A series of sharp increases in the price of steel has stunned the industry. Indeed, talk about the price hikes is one of the top concerns among executives in all segments of construction.

Recently, Craig Barner, editor of Midwest Construction, had a roundtable discussion with some executives about steel prices.

They included John Cross, vice president of marketing of the Chicago-based American Institute of Steel Construction Inc.; Bill Hanson, division manager of Gary, Ind.-based erector Danny's Construction Co. Inc.; Paul James, senior vice president of general contractor Bovis Lend Lease in Chicago; and Terry Peshia, chairman/CEO of Aurora, Ill.-based fabricator Garbe Iron Works Inc.

The discussion was held to try to illuminate the issue. The following transcript was edited for size:

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MWC: The price of steel is rising fast. According to Robert Murray, vice president of economic affairs for McGraw-Hill Construction, the producer price index for iron and steel products is up 42 percent since January 2002. The spot market price for metals is up 89 percent from January 2002. And the producer price index for iron and scrap steel has risen an unbelievable 189 percent. Everyone knows that the main reason for the increases is demand in China. Are there any other reasons?

JOHN CROSS: I think you really need to take a step back. In the early 1980s, structural steel - and that's what I'm talking about primarily when I reference things - was a product that took about 10 man hours per ton at the mill level to produce.

In the past 25 years, there has been an amazing productivity gain. Today, it's between a half an hour and 0.7 hours per ton of structural steel on the production side.

There's been a similar reduction in energy costs during that time in terms of what's required for structural steel, which is scrap-based and fully recyclable. During that period, the base price of mill material stayed relatively consistent without a lot of swings up and down, far more consistent than, say, concrete, which has had a pretty smooth, upward trend over that same period of time.

As we came into the end of 2003, the mill producers were pricing their product on the cost-based price methodology: This is what our labor costs are, these are what our scrap costs are, these are what our energy costs are. It is that cost-based methodology that was driving the price of steel.

When the scrap increases hit at the start of the year, they were really substantial, and it was China, India and South Korea kind of cooperating together to trigger that.

At the same time there was increase in the world demand for structural steel. There was no longer a surplus. The world market started really pulling in structural steel, especially China in a large capacity. The initial increases were off of the cost-based model.

The price of steel is much more being based on a global demand type of price structure, and structural steel in United States is still running about $100 a ton less than the global price.

So there's been a change in the pricing methodology that's taken place over the past six months as well as just increased demand for scrap.

MWC: A fire in a coal mine was mentioned to me as affecting the price for coke, which therefore affected the price for steel. Have you heard this?

JOHN CROSS: It was a facility in West Virginia. It was a coal mine associated with a large coke-processing battery, so it was primarily a whole complex that was dedicated to the production of coke.

That happened around Thanksgiving, and the mine didn't get back into operation until a month ago. That affected coke, which really doesn't affect structural steel. Coke is only used in a basic oxygen furnace - not an electric arc furnace - and all structural steel in the U.S. comes out of the electric arc furnace process.

So where that would have more impact would be with integrated mills that were producing plate and sheet and roll material and bar material. That would affect tube prices and plate prices, but not basic wide flange structural product.

BILL HANSON: That would also go towards plate girder products.

MWC: I get a sense from a few professional that there is hysteria about the steel price increases. Do you agree?

TERRY PESHIA: We began experiencing this and being concerned in February. There are people that still have to produce and supply the jobs that they have committed to and for them, it's quite a problem.

I'm anticipating a slight rollback in the value within the next couple of months. The anticipation of that and the hedging for it is something that each company has to handle separately. I'm not concerned about this being an ongoing thing. I think anyone putting budgets together recognizes it.

MWC: Engineering News-Record, the sister magazine of Midwest Construction, had a forecast in a recent issue that steel prices were to peak in the second quarter of this year. Do you think that was correct?

TERRY PESHIA: Yes. I don't think they'll go down to 18 cents but something in that neighborhood. And then other than just little swings in the market, I don't expect it to be down a lot lower than that.

MWC: The most recent figure I had was a ton of steel was $420 per ton. Is that correct?

TERRY PESHIA: My average right now is higher than that. When they say a ton of steel, of course they're looking at all the products that steel can be made out of. We use a lot of tubing in columns. Tubing is the high one because it's made out of plate, which is made by the integrated mills, which were affected by the coke fire.

