Counter measures solve steel crisis

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Nissan has had to close three factories in Japan for five days and cut production by 30,000 cars; BP is struggling to find the materials to build its Alaska pipeline; Norwich bus station will be delivered over time and over budget. The world steel crisis is biting. It’s not just the price of it – throughout 2004 there simply does not seem to have been enough of the stuff.

We solved the potential steel shortage and possible subsequent delays in providing facilities for its customers by organising an effective supply chain and by ordering a standardised product. ProLogis has the advantage of being a large steel consumer – it is the fourth largest user of sheet steel in Europe. It overcame the shortages through its closely developed links with the supply chain. It has a large enough platform of demand to make itself attractive to suppliers.

Many companies buy their steel from China. Among them, for example, is Toyota Motor Corp, which plans to start procuring steel from there and from South Korea rather than rely on Japanese supplies. One of ProLogis’s preferred suppliers is Barrett Steel, which buys from Anglo-Dutch group Corus, which imports from China among others.

But part of the steel problem lies with China itself. As well as being an exporter, it has been consuming more and more of its own steel. In 2003, it accounted for more than 25% of the world’s steel consumption.It has seen increasing output of steel-rich products such as cars and washing machines.

The Chinese domestic market for steel has room to grow, too. Steel consumption per head of the population in China was still just 223kg per person in 2004 compared with 465kg in Germany and 406kgs in the US. Building works for the 2008 Beijing Games have compounded its steel consumption as it undertakes a massive improvement of infrastructure.

One of the reasons we stayed ahead of the shortage of steel in the West is that it uses a steel supplier, which is also a steel stockholder. ProLogis’s promise of a 50-day delivery time when it pre-lets a warehouse means it needs to source components off-the-peg and fast. ProLogis brought together a team of contractors to be part of ProShed, including Northampton based contractor Winvic Construction and architect and engineer Burks Green, but important among them in the last few months has been Barrett Steel Buildings.

This streamlining of the supply chain has helped reduce costs and mitigate the effect of increased steel prices. Barrett has been able to keep to the stringent delivery time. In some cases, steel delivery has moved out from four weeks to up to three months.

It also helped that ProLogis’s demand is for a standardised product. The shortage affected both the primary steel market and secondary market for related products such as cladding, which ProLogis principally sources from CA Group. Prices for some warehouse components are up 100% in the last 12 months. For many developers, total build costs are up a quarter. High prices for steel in distribution warehouses could mean higher prices for the goods that get delivered from them. The problem may soon impact on your breakfast cornflakes.

ProShed buildings are bespoke, and can be of any size, chosen from a matrix grid giving dozens of combinations of width and length. To gain speed, however, they use a greater proportion of steel-to-concrete. The steel grids are “racking-friendly”, designed to cater for all standard wide and narrow-aisle racking layouts. Modular solution and standard details virtually eliminate re-design and drawing costs, substantially reducing costs. Steel ground beams replace conventional concrete ground beams, for economy, speed and easier integration of following trades. Offices are completely modular, incorporating an integrated steel and pre-cast panel design.

Absorbing costs

ProLogis is currently speculatively developing in total some 1.3 million sq ft of warehouse accommodation at: The Fort, Birmingham; Abbey Road, Park Royal, North West London; Kettering; and Enfield, North London. In 2004, it let more than 3.2 million sq ft of warehouse accommodation in the UK.

Like all developers, ProLogis has to absorb the higher steel costs without putting up asking rents. The headline price of steel from Corus is up 50% this year alone. The warehouse leasing market currently cannot stand price rises. The rents are not going up commensurately, so the high price of steel is making margins tighter for everybody in the supply chain from source to developer.

The problem is not particular to ProLogis. It’s widespread throughout ProLogis’s sector. But by planning ahead, ProLogis has been able to manage the problems of both steel supply and steel cost.

The future for the steel market is uncertain. Some analysts believe the shortfall may not be solved until 2006 when the world’s largest metallurgical coke factory begins operating in China. Some believe the future of steel may lie closer to home. The worldwide problem has become so severe that in Europe, where many had begun to view coal mines as historical relics, German conglomerate RAG said in September it was ready to open up a domestic mine to help steel production.

Global crude steel production has grown by 6% in each of the last two years and, if this trend is repeated, then 2003’s 963 million tonnes will have grown in 2004 to 1,020 million tonnes. At this level of production, the steel industry would have needed to find an extra 60 million tonnes of iron ore, 25 million tonnes of scrap and 15 million tonnes of coke.

Looking further ahead to 2007, if the International Iron and Steel Institute’s forecast of increased steel demand is to be met, then crude steel production would need to rise to 1,130 million tonnes. To meet such a level of production, steel makers would require by 2007 an extra 200 million tonnes of iron ore, 60 million tonnes of coke and 75 million tonnes of steel scrap. Quite a tall order and the reality is that materials could start to run short which, coupled with shipping constraints could put a brake on future steel growth.

It’s not all gloom, however. Barrett managing director Richard Barrett believes we have seen the worst of the steel crisis and next year will see only modest price rises, if any, and delivery times back on track. He says that, for the meantime, supplying standardised products such as Barrett does for ProLogis helps the supply chain at his end.

“If you go back into the summer, people who didn’t have a decent supply chain were struggling to get hold of certain sizes,” he says. “Now it’s not such a problem getting hold of the stuff. There isn’t an issue in getting availability. There appears to be a reasonable amount of stability returning to the market in terms of prices, too.” Richard believes the medium-term for steel supply is rosy. For the longer term, like the ISSI, he is not so sure. He says Germany is not an effective producer of steel and he expects to look for supplies in Eastern Europe and the Far East. n

Maurice Dalton is first vice president commercial at ProLogis. Tel: 0121 224 8700.

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