I have been asked my opinion about the outlook for steel prices. This has been one component of construction costs that has been highly variable − one might say volatile − over the past year or so. The primary reason has been the exceptional level of spending on capital projects (and some consumer products) by the likes of China and India and other newly arising nations.

In the year ahead, however, demand and supply forces would suggest that steel prices will moderate. In fact, in their public pronouncements, the major North American mills are talking about how orders have dropped off to a significant degree.

Car demand and housing have been particularly weak in the United States. This affects sheet and framing steel directly and stainless steel indirectly, through appliances and fixtures. In Canada, housing starts are about to weaken. Also, high-rise office building is probably past its peak in this cycle, since office-based employment is now growing at a slower pace. Structurals and rebar usage will therefore see a tailing off.

The general world economic outlook has turned unfavourable. Even China and the other countries of Asia-Pacific are seeing reduced industrial output. All of these factors will lower steel demand and cut some of the pressure on prices.

However, there are some other factors to keep in mind. Major steelmakers have just signed raw material input contracts that have incorporated huge leaps in costs. For example, iron ore and coal are now being supplied (from Australia, Canada and other countries) at up to three times their previous contract amounts. This suggests that producers will be striving as hard as they can to keep a floor on prices.

Finally, there is one other element that also has to be considered - currency values. The flight-to-safety in the current uncertain economic times has meant extraordinary strength in value for the U.S. dollar. As a consequence, Canada’s loonie has fallen to $0.80 to $0.85 USD.

The currencies of all commodity-based economies have taken a nose dive. The lower-valued loonie will raise the cost of steel imports from the U.S. The effect will not be as dramatic, however, from Spain, Brazil and Asia-Pacific.

The bottom line is that steel prices will ease. But input costs and the currency effect may main less of a drop than would otherwise occur.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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