JOHN CROSS: I speak in tons: probably between $530 and $540 a ton.
MWC: Paul James, you deal with owners, both those who are public and private. Are they getting sticker shock?

PAUL JAMES: It depends on how sophisticated the owner is and how much they understand the marketplace.

The problem that they have is that on large projects, the pre-construction period can be extended from the time they begin to think about a project until the time they get started. It could be one, two or three years, depending on what the project is and whether it's a public or private project.

We do a lot of school projects. Districts go to the voting public and ask for a bond issue. Once they get that commitment, they begin to finalize the design and go out to bid. We have enjoyed a period of 15 or more years of relative stability in the marketplace. When they were asking for bond issues a year ago, no one anticipated we would see this kind of spike.

We have been talking about steel. It's actually every metal that we're aware of in the business, and the price increase affects almost every trade. The sprinkler fitters probably have as high a percentage of metal in their cost of business as anybody because they are just putting up steel pipe.

There are cost increases in virtually every industry and collaterally, as you mentioned, we are beginning to see concrete increases and we are beginning to have talk of cement shortages and rationing.

MWC: Will the impact of the steel price increases be felt years hence?

PAUL JAMES: No, what's happening is the effect of steel now is apparent to anyone out on the marketplace bidding or trying to contract. What's happening is the projects that are going to start shortly have to face the fact that they have to commit now to dollars, significant dollars, on large projects.

The other thing we haven't talked about is that the United States is competing on a global market, and the American dollar is a huge issue as we compete with foreign goods and services. The impact of a weak dollar/strong dollar on our ability to buy foreign products is also something when you look ahead. So do you think the dollar has strengthened against the Euro or the Asian currencies or not? It becomes more complicated for anyone to do planning.

I think there's a lot of uncertainty in the market place, owners are sensing that instability and they're concerned. They're looking for reassurance.

MWC: Are owners asking to take steel out when practicable? Have you received that kind of response?

PAUL JAMES: Some. A good example is the Trump tower in Chicago. They just made a switch from being a partial composite building - steel and concrete core on the lower floors and then all concrete on the residential portion. They just made a decision in the last month to go to an all-concrete building.

That's not just driven by cost: They also changed the function of the building. When they originally had a composite design, they had an office component that lent itself to steel construction. During the first part of 2004, they made a decision to either go to all condominium or hotel-condominium. That tends to lend itself to concrete construction.

MWC: Terry Peshia and Bill Hanson, you're on the front lines. When a mill announces a surcharge, you're hit with it right away. How many surcharges have you had over say the last year and a half?

BILL HANSON: As an erector, we don't really see any. We've just been fighting the budget on jobs where the general contractor or construction manager was already committed to a budget. Prices came in, and they're over budget when the fabrication and erection prices come in.

TERRY PESHIA: In terms of number of surcharges, it was January that we began to get them. I believe that there have been three or four - about one every month.

The surcharge initially was applied to us based on the value of scrap. That was what they tied it to. In the last 45 days, the surcharge is considerably lower.

However, the base price has gone up, and the result is whether it's a surcharge a base price, we've had a continuing increase.

We buy from the mills and we buy in bulk quantities for a surplus of shapes and lengths. Over the years, that's been a business decision to keep that as a hedge.

MWC: Bill, because we're in the Midwest, are we more insulated from the surcharges than other parts of the country?

BILL HANSON: I don't think so. The integrated mills are in Northwest Indiana, but they don't make structural shapes. They do make the steel plates and of course that's a big part of the steel pricing crisis.

From my understanding it was quarter-inch plates and less which are really going through the roof. And products made for those quarter-inch plates are tube steel and pre-engineered buildings.

JOHN CROSS: As you talk about availability of the product, there really is no shortage of wide flange structural members anywhere in the United States. The mills that are online doing structural shapes have an annual capacity of around 6 million tons, and this year we'll use about 4 million tons.

Plus, the service centers that a lot of fabricators buy from are holding about a million tons of inventory.

BILL HANSON: And I think the plate products are available. The prices are little high but I don't think there's a shortage of availability there either.

TERRY PESHIA: We recently begun to recognize the service that service centers provide. By chance, one of the major service center companies in the U.S. has established a plant in Marseilles, Ill., which is not far from the Chicago market.

There are two things that they're doing for me. Number one, they're ensuring supply.
And they're giving me a little bit more stability in price.

