Keep up to date on key trends in the property and construction industry with Owen Weatherley’s ‘Market Insights’. This week we hear from Senior Market Analyst, Owen Weatherley and G&T Partner, Rachel Oldham on the UK steel industry and the effects of the recent well publicised decision by Tata Steel to sell off its UK manufacturing operations…
With Tata’s decision to sell off its UK steel manufacturing operations there is a growing desire within the industry to understand the present dynamics of steel pricing within the construction market (the following is a summary of a longer report that can be found here).
UK Construction Steel Market
The UK steel industry directly employs around 18,000 people with a total UK workforce of around 31million. As a significant contributor to the UK economy the steel industry is of vital importance. In spite of the disconnect between the sustained levels of steel prices and the well-publicised weakness in global prices for steel generally, there are several factors that explain the resilient steel pricing in the past 18 months including:
- The level that steel pricing is starting from – since 2008 supply and install rates in London have risen around 20-25% while nett rebar prices have increased between 15-20%. This compares with concrete costs that over the same period have risen from 40 to 50%.
- Recent media attention has focussed on the UK steel industry as a whole (including steel for manufacturing, packaging etc) which ignores the fact that products like CE marked structural sections are not under pressure from cheap Chinese imports.
- Localised market factors such as labour costs, capacity, overhead and profit allowances and overall demand can outweigh changes in material input costs. While labour costs for steel trades have not increased as much as other trades due to a four year industry wide training and apprenticeships push, demand for steel across the UK has been sufficiently high to sustain prices over the past two years.
Impact of Tata’s Decision
The impact of Tata’s decision on the construction market is not anticipated to be as significant as first thought for the following reasons:
- The recent deal completed with investment firm Greybull Capital for the sale of its long-products operations. This mitigates the immediate impact of potential closure on prices (issues around delivery lead times are expected during the transition period).
- As a result of the EU Conformity (CE) marking which implemented strict quality controls in 2013 the vast majority of steel sections used in UK construction are sourced either domestically or from the EU, which also reduces structural steelwork’s exposure to an influx of cheaper Chinese steel. EU production of long sections remains over 9 million tonnes annually. Therefore the relatively small potential increase in demand from the UK (c. 500k tonnes) if operations close does not pose a significant inflationary risk to pricing or supply, although will increase the sensitivity of pricing to currency fluctuations.
Impact of Importing Chinese Steel
While the mandatory CE marking for structural steelwork in the UK/EU has impacted Chinese steel section products entering the UK, it is not the case for rebar (reinforcing steel bars). Chinese rebar imports have increased significantly in recent years (up from 2% in 2013 to 44% in 2014). As growth and demand for construction in China has weakened Chinese producers have looked to export markets, often selling at significantly lower prices. Despite concerns around quality and compliance with British Standards and a recent rally in domestic steel demand, Chinese rebar is expected to remain a cheaper alternative to UK/EU rebar with the proportion of it used in the UK construction industry continuing to rise.
Forecast for the Future
Looking forward, factors affecting steel sections and rebar will see differing cost pressures applied. The recent rally in demand for steel in China is viewed by most analysts as a result of policy makers talking up growth and stimulus and increases in steel speculation activity. This is unlikely to be sustained. Therefore a longer-term continuation of weak construction demand within China will maintain the surplus Chinese supply of rebar on the global market.
The recent introduction of levies between 9 and 13% (11% in UK) by the European Commission on China’s rebar exports will offset some of this. Should higher tariffs be imposed this will have an inflationary impact on rebar pricing. Our medium-term outlook is for continued price stability.
For steel sections the price of iron ore will drive pricing, alongside fluctuations in other input costs, overheads, profit rates and overall demand. The recent rally in Chinese steel demand has seen a 40% surge in iron ore prices but as mentioned is not expected to be maintained. Citigroup forecasts iron ore prices will average $US45/tonne in 2016, $US39/tonne in 2017 and $US38/tonne in 2018 indicating continued weakness for several years to come.
As residential and commercial demand for new construction is anticipated to normalise over the next year, localised inflationary factors should also moderate. Continued weakness in structural steelwork pricing is therefore expected in the short to medium term.
Want to find out more? Read Owen’s full report here!
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Remember – Our advice is to review each project on its own merits. This forecast publication must be treated as a guide only, being that it is based on averages of various types and sizes of projects across a region, ascertained through our latest market research. The quality, both of design and desired end product, procurement route (particularly ownership and transfer risk), delivery timescales, complexity of design and desire of contractors to tender should be carefully considered in project specific estimates and their outturn cost. Suitable allowances should be made for project specific designs, site conditions and local market conditions, which should be reviewed regularly with your Gardiner & Theobald team to determine the appropriate base cost. Neither the Author nor Gardiner & Theobald LLP owe a duty of care to the reader or accept responsibility for any reliance on the foregoing.