing massive amounts of scrap steel, including from the United States. As a result, American mills are short on raw materials.

Furthermore, China is buying up coking coal used in the steel production process. Coking coal prices are expected to climb 20 percent this year, putting additional cost pressure on domestic steel mills.

American mills have instituted surcharges of up to 25 percent to help cover the costs of raw materials, said Dave Wasson, general manager of Valley Steel, a Fort Collins wholesaler.

But Wasson’s biggest fear is a shortage of steel this year in the U.S. market. One mill has already put Valley Steel and other customers on allocation, or rationing.

“Most of the mills have circulated information warning ? of short supplies” he said. “I don’t know that the next level (building supply retailers and contractors) has experienced enough yet to know how serious it is.”

Dohn agrees.

He recently bid on a local commercial project and found he was the only contractor to place a disclaimer on the steel price component — which can represent up to 30 percent of material costs in a commercial building.

“We get letters every day from suppliers, usually followed with articles from the Wall Street Journal or other trade publications about what’s going on,” Dohn said. “It’s kind of amazing the public’s not very aware of it.”

Dohn said he’s encouraged customers to pull the trigger on projects in order to acquire materials before prices leap again.

Wood prices take a toll

Housing contractors are also minding steel prices, which account for about 5 percent of material costs in a single-family home. But their greater worry is for lumber.

Since Jan. 1, wafer wood has jumped 70 percent to an all-time high, said Doug Frost, owner of the Collins Cashway building supply store in Loveland. And it will contiue to climb, he said.

“That’s in six weeks,” he said. “Last year it took six months to reach a (annual) high.”

Wafer wood is widely used as a sheathing product for floors, walls and roofing. The result, Frost said, is that lumber costs for a modest 1,400-square-foot house have gone up about $2,000.

Frost blamed the spike on an unusual supply-and-demand cycle.

Traditionally, wood prices rise and dip with seasonal demand, and lumberyards try to buy at the low end of the cycle, Frost said. However, when prices didn’t come back to normal seasonal lows last year, buyers held off on purchasing.

Consequently, mills cut back on production.

Recently, the lumber industry has seen “a frenzy of purchasing” and prices have skyrocketed in face of the tighter supply.

The major concern is the timing.

“We’re in the dead of winter,” Frost said. “Last year the prices took off in May. This is the worry we have for our builders ? When we get to the building season, when we really need supply, what will the price be then?”

Bill Kish, partner in Executive Homes in Windsor, said he hasn’t raised prices yet on his products but it’s coming.

“I’ve got to sit down and put a pencil to that,” he said.

While steel and wood top the list, builders are also facing hikes for dry wall, vinyl and roofing materials. As a result, Kish estimated a 3.5 percent hike — possibly as soon as March 1 — would be reasonable.

Such an increase means another $8,750 on a house that would cost $250,000 today.

With expectations that interest rates will climb as the year goes on, Frost fears the impact on the housing market could be serious.

“Every time you raise the price of a house a couple of thousand dollars, and if interest rates follow suit, you’re taking more potential buyers out of the market,” he said. “That’s the real issue.”

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