The mills send me the invoice on the day that they ship it. I can't predict when that shipment date will be. I'm sometimes 10 to 15 days off on the date. The service center has it in stock and the price is established when I place the order.

MWC: An electrical contractor said the price for conduit sticks have doubled just in the last year. Which products used in construction seem to be rising the most?

JOHN CROSS: Typically the ones that use sheet product in their manufacture.

A company in Atlanta tracked the different types of steel in a structure and just looked at steel alone in terms of its impact. And what it has seen is that for every $100 of average increase in steel price at the mill level, if it's a concrete frame structure, there's going to be a 3.3 percent increase in project cost. For the steel frame structure it's about 3.6 percent.

MWC: What individual products do you see going up?

PAUL JAMES: Actually, the first one we were aware of was drywall studs. The first notice we got from anybody was that stud prices were going up. I kept getting notices from our drywall suppliers that it's up 30 percent to 40 percent this month and to expect a 30 or 40 percent increase next month.

The conduit for electrical, the tubing for sprinklers - all of those fabricated products have had some very dramatic increases. I did check with some concrete contractors, to talk about what they are with rebar. They have had the same kind of increases, 50 to 80 percent increase this year.

BILL HANSON: Construction equipment that we're buying now was made before the price increases. It could be a year from now for equipment that we buy that has steel in it to be quite a bit higher because of the steel increases.

MWC: Some people are calling for price adjustment clauses whereby the price is indexed to the letting dates. Do you see a lot of those?

TERRY PESHIA: Indexing is risky on either side of the fence. The owner, if they can hold for a fixed cost, are much more satisfied. If conditions are such that there's pressure to do that, the supplier has to be very careful that he or she finds an index that truly reflects what will happen.
Construction has always been high-risk business. Clearly, if you had obligated yourself to a price early and then something far beyond your control occurred, you'd have a reason to want to have an adjustment. Because I'm beginning to see the stability, I'm not concerned about radical changes from this point on.

PAUL JAMES: We got a job in March that had a fairly significant steel component, and the steel fabricators proposed to tie it to an index. The owner that we were bidding to didn't want to hear about it.
The last couple of months we haven't heard anybody talking about any kind of indices. I think there's some stability. You can get hurt on an index.

Most owners cannot afford to have uncertainty in their pricing because of the way they've structured their loans. They can't be in the risk business so they use contractors to take that risk, and I think that's going to continue into the future.

TERRY PESHIA: While we say that there isn't a good index to hang your price on, it isn't to say that there aren't modifications being made in contract prices.

If you are the purchaser and you're a specialty contractor that cannot afford to handle his or her obligations, your choice is to watch him leave because he won't be able to operate. It just won't happen. So there are many owners that are sitting down privately with their GC or their specialty contractors and saying, we can't afford this either. Where can we compromise?

JOHN CROSS: I think one of the real keys is the transition that's taking place. Those discussions now need to take place upfront where the owner really does make a decision of who's going to carry the risk.

PAUL JAMES: I think it's what Terry talked about earlier. Anybody who goes to an owner and says he wants relief from metal prices is not going to get a sympathetic ear. No one has been able to anticipate this. If you were to put these kind of increases in your proposal last November, you would have been laughed at as being ridiculously high.

And so I agree with Terry. There are selected instances where people are looking at individual circumstances and trying to balance all of the issues about who's getting hurt.

MWC: Are there certain construction markets that may be affected in the near term by the steel price increase?

JOHN CROSS: Probably where plate is heavily used in the bridge market is one where there's going be a little concern.

PAUL JAMES: I think if a project is marginal, the general increase in cost and construction across the board is going to make those projects even more marginal than a project that is well thought out and well-financed and has value in the marketplace. Those will probably still get built because it has intrinsic value.

There are programs, whether its schools or highways or whatever, that they may change their scope or their level of quality.

JOHN CROSS: You mentioned value engineering before. That's something that we are encouraging and that is getting to fabricator or the specialty steel contractor involved early in a project to be able to utilize some of the new tools out there, such as electronic data interchange and integrated design and fabrication. They can take almost an equivalent amount of cost out of a project.

MWC: Is there something you'd like to seen done either from the public or private sector that would help the industry?

TERRY PESHIA: I think that there has to be a lot more conversation on acknowledging who is taking the risk. We will take it from time to time. It's a choice that we make that we want to be recognized.