The State of Steel Framing: A Solid Pipeline of Work

On Wednesday, September 8, 2021, the Steel Framing Industry Association (SFIA) presented the webinar, “The State of Steel Framing — And What You Can Do About It,” which featured industry thought leaders’ discussing the cold-formed steel (CFS) framing supply chain and the broader economy.

This article presents a summary of the webinar. Presenters’ comments have been edited for clarity.

Larry Williams, SFIA executive director, introduced the hour-long program, which was part of the SFIA Forum series on the design and use of CFS framing.

“The last 18 months has been challenging for everyone in construction, and this definitely applies to suppliers, manufacturers and users of steel framing,” Williams said. “Our objective for the program today is to provide you with a better understanding of the impacts on the broader construction industry, an understanding of how the steel framing supply chain is adjusting to these forces and ideas on how you can work through these challenging times.”

The program was recorded and is available to SFIA members.

Population Shifts to Drive Construction

Kathryn Thompson, CEO, director of research and founding partner of the Thompson Research Group, is an expert in the construction markets. Thompson reviewed the causes and effects of the 2020 roller coaster ride. TRG focuses on three main construction markets — residential, public and non-residential commercial.

Based on TRG survey data, Thompson said construction has a “solid pipeline” of work and “resilient backlogs.”

“You’re still pushing ahead with projects, even though you have obvious labor constraints and increasing material shortages,” Thompson said. “These are not necessarily stopping projects from moving forward.”

Thompson said that commercial construction “is back, and it’s not just data centers and distribution centers. You’re seeing a greater variety of projects in the traditional commercial market.”

However, Thompson emphasized population changes as the “big thing to focus on that’s going to influence all markets.” Populations are migrating to the East, South and Southwest, and home ownership is increasing, she said.

“Both trends are going to meaningfully influence the overall outlook for construction and have a domino effect on a lot of different industries for years to come,” Thompson said. “From our perspective, this is the biggest population shift since the turn of the last century.”

“With public construction,” Thompson said, “when you build a new road, guess what comes next? A gas station, a supermarket, restaurants.”

Thus, population shifts will support further residential, public and non-residential commercial construction. All three markets will continue to do well, Thompson said.

On inflation and the supply chain, “the price situation will get worse, for a couple of different factors,” Thompson said. As building momentum continues, the U.S. construction market will “see constraints coming from Asia,” she said. It has to do with getting space on cargo ships with the coming holiday season. Even getting ships into port, Thompson said, is an increasing challenge, which further emphasizes that costs are going up and the supply chain will remain tight.

What does this mean for projects? Thompson said contractors “can’t even get projects moving forward quickly enough because of labor shortages.” But, “the availability of products,” she said, “is becoming a greater issue.”

The COVID-19 recovery has also heated up merger and acquisition activity, Thompson said.

“The big are getting bigger and being more strategic this time,” Thompson said. “Against this backdrop, we see distributors as generally the winners — but manufacturers, too.”

Production Capacity Is Increasing

Timothy Gill, chief economist for the American Iron and Steel Institute (AISI), offered webinar attendees an insider’s look at the impact of the steel industry’s response to the COVID-19 crisis and how the steel industry is meeting the surge in demand.

“There has been an unusually large degree of structural change in the steel industry,” Gill said. “At the level of the mills, over the last few years, there has been lots of acquisitions, mergers and investment activity.”

Since early 2018, the industry has seen nearly $16 billion in investments announced, Gill said.

Gill mentioned the industry’s having upgraded its equipment and added 3.5 million tons of crude steel production capacity since late last year. “Much more has been announced and is expected to come online this year and next, and possibly into 2023,” Gill said.

When the pandemic began, the steel industry’s capacity utilization fell from about 80 percent to just over 50 percent in a seven-week period from mid-March to May 2020, Gill said. “It fell during the 2008 to 2009 period, but we never thought we’d see anything that dramatic again,” he said.

Gill pointed out that the steel industry has rebounded. It is now running at about 85 percent capacity utilization.

Switching to the topic of steel mill product shipments — steel sheet, strip plate, bars, pipe and tube, etc. — Gill said “a rebound continues to be underway. Shipments have returned to essentially their pre-pandemic level running at a little over 8 million tons in June,” Gill said.

Steel Shipments

Gill then spoke about the economy.

“We’re looking at very strong GDP growth both this year and next,” Gill said. “In fact, the overall economy, as measured by real GDP growth, surpassed the pre-COVID peak as of the second quarter.”

“The overall economy,” Gill said, “is actually back to where it was at the end of 2019.”

“The problem is, labor force participation is bouncing back quite slowly. It has only made up about half its decline,” Gill added. “That’s translating into slower rates of actual employment growth, is leading to labor shortages and is contributing to the supply chain issues that are so ubiquitous.”

“The ISM Manufacturing Index, a bellwether measure of manufacturing, fell sharply through the middle of last year and has now rebounded,” Gill said. While the index has slowed recently, a flattening ISM reflects the demands placed on a manufacturing sector already trying to alleviate the current “supply chain tightness,” Gill said.

