Steel Market Cost Analysis

On March 8, 2018, President Trump imposed a 25% and a 10% tariff on steel and aluminum imports, respectively. As of June 1, 2018, those tariffs extended to the European Union, Canada, and Mexico. The new blanket tariffs will impact current and future construction projects, increasing domestic metal prices at parity with foreign alternatives.

White House Proclamation Excerpt:

“steel articles” are defined at the Harmonized Tariff Schedule (HTS) 6-digit level as: 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTS classifications.

Many project managers are asking:

“How will this impact my construction project?”

The United States is the world’s largest importer of steel, importing 34.6 million metric tons (mmt) of steel in 2017. Steel imports and exports are broken into five product categories: flat, long, pipe and tube, semi-finished, and stainless. Construction items such as bars, rails, rods, and beams are classified as long products. Pipe and tube products are also commonly used in construction projects.

As of April 2018, the United States has imported 11.3 mmt of steel. Five countries make up 62 percent of the steel imports. Similarly, steel exports from the United States are dominated by Canada and Mexico, accounting for 56 percent of all steel exports in 2017.

The increased price of foreign steel under the imposed tariffs will likely accelerate domestic production. A higher capacity utilization rate in the United States will be beneficial for employment at local steel mills but may come at a higher price to the consumer as domestic steel prices match foreign import prices.

Conversely, it is expected that retaliation from other nations will have an effect on overall foreign and domestic steel prices. Retaliatory tariffs on U.S. steel exports, particularly fabricated steel, will impact prices domestically. Other retaliatory measures could influence the broader U.S. economy, creating new cost impacts on construction materials. A looming threat of trade war would exacerbate these issues, potentially creating unforeseen price increases.

Long steel, pipe and steel tube products are the most commonly used types of steel in construction projects. Most of the imported or manufactured steel items in these categories are used as structural steel in new facilities. Construction projects will mainly see the impact of the imposed tariffs on structural steel.

The typical U.S. installed structural steel cost is $6,000/Ton and is divided into five components:

  1. Raw Materials ~ 30%
  2. Fabrication ~ 38%
  3. Delivery ~ 2%
  4. Construction ~ 20%
  5. Fire Proofing ~ 10%

The tariffs on imports to the U.S. are on the raw materials that are utilized for structural steel which are 30% of the overall installed structural steel costs in United States.  Analysts state that the cost increases of the raw materials will be absorbed by companies to remain competitive, meaning the remaining 70% of the steel cost will be minimally affected.

While at face value a 25% tariff appears high, the tariff is on one component (raw materials) and the cost impact will be minimal.

For example, a 50,000 GSF office building with a structural steel frame:

  • Total cost of building: 50,000 SF x $300/SF = $15M
  • Total quantity of structural steel: 50,000 SF x 15lbs/SF = 375 Tons
  • Structural steel raw material cost, $6,000 x 30% = $1,800/Ton
  • Total cost of structural steel in building: $1,800/Ton x 375 Tons = $675,000

Include the new tariff:

  • 25% tariff applied: $675,000 x 1.25 (25%) = $843,750
  • Total cost increase: $168,750

The effect on total project cost:

  • Original project cost: $15M
  • Project cost with 25% tariff applied: $15.17M
  • Estimated project increase: 1.01%

With even the most conservative estimates, our cost engineers would apply a markup of 1.5% on current and future projects as a result of the imposed steel tariffs. However, everything is met with uncertainty.

The resulting price fluctuation will leave contractors and subcontractors vulnerable, resulting in elevated levels of risk when bidding on projects. We can therefore expect an increase in bid prices to cover that risk.

Conversely, prices fluctuate and could be circumvented through the import of fabricated steel, or trans-shipment from nations with whom the United States has free trade agreements.