The renewed onshoring push is already stretching procurement timelines for many materials across the board, namely microchips, HVAC equipment, electrical switchgear and fabricated millwork.
Now, in addition to those materials, these multibillion-dollar megaprojects are also exerting pressure on sourcing steel.
Chip factories, battery plants and even data centers all require more and larger steel conduit than typical nonresidential construction, such as office buildings or hospitality facilities, said Dale Crawford, executive director of the Steel Tube Institute, a Chicago-based organization that brings together key producers in the steel industry.
Spending on manufacturing construction projects, the largest nonresidential building segment, reached a seasonally adjusted annual rate of $206.85 billion in October, a 71.2% increase from October 2022. Data center starts should reach $16.4 billion in 2023 and $17.9 billion in 2024, a 14% and 6% annual growth, respectively, over the next two years, according to Dodge Construction Network.
For smaller contractors, that means these types of projects will further amplify the strain on steel prices, said Scott Keller, engineer at Gordian, a Greenville, South Carolina-based construction cost data tracking firm. That’s true even after a short reprieve following labor stoppages at some plants.
“We have seen steel prices decrease over the latter half of 2023 with the United Auto Workers’ strike decreasing demand for certain steel products. Now that the strike has ended and demand has gone up, steel prices are following suit,” said Keller. “We would expect that if these megaprojects all move forward, further increasing demand, it could make it difficult for smaller contractors with increased costs and possibly longer lead times for residential projects.”
Prices for steel mill products, such as large structural sections, heavy plate, strip, wire rod, bars and pipe, dropped 2.5% in October, and remain down close to 10% over the past 12 months, according to U.S. Bureau of Labor Statistics data. However, despite much-needed cooling over the past year, steel mill products are still 62.1% more expensive than in February 2020.
That’s bad news for smaller contractors, who are already grappling with reduced commercial real estate activity, said Anirban Basu, chief economist at Associated Builders and Contractors.
"Smaller contractors are often the ones most dependent on developer-driven activity," said Basu. "With developers facing both higher borrowing costs and greater difficulty lining up project financing, backlog among some contractors is beginning to dissipate."
Smaller contractors, or those firms with less than $30 million in annual revenue, have now posted three straight months of overall backlog contractions, according to the ABC backlog indicator report. On the other hand, contractors with annual revenue greater than $30 million continue to pile on work.
For example, firms that bring in between $50 million and $100 million in sales notched the biggest backlog growth in October, according to the ABC backlog indicator report. That pipeline of work by larger contractors, coupled with other global trends, will put pressure on steel prices again in 2024, said Sam Giffin, director of data operations at Gordian.
“Looking at the trends in the market over the past six months, we’ve seen steel prices largely stabilize,” said Giffin. “[However,] with reduced international demand coming down the pipe from China, increasing costs here in the United States and supply constraints, it seems likely that prices will continue to trend up mildly in 2024.”
Cause for optimism
Not all the news is bad, though. Steel pipe and tube, which includes conduits, account for a small fraction of overall demand for steel, said Basu.
So, while manufacturing projects and substantial data center investments may put upward pressure on steel conduit prices, that does not necessarily translate to an immediate increase in steel prices within the next year, he added.
“Prices received by domestic producers of iron and steel remain up more than 52% from February 2020 but have fallen 26% since the end of 2021,” said Basu. “Other factors, like declining global demand, falling diesel prices and softer activity in other nonresidential segments should allow steel prices to continue to moderate, although they will remain elevated relative to the pre-pandemic level.”
