Skyrocketing pricing is the predominant storyline for the structural tubing market in the early days of 2021, and industry players hope the ride back down is much gentler than the trip up.
There was a single overriding issue hovering over the structural tubing market entering into 2021 – what’s going on with the price?
Long-time observers of the sector couldn’t recall a pricing environment quite like the one that bridged the end of 2020 with the start of the new year. The price of the material more than doubled over the course of just a few months.
“It’s almost unbelievable at times,” says Damon Gaynor, vice president of sales for Industrial Tube and Steel, Kent, Ohio. “I can’t remember the last time I saw a $100-per-ton increase, let alone three within a month and a half. We have probably seen eight price increases.”
His guesswork with how many hikes the market has experienced is not uncommon. “We’ve lost count of how many price increases have been announced. It’s probably around seven or eight,” says Paul Vivian, owner of Preston Publishing, Ballwin, Mo., which produces the industry-leading Preston Pipe. “It’s over $600 worth of price increases.”
The price hike is really driven by the flat-rolled mills, which provide the feedstock for the tube rolling mills. It dates back to the start of the pandemic, when auto companies shut down assembly plants and the flat-rolled mills responded by idling capacity.
The auto industry rebounded stronger than anticipated, catching the flat-rolled mills off guard. The inability, or unwillingness, to ramp back up quickly to meet the new spike in demand drove prices upward and onward, as the supply wasn’t there to meet the demand for the material.
“It’s been an unforeseen demand blow that has just swallowed up everybody’s capacity, so prices have gone crazy as a result of that,” says Joseph Anderson, president of the Steel Tube Institute, which has a division devoted to the promotion of Hollow Structural Sections, a tubing product. “And any time that happens, you also get the hoarding effect. Our members are scrambling to find coils.”
One of those members is Bull Moose Tube, a manufacturer of structural tubing. “I wouldn’t call it quotas, but if you ordered 5,000 tons last month, you’re not going to get 10,000 tons this month,” Mark Abernathy, manager of engineered sales for the Chesterfield, Mo., producer, says of the flat-rolled producers. “You’re going to get the same as you ordered before, or maybe a little less.
“We could sell everything we make these days, if we had the steel,” he adds.
The same condition exists for the service centers. “Right now, if you’re not in a contract with a particular flat-rolled mill, you’re not getting steel. There are very little spot tons available in the flat-rolled market,” says Keith Woods, owner and CEO of Central Steel Service, Pelham, Ala.
And all of this has a cascading effect. “Flat-rolled coil mills are running what seems like two to three weeks behind, which affects the ability to get the coils in time to meet certain tube rolling schedules,” he says. “We hope they get caught up.”
Gaynor worries the buying is being driven not by genuine demand, but customer fear of not getting material when they do need it. “I feel like a huge chunk in the uptick in business is not demand driven; it’s supply driven. It’s caused a panic in the market,” he says.
In many steel markets, imports would be there to fill the void. But Vivian notes that, of any of the tubing segments, the domestic structural tubing industry is the least dependent on imports. He says a combination of effective trade cases, plus a successful effort by Zekelman Industries to identify the fact some Chinese products weren’t meeting specifications, has really limited the market to mostly North American producers.
That lack of foreign product is seen by the service center sector. “There are new offerings coming out for June/July delivery with a 10 percent spread from the current replacement price. That’s a 10 percent price advantage for something that’s five to six months out,” says Greg Totten, co-president and CEO of Totten Tubes, Azusa, Calif.
“The import market has been hard. We really haven’t seen the spread coming to a place where we feel we have to make a defensive buy,” he says.
The story is the same on the other side of the country. “I’ve received effectively one offer, mostly on the flat-rolled coil side. We generally don’t source foreign material, but even if we did, the lead time was six months out. The pricing was not advantageous enough to take that risk,” Central Steel’s Woods says.
Vivian believes if the U.S. price remains high, the spread will grow to the point where imports will simply be too appealing to ignore, even with tariffs attached.
Thus far, the distribution sector has been able to pass along the increased costs to downstream customers. But how long that will last remains to be seen.
