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Structural steelmakers, such as Gerdau’s Midlothian, Texas, facility, are concerned by the influx of imported fabricated products, which aren’t protected by Section 232. (Photo courtesy Gerdau NA)

Structural Steel Shipments Off to an Improved Start in 2018

Questions loom over impact of Section 232 on the industry

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The U.S. structural steel market has been off to a relatively good start in 2018, with both shipments and prices seeing modest year-on-year gains. The outlook is mostly optimistic for the back half of the year, though tempered by fears produced by the ongoing Section 232 issue and its fallout.

After declining 5.9 percent last year, U.S. domestic shipments of heavy structural shapes have been improving through the first five months of 2018. Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., predicts shipments will grow 2.3 percent this year and another 2.9 percent in 2019. 

That growth would represent a slowdown from the first quarter. John Cross, vice president of special projects for American Institute for Construction, says mill shipments saw 5 percent year-over-year improvement during the first three months. 

The story was even better for distributors. Service center structural steel shipments increased more than 10 percent during the quarter, says Norm Browning, vice president of business development for O’Neal Industries Inc., Birmingham, Ala. The effect, however, was not uniform. Areas hit hardest by the year’s long, severe winter did not enjoy the first-half surge, says Pauline Malone, vice president for procurement at Rochester, N.Y.-based Klein Steel Service Inc.

Malone says her company’s structural steel tonnage has been mostly flat. Though she’s seen a recent pickup in quoting activity, she believes that might be driven by customers asking for requotes due to increasing prices. She remains hopeful that demand in the region her company serves will begin to improve. 

“A lot depends on what happens with tax reform and infrastructure, although that will take time to filter down to service centers,” she said, adding that with the big jump in flat-roll prices, beams could be used instead of tubing in certain applications. 

Gerdau Long Steel North America’s Rob Thompson says his company is optimistic about the back half of the year. “We anticipate continued strength in the months ahead leading into the summer construction season,” says Thompson, Gerdau’s vice president of sales and marketing. 

Thus far this year, construction activity has been slightly better than some initial expectations, according to Scott Hazelton, managing director of IHS Markit’s construction service. The group predicts the construction sector should see single-digit year-on-year growth. That comes after somewhat disappointing performance in 2017. 

Kermit Baker, chief economist for the American Institute of Architects, says building construction spending finished 2017 up about 2.5 percent versus initial predictions of a 5 percent increase. But he says the early signs indicate 2018 will be a better year, in line with the AIA’s consensus nonresidential forecast of 4 percent growth. 

Even with mill shipments trending up, Cross says first-quarter structural steel apparent consumption was mostly flat year on year. Also, while up slightly, domestic operating rates remain below 70 percent of production capacity, Plummer says. That’s “highly unusual,” given that this year marks the fifth year of recovery for the structural steel market, he adds. 

Plummer attributes both this low capacity utilization and the lackluster apparent consumption to the number of imports coming into the United States. The biggest culprit are fabricated beams, which, like other secondary and fabricated products, are not subject to Section 232 tariffs or quotas and are currently coming in at twice the rate of conventional, rolled structural steel products. 

U.S. imports of rolled heavy structural shapes fell 1.8 percent to 860,000 tons last year and are expected to fall another 5 percent to 817,000 tons in 2018, representing a 12.6 percent market share. In contrast, Plummer says imports of total heavy structurals, including fabricated beams, are expected to increase 5.5 percent in 2018 to 2.6 million tons, a 31.2 percent market share. That followed a 2.2 percent increase last year.  

Similarly, fabricated beam imports, which had only been 646,824 tons in 2011, climbed to 1.56 million tons in 2017. Plummer is forecasting that they will peak this year at 1.74 million tons. Despite the jump in fabricated beam imports, U.S. fabricators are currently very busy with strong backlogs, according to O’Neal’s Browning.

Tabitha Stine, vice president of market development for the American Institute of Steel Construction, says the group is promoting the idea to U.S. Trade Representative Robert Lighthizer that fabricated beams should be included in Section 232. “We are supporting a group of fabricators that are exploring a trade case,” she says, adding that at this point nothing has been filed, but exploratory work has been going on for several months and that AISC has been supporting that effort with different types of logistics and funding.

Though much hinges on the Trump administration’s final decision on 232, it is possible rolled beam imports could start picking up again in the third quarter, says Metal Bulletin Research Principal Consultant Amy Bennett. The gains would be modest, with volumes remaining below last year’s levels. Though prices for beams and other long products haven’t gone up as much as they have for flat-rolled, the gap between domestic and import prices started to widen again in April, she says. 

Still unanswered questions about Section 232 have also resulted in a lot of uncertainty about what the future might hold, not just for structural steel but for many steel and aluminum products. John Anton, director of steel analytics for IHS Markit’s pricing and purchasing service, says he believes this is creating a good deal of paralysis. 

“Both construction and manufacturing firms don’t know what to do, so they are doing nothing,” he maintains, especially with President Trump delaying his decision until June 1 on what countries and products would be permanently excluded from 25 percent import tariffs or be subject to quotas. 

As of mid-May, it appeared that many of the countries that were granted temporary exclusions, with the possible exception of Canada and Mexico, could be required to accept “pure” import quotas. That would be a deviation from the combination of quotas and tariffs some originally expected. These pure quotas are expected to be equal to 70 percent of their average 2015-17 imports, such as the quotas that South Korea, Brazil, Argentina and Australia have already agreed to. 

