THE STEEL TARIFF’S EFFECT ON CONTRACTORS

From May 2017 to May 2018 the cost of goods used in the construction industry rose 8.8 percent due to the overall improvement of the economy. This growth does not take into account the 25 percent tariff on steel imports from Canada, Mexico, and the European Union imposed on May 31, 2018. In 2017, the US imported nearly 35 million metric tons of steel, which accounted for 33 percent of all steel used in the country. Of the 35 million tons imported, approximately 25 percent of this originates from Canada and Mexico. This tariff, along with construction costs continuing to accelerate, will require contractors to find ways to reduce costs for existing and new projects.

The capacity utilization rate of US steel mills is currently 75 percent. The goal of this tariff is to hopefully reach 80 percent. According to Michelle Applebaum, a steel industry analyst, “the U.S. steel industry should be able to meet most demand,” initially; however, the tariff will push U.S. mills to exceed their current capacity. While the industry adapts, this change will drive the cost of production higher due to an increase in overhead costs for the additional labor, as well as costs for reopening mills that are currently shut down. Additionally, the tariff could result in construction delays and potential cancellations of future projects.

There will likely be pricing uncertainty while the industry is adjusting to the tariffs and increased capacity goals, which could land contractors and subcontractors in a vulnerable place between submitting bids and being awarded contracts. Below are some suggestions on how to manage the risk of steel material costs during this adjustment period:

  • Monitor market conditions frequently for any change
  • Review the price guarantee durations and/or fluctuation clauses specific to materials cost in the bid documents
  • Consider options for early and/or pre-purchase of steel to lock in prices for future projects

If you have specific questions regarding how the steel tariff will affect your business, contact us

This tariff, along with construction costs continuing to accelerate, will require contractors to find ways to reduce costs for existing and new projects.

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