Woods believes the condition could be problematic in situations where a bid on a project was taken before pricing started going haywire, then the contractor returns to find the new cost wasn’t in the budget. “He may not be able to accept that project any longer, and you have to potentially restart the bid process,” he says.
In some cases, end users can seek out alternative materials. “Out here, if the pricing gets too high, they’ll either switch to concrete or put the project on hold if they can,” says Greg Totten.
“The good news for us is all building products are up – concrete and wood are really inflated as well,” counters his brother, Paul Totten. “It’s probably for the same reason: low interest rates, people doing things to their homes.”
In the absence of foreign material, the sector will continue to rely on the tightly squeezed domestic industry for product and worry about what happens when the pricing run-up runs its course. Legitimate fears exist about what happens on the downside of the market, particularly if it’s as steep as the trip up.
“We could see another December 2008,” acknowledges Paul Totten, who serves as co-president and COO of the West Coast company. “There are so many unknowns in the marketplace, things that could happen that would trigger a decrease in prices like we saw in late 2008.”
Distributors are trying to guard against that catastrophic scenario. “Luckily, we’re not so heavy in high-priced inventory,” says Gaynor. “We didn’t buy an abundance of material, nor do I plan to buy a huge amount. I’m sticking to only buying what I need for the next quarter.”
If the price plummets, Abernathy believes the behavior of the flat-rolled mills will be the culprit. “We’re on a cycle. It repeats itself because the mills get greedy. They have not figured out how to keep price increases going up in a gradual amount and keep the pipeline full. They push it to the limit, and the straw breaks the camel’s back, and it all comes tumbling down.”
The structural tubing market emerged from the pandemic in better shape than many other steel products, in part because construction projects started before the coronavirus took hold continued with little disruption. The strength continued through the remainder of the year, though there were some darker signs at year’s end.
“The Architectural Billing Index is down and it has not recovered to the degree we thought it would,” says Anderson. The ABI is the leading indicator for the health of the nonresidential construction sector, though a softening in the index is not usually felt until six months later or more by the suppliers of steel.
The biggest fear for the nonresidential sector, one of the two leading consumers of structural tubing, is the office construction segment. The pandemic sent many workers home to perform their duties, and the question remains how many of them will come back when social distancing and other spread-preventing measures are relaxed.
“There’s this underlying theory that now that we’ve gotten a taste as a nation of working virtually, are people going to return to offices. The institute believes some of that will occur, but is it going to go back to where it was, I don’t know. That’s a big question mark in everybody’s mind,” Anderson says.
Vivian shares that concern. “We’re worried what the return-to-work return to work model looks like,” he says. He notes that commercial leases tend to be long-term, multiyear contracts, so it’s not certain many companies are making decisions now on their future workspace requirements.
What could offset the construction space is taking more share of the existing market. Anderson says the institute has some data suggesting that is happening. “We believe we’re gaining traction in the steel-to-steel sector, construction.”
Of course, any potential losses from office or retail construction coming out of the pandemic would likely be offset, and then some, by a robust infrastructure package, which is always the hope when a new administration takes over. Most long-time observers have seen that particular football pulled away too many times to invest serious hope in such a bill, but it remains an inviting idea.
Anderson says HSS would see a particular boost if action took place in the much-needed bridge space. “It’s not a predominant material, but it’s a great ancillary product in bridges. If we could get this country moving forward on a focused infrastructure bill, I think there would be an opportunity for HSS to thrive as much as any steel product.”
Outside construction, manufacturing remains strong, with particular promise in the previously moribund ag market. “The farmers are finally making a little more money after four to five years, which means they’re buying equipment,” Vivian says.
Despite the worries, the general consensus is the structural tubing market will remain solid through the first half of the year, with some price/demand concerns overhanging the back half.
“Make hay in the first half,” Greg Totten recommends.
Photo Caption: Industrial Tube and Steel is trying to buy only what it needs to guard against getting caught with high-priced inventory if the pricing trend reverses course. (Photo courtesy Industrial Tube and Steel)
Call-out: ”Flat-rolled coil mills are running what seems like two to three weeks behind, which affects the ability to get the coils in time to meet certain tube rolling schedules.”
Keith Woods, Central Steel Service