What the Data Says: Steel Construction Cost Trendcasting

By Matthew Kelliher-Gibson

Whether in response to public policy or concerns about infrastructure, all of America seems to be talking about construction costs. As the leader in construction data, software and expertise, we welcome the conversation, and we would like to add our insight. We’ll regularly examine the long-term construction cost trends of the industry’s most vital materials.

The Material: Steel

Concerns about steel costs are warranted given its presence in the United States. Steel supports our buildings, our factories and our bridges; it’s in our schools, our cars and our kitchens. Steel is everywhere. A dramatic spike in its cost has real implications for business owners, contractors and consumers. Historically, steel cost changes have been steady and consistent. However, since the implementation of steel tariffs our data is showing us something we have not seen in years.

The Data

Gordian regularly collects and analyzes cost data on steel construction materials from across the United States to ensure the most current data and trends are incorporated into our RSMeans data solutions. RSMeans data is North America’s most comprehensive construction cost database and includes more than 55,000 material costs localized to 970+ locations. We’ve been collecting and studying this data since the 1940s—it’s our specialty.

By examining price changes of steel material over time, we can take a microeconomic view of national