The steel price outlook for contractors is again ominous as the short-term inventory cycle in the world steel market moves into the "too little" phase accompanied by rapidly rising steel demand in all of the major consuming countries. The pauses and pullbacks in many commodity prices early in 2007 are now reversing as US factory production and construction activity resumes rising in the second half of the year and through 2008. Prices will increase most for low-volume specialty products, such as stainless or structural shapes.

There will be a base price increases initiated by strained iron ore production capacity. Except in China, suppliers are reluctant to add capacity in the sixth year of a sustained industry expansion for fear than demand growth could soon end. The consensus in commodity markets is that iron ore prices will increase about 20% in the next year. Alone, this would add about 5% to the price of high volume, inexpensive grades of steel but less to the prices of alloy, custom finish or custom shape products.

In addition to iron ore, price trends are turning against buyers for many of the other components in the final delivered price of steel and steel products to the job site. Fuel for mill operations and freight is an exception. Although the recent jump in fuel costs may not yet be fully passed through to steel buyers, the outlook is for a decline in fuel costs. The US Energy Department forecasts that crude oil prices will drop $5.00/bbl. by the end of next year.

Already high prices in other commodities used in steel production will continue to rise. Coal prices have been steady so far this year but are expected to rise 4%-5% over the next year. Nickel prices have retreated since the record high spring level but the price trend is still up averaging out short inventory cycles. Nickel has become so expensive that stainless buyers are now experimenting with substitute alloys.

There is also a rising risk of much increased producer, processor and distributor margins in a market with tight supplies. Mill capacity for specialty shapes and stainless is more strained than capacity for high volume carbon sheet products used in consumer products.

Stainless steel prices have increased by 1/3 over the last year with more, but slower, price increases ahead. Structural steel prices are up 6.4% in the last three months and will be pushed higher by the recent surge in construction starts. Reed construction data reported a 30% rise in heavy construction starts and a 22% rise in nonresidential building starts in the second quarter over the first quarter. – Building Team Forecast