Steel tariff consequences will vary, but observers expect price increases, project deferrals, and substitution

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Design and Construction Report staff writer

What will the consequences be from President Donald Trump’s steel and aluminum tariffs for the US construction industry?

The answer: It depends on the sector, market and how the tariffs are actually implemented. However, there are increasing concerns about significant cost increases and the risk that steel will be substituted by other other building materials if prices rise too high.

Not surprisingly, the American Institute of Steel Construction (AISC) has come out in favor of the 25 per cent tariffs – in fact it was one of the biggest lobbyists for them.  In early March as the new tariffs were announced, the association asked the administration to go further and expand them to include include fabricated structural steel.

“Otherwise, the effects of any tariffs will be too easily subject to circumvention by offshore fabricators, who will be able to buy steel at tariff-free prices, transform it into fabricated steel products for critical infrastructure components, and then import those components around the tariffs below the cost of domestic fabrication,” AISC president Charles Carter and chair David Zalesne said in a March 2 letter to Trump.

While the administration initially announced that it would levy the tariffs world-wide, it has put a hold on them for Canada (the largest exporter to the US) and Mexico pending resolution of the North American Free Trade Agreement (NAFTA).  While Trump has said he would leave NAFTA if he doesn’t get major concessions from the other two nations, there are signs that the administration has modified its stance and is now eager for a NAFTA settlement – at least in principle – within the next couple of months.

Meanwhile, the administration has stepped up its trade conflict with China – considered to be the main source of low-cost steel imports – resulting in much rhetoric and threats of retaliatory trade actions.

On the ground (or, in the case of structural steel, often at heights), contractors in several areas of the US are reporting severe cost pressures, as steel producers and distributors continue price increases that started even before the new tariffs were announced.

In North Carolina, for example, Carolinas Associated General Contractors (CAGC) president Dave Simpson said steel price increases will be costly, as the metal is used everywhere in construction, including concrete (as rebar), bridges, to make the structure of buildings, for beams, in staircases, interior walls and hardware.

Most of North Carolina’s steel comes neither from the NAFTA countries or China – the state imports most of its steel from Brazil, reaching $52 million in 2017.

Charlotte-based steelmaker Nucor Corporation recently raised its prices by $45 per ton.

Bill Pruden, president of Rocky Mount contractor Steel Technology Inc., said he saw an overnight increase of 5 percent, continuing price hikes of 26.8 percent over the past three months.

Meanwhile, Chuck Pinnix, director of sales at Buckner Steel Erection, said the current chaotic price escalation will make developers re-design projects to stay within budget.  “What we’re probably going to see is a lull of projects sitting still or not moving forward,” Pinnix told the Raleigh News & Observer.

Simpson with the CAGC says his organization expects more price hikes. “The proposed increases may make good political soundbites,” he said, “But we in the construction industry are very concerned about how it will drive up prices on both imported and domestic steel.”

Conversely, experts indicate they don’t think prices will increase that much in New York City.

“In the New York Market, almost all steel comes from the US,” said Brian Raff, the AISC’s director of government relations.

“General contractors and developers could steel feel some effects, however, because sapping foreign competition would give domestic producers more leeway to set prices.

“Will this allow domestic steel mills to raise prices a little bit? Probably,” said Paul Brancato, general manager of Ideal Steel in the Bronx. “But I don’t think this is going to be a great boon to the industry where we’ll see steel mill after steel mill opening.”

New York City is already home to the priciest construction in the world, and the cost of steel alone rose about 5 percent between 2015 and 2017, according to a report from Turner & Townsend.

Overall, the message from AISC, representing the steel industry, is that the tariffs won’t really cause that much hardship, while other associations have been speaking loudly to say it will harm the construction industry and stall development.

In a statement, AISC says: “As for the price impact of a tariff on steel projects, the answer is that it will depend.”

“However, a 25 percent tariff on imports would not mean a 25 percent increase on the overall cost of a project. First, the cost of material is just one of several components in the cost of a steel structure. And while percentages vary from project to project, even if the full impact of a 25 percent tariff on material cost was passed on to a project, it would likely impact the cost of the steel package by 5 to 10 percent, and the total project cost by less than 2 percent.”

However, AISC acknowledges there could be other consequences because steel prices don’t operate in isolation. The association noted for example, that in the past four years, the index cost of ready-mixed concrete has increased by 17 per cent, while the indexed cost for steel has declined. “And to the extent a tariff applies to rebar imports as well as structural products, it will also affect overall costs for concrete. So on any individual project, the actual impact of a tariff will need to be evaluated against overall market factors just like any other volatility in material costs.”

These observations relate to the wider market impact of cost changes.

“Rising construction costs, along with labor costs and bank financing constraints, have been a significant factor in limiting property development over the course of this (economic) expansion, Salm Chandan, the associate dean at the New York University’s Schack Institute of Real Estate, said in a statement to the Commercial Observer. “Policies that add to cost pressure exacerbate drags on new supply.”

While making foreign steel more expensive through taxes could mean companies may use more domestic steel, the US industry will not have the supply to keep up with the demand, said Louis Coletti, president and CEO of the Building Trades Employers’ Association in New York.

“The US steel manufacturers cannot produce the quantity of steel needed. Steel manufacturers are already telling contractors to expect price increases,” Coletti said. “The lack of steel availability will also cause scheduling delays that ill add to additional cost increases. This policy will have a detrimental impact on the economic growth of (New York) and the nation.”

Meanwhile, the National Association of Home Builders (NAHB) said in a statement that the steel tariffs will be costly.

“Given that home builders are already grappling with 20 percent tariffs on Canadian softwood lumber and that the price of lumber and other key building materials are near record highs, this announcement by the president could not have come at a worse time,” said NAHB chairman Randy Noel.

“Tariffs hurt consumers and harm housing affordability. We hope the administration will work quickly to resolve these trade disputes regarding lumber and steel so that businesses and consumers have access to an adequate supply at a fair market price,” Noel said.