“Such quotas are just about the worst thing I could imagine,” Anton says, maintaining that they have the potential of killing jobs, causing steel shortages and driving prices up even more than tariffs, as companies will not be given the choice of paying extra to import the steel they need. Despite the danger of such unexpected consequences as a trade war, Anton says that by late this year or early 2019 things could return to some level of stability in an environment with tariffs. “But a quota world could be painful,” he says, because if there isn’t enough steel to go around, some work won’t be done, and people could possibly be laid off. “It could affect the whole economy.”

Ken Simonson, chief economist with Associated General Contractors of America, says that increases in building materials have already been “a giant headache” for contractors, especially those who have projects under way at a guaranteed price and haven’t ordered their steel yet. “There is concern that at some time if this continues their customers are going to reject bids and either defer, scale back or even cancel projects. 

This comes as the progress in construction activity is somewhat uneven with strong pockets of growth – such as for single-family housing, warehouse and airport construction – at the same time as certain others such as retail and manufacturing aren’t doing as well. 

Most sectors, however, should see at least some gains this year, Plummer maintains. He is predicting the value of total U.S. construction starts will increase 2.8 percent in 2018.

How long it continues is an ongoing question, according to Dodge Data and Analytics Chief Economist Robert Murray. He says there are concerns the construction sector recovery, which first started to take hold in 2012, could be getting “a little long in the tooth.” 

Also, given a general trend toward smaller construction projects, especially for office buildings, it is possible structural steel suppliers might not see as much benefit as the data and underlying trends would indicate. That negative trend could be countered by a decline in office vacancies. According to Alex Carrick, chief economist for ConstructConnect, vacancies have declined to about 10 percent from above 15 percent during the economic downturn. 

“The underlying economy is doing well, with 2.3 percent domestic product growth in the first quarter of 2018, consumer confidence at unbelievable highs, unemployment at just 3.9 percent and the U.S. population increasing by 0.7 percent per year – about 2 million people per year,” he points out. “But while there is strength, the construction sector is still not as strong as it had been in the past at this point in business cycle.”

Cross says even multi-family housing, which had been very strong over the past few years, including a 26 percent increase in 2017, could see growth flatten this year. That could just be a pause after reaching a saturation point, particularly for luxury apartments, Simonson adds. While starts might only move up about 1 percent this year, the rate could start to pickup again in 2019. 

The future of multi-family is predicated on the behavior of millennials, which remains an unknown. While the cohort has generally preferred to cluster around downtown areas, that could change now that many are forming family units. They could begin buying single-family homes in the suburbs as their parents did rather than renting in the cities. 

There could also be a little easing in commercial construction, according to IHS Markit’s Hazelton, who is expecting growth at just 1-2 percent this year. Others, however, are expecting slightly greater growth – as high as 6 percent year-on-year growth – due to the potential positive impact of the recently passed tax reform package. 

“The corporate tax reform initiative should make U.S. businesses more competitive with their international competitors, incentivizing investment in existing businesses and attracting new direct investment,” Gerdau’s Thompson says, noting this includes the potential to stimulate greater manufacturing investment. 

While O’Neal’s Browning believes it is too early to know for sure what the impact of tax reform will be, he believes many companies will use any “windfall of cash” they see to invest in their businesses. 

However, while he agrees that the huge corporate tax cuts could eventually translate to a pickup in manufacturing construction, AGC’s Simonson says so far there have been more announcements of stock buybacks, bigger dividends and one-time employee bonuses than of plans for plant investments.

Over the past few years, manufacturing construction had been “awful” – down 14 percent in 2017 after falling 6 percent in 2016, Hazelton says. Initial forecasts had been for another down year in 2018, “but now with most of the recent data being strong, it is possible that this year it could actually turn moderately positive for the manufacturing sector,” he says. 

The fastest growing commercial building sector continues to be warehouse construction, which saw 33 percent growth last year following 26 percent growth in 2016 with e-commerce companies building up their infrastructure, Hazelton says. While these increases can’t last forever, he is optimistic that warehouse construction, which tends to be very steel intensive, will be up another 8-10 percent this year. Those gains will come at the expense of the retail sector, specially brick and mortar general merchandise stores that are traditionally mall anchor stores. 

Meanwhile, the future direction for infrastructure construction remains somewhat uncertain, riding the apparent ebb and flow of interest in Washington. “The big question is whether there is much appetite for increasing the deficit further through further federal spending on infrastructure projects,” AIA’s Baker explains. With no consensus on how to pay for this plan, it is now generally believed that nothing will happen until after the midterm elections this November, at the very earliest. 

AISC’s Stine says even though Congress did pass its first long-term highway bills in about a decade in 2015 and there was $10 billion in transportation funding in the Omnibus budget passed in March, to date it hasn’t had much of an impact. Dodge’s Murray says the “surprise” additional funding in the fiscal 2018 appropriations bill should keep the public works sector moving at a decent clip, but it remains to be seen if all that money gets to construction sites. 

There is optimism that Congress will pass a new waterways development bill later this year. Gerdau’s Thompson says such a large-scale project is badly needed and long overdue. 

While public works construction is likely to increase about 2 percent in 2018 and another 3 percent in 2019, Plummer says that will likely be more beneficial to rebar and fabricated plate than structural steel. 

Overall, 2018 should be a good year for structural steel producer, IHS Markit’s Anton says. “But that is because of the artificial impact of the Section 232 upon prices and availability. The underlying fundamentals point to a mediocre to OK year.”