“You have got a huge rise in demand from China especially, but also from emerging markets generally,” says Noble Francis, economics director at the UK’s Construction Products Association (CPA).

At the same time the costs of both iron ore and crude oil, which sets the benchmark for energy costs, have doubled in the last year.

Corus, the European steel producer, recently said it would have to raise prices because of an “unprecedented” surge in raw material and energy costs. The group also warned of further rises in the summer if strong global demand continues to affect the market.

Ian Rogers, director of UK Steel, the producers’ trade body, says: “Our steel prices are going up because raw materials are going up because steel demand is going up. We are not in a situation where there is a steel shortage but the supply/demand balance is pretty tight.”

For construction companies these rises have been a real challenge, as major projects often require deliveries of steel over a period of months or even years.

The Beijing Olympics saw the construction of 31 stadiums and 45 training centres. The main stadium alone, known as the Bird’s Nest, required 110,000 tonnes of steel.

Construction economist group Franklin + Andrews estimates the 2004 Athens games used more than 250,000 tonnes of steel.

London’s 2012 Olympics will use 250,000 to 300,000 tonnes while Crossrail, the cross-London rail link, will need 140,000 tonnes of steel for structural works and 140km of steel rails. The Shard of Glass office development in London will require a further 11,000 tonnes of steel.

The troubled Wembley Stadium project required 15,000 tonnes of steel reinforcement and 23,000 tonnes of structural steel while Heathrow’s Terminal 5 used more than 80,000 tonnes.

Global consumption of finished steel products jumped 33 per cent to 1,200 million tonnes last year from 900 million tonnes in 2003, according to the International Iron and Steel Institute. It expects that figure to reach 1,350 million tonnes by 2009.

All players in the supply chain have to take a view on where steel prices will go. For construction firms bidding for a fixed price contract, that decision can be critical.

“They may have no idea what the steel price will look like so they have to find a cost for it now and factor in all kinds of worst scenario situations,” says Francis at the CPA.

Get it wrong and a company can find itself locked into a loss-making contract or find itself running way over budget.

A landmark redevelopment of downtown Los Angeles by world famous architect Frank Gehry, for example, has overrun its $1.8 billion budget by more than a $1 billion thanks in part to rising steel and concrete costs.

Closer to home, the bill for the 2012 Olympics has risen from £4 billion to £9 billion in three years.

“In major projects it does not tend to be one thing that makes it go over budget. But if steel prices are going incredibly over budget, you will find a lot of other costs also rising,” the CPA’s Francis says.

Analysts at Lehman Brothers, the investment bank, expect steel prices to continue to increase. Against that background, the ability to hedge prices through the London Metal Exchange is seen as highly valuable.

A senior official at a steel producer said: “To be able to hedge against costs has to be a good thing. In my view the steel market is very opaque when it comes to price, and if we end up with enough being traded through the LME that is going to be a big market that is transparent for the world to see, then that will be good.”

Phil Thornton
Steel eRingsider
Summer 2008