“The upshot of it all is we are expecting a sizable increase in steel usage both in 2021 relative to 2020, as well as next year,” Gill said. “Definitely, after that horrific plunge last year, things are looking up.”

Choose Your Suppliers Wisely

Eric Larson, executive vice president of California Expanded Metal Products Co. (CEMCO), spoke on the supply and demand of steel framing during the pandemic.

“I’ve been in the industry for 35 years,” Larson said, “and these last 18 months have been the most challenging that I’ve ever faced.”

The pandemic “derailed a perfectly good economy,” Larson said, and led to severe material shortages and supply chain disruptions.

Larson said tariffs and quotas, imposed under Section 232 of the Trade Expansion Act, has affected offshore producers of steel products and “had the effect of dampening supply in the U.S.”

In addition, strong demand for steel has “compounded the situation,” Larson said, which has extended the lead times for steel products.“There has been a supercharged competitive market for available tons over the last year and a half,” he said.

As steel mills have increased their prices, freight has become another problem, Larson said. “It’s very difficult, very competitive, to get flatbed trucks, rail cars and vessels,” he said. As an example, Larson said a total of 76 container ships are either at berth or are waiting to anchor in western ports. Pre-COVID-19, that number was 16, he said.

Next, Larson discussed steel prices using figures published by the Federal Reserve Bank of St. Louis. Steel prices had been relatively stable from 1967 to about 2000, Larson said. While some inflation occurred between the mid-1970s and the mid-1980s, from about 2000 to 2019 “we definitely started to see more lumpiness in the pricing of steel,” Larson said. But, the 2020-2021 period “can only be referred to as a disruption,” he said. “We have not seen a period like this.”

To address these challenges, Larson said it’s time to “really plan ahead” by forecasting weekly and modifying those forecasts regularly.

“To the extent you can control your own outcomes, choose your suppliers wisely,” Larson said. “We all need to ask ourselves, is my supplier established? Do they have staying power? Are they compliant with industry standards? Can they adequately service my business? Is their product line diverse enough to handle my requirements?”

‘We Need to Align the Supply Chain’

Travis Vap, CEO of South Valley Drywall, addressed the challenge of managing construction contracts in the midst of volatile prices and material availability.

“What we’re seeing in commercial construction is a tremendous amount of projects slide right now, because of the volatility of pricing,” Vap said. “We’re seeing a slowdown in contracts being awarded and shovels going into the ground.”

Vap anticipates, however, that more construction projects will get started in 2022 and 2023. He made several recommendations to improve the steel framing industry’s success rate at winning a greater share of the framing market.

“We are using unsophisticated tools to negotiate in a sophisticated market,” Vap said. “We’re going to have to change and navigate to a far more sophisticated model.”

Vap sees a “massive movement” towards steel mid-rise structures taking over concrete podiums and replacing wood. “We sure don’t want to lose that momentum,” he said.

But how?

Other specialty contractors, such as mechanical contractors, have been “breaking out their material on a separate bid tab” and “tying that to an index,” Vap said.

“They’re being transparent on their bid tabs,” Vap said. “They’re sitting in a room with their general contractors, and they’re lining out every single piece of material, every foot they’re doing, and are negotiating their contract on margin. They’re essentially allowing their clients to choose how to spend their money.”

Vap said the concrete industry is “far more aligned than most industries,” and collaboratively targets steel structures and sometimes flips them to concrete.

“We need to see more alignment and partnering,” Vap said. “We need to take an approach from the mechanical industry of breaking up our material and tying it back to an index.”

“We’re agnostic on price. We don’t necessarily care if it goes up or down,” Vap said. “We just care that we can hedge for our clients.”

“We feel that by using the tools from the CME Group, and by partnering as a supply chain — working together to give cost certainty, or at least cost transparency — we can allow clients to make decisions to move more steel projects forward.”

Outlook: Mid-Single Digit Growth

Thompson concluded the webinar with a forecast for the economy.

“The economy is going to be equal to or better than 2019,” Thompson said. “But the magnitude will vary by geography, and by end market.”

“Because of supply chain issues, I don’t think it will be realistic to have year-on-year double-digit growth for residential [construction],” Thompson said.

“But, what you’re going to end up seeing is, in terms of a compounded average annual growth rate, over the next five years residential [construction] will easily be in the mid- to high-single digits,” Thompson said. “Public [construction] has been flat, but it will be up in the low- to mid-single digits, depending on the market. For the commercial [construction] market, it will vary with where you are, but on average I see a mid-single digit type range.”

“We don’t see the supply chain fully resolving until 2023,“ Thompson said. “We’re still struggling to keep up with demand, and you’re struggling to build up inventories, which will take time.”

Additional Resources

• Overview of Podium Systems in CFS-Framed Multifamily Construction
• 3 Trends Driving the Construction Industry
• One Architecture Firm’s Post-Pandemic Future Includes Steel Framing

 

Article cited by BuildSteel.org