Recent articles suggest that steel cost is expected to increase and this will almost certainly affect the cost of construction. But just how much of an affect would a cost increase have on total building cost? The cost increase that is being talked about is the mill price cost of steel, not the producer price (PPI) and also not the total cost of steel installed. The PPI is the price after fabrication. Total cost is the contractor’s bid or selling price installed which includes all markups (or markdowns).
The questions we need to answer are:
- How much of a cost increase will we see in the raw product, manufactured raw steel?
- How much steel is used in a building?
- What affect will a raw material cost increase have on the cost of steel installed?
- How much does that change the cost of the building?
It might help to start with a basic understanding of steel manufacturing and use.
Basic Oxygen Steel (BOS) steel making uses between 25 and 35% recycled steel to make new steel. BOS steel usually has less residual elements in it, such as copper, nickel and molybdenum and is therefore more malleable than EAF steel so it is often used to make automotive bodies, food cans, industrial drums or any product with a large degree of cold working. Cold rolled steel is in this category which would include gypsum wall system steel studs.
Electric Arc Furnace (EAF) steel making contains more residual elements that cannot be removed through the application of oxygen and lime. It is used to make structural beams, plates, reinforcing bar and other products that require little cold working. EAF steel uses almost 100% recycled steel. Most steel that goes into a building is in this category.
Typically quoted benchmark steel pricing is based on cold-rolled sheet steel. This is a type of BOS steel and is a common product used for the automotive industry, but not so much for the construction industry. Structural steel is nearly 100% dependent on recycled steel so is not as much affected by price changes of iron ore.
The United States produces approximately 100 million tons of steel each year. More than 40 million tons is used in the construction industry. The next largest industries, automotive and equipment and machinery, together do not use as much steel as construction. The U.S. imports about 30% of the steel it uses. Structural steel is the most widely used structural framing material used in the U.S. with nearly 60% market share in nonresidential and multistory residential buildings.
What affect might a steel cost increase have on a building project? It will affect the cost of structural shapes, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit. Structural steel and reinforcing steel are hot-rolled long products, EAF steel. All the others are cold-rolled flat sheet BOS steel.
Here are some averages of the percentage of steel material costs as related to total project construction cost. For a building that is predominantly masonry, these percentages would be reduced considerably. For a heavy industrial building the percentages might be higher. Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total building cost.
Structural Steel only, installed, represents about 9% to 10% of total building cost. If the structural steel subcontractor increases bid price by 10%, that raises the cost of the building by 1%, but if it is the mill price of steel that increases by 10% the increase to final building price is far less. It is the mill price of steel that is tracked by the producer price index (PPI).
The final cost of steel installed in a building is about four times the cost of the raw mill steel material used in making and installing the final product. Why so different? Well, for instance, structural steel cost includes: raw mill steel cost, delivery to shop, drafting, shop fabrication, shop paint, delivery to job site and shop markup. At the job site it includes: unload and sort, field installation crew, welding machine, crane and operator, contractor’s overhead and profit and sales tax.
Assuming a building as described above, a 10% increase in the cost of mill steel, which affects one fourth the cost of 16% of the total building cost, then a 10% increase in the cost of ALL mill steel may result in a composite price increase on a whole building of about 10% x ¼ x 16% = 0.4%.
So, if the mill cost of steel were to increase 10% from $500/ton to $550/ton prior to shop fabrication, that could add roughly 0.25% ($250,000) to the cost of the structural steel contract or roughly 0.4% ($400,000) to the total cost of all steel in a $100 million building.
update added link to relevant data article http://www.ita.doc.gov/steel/countries/pdfs/imports-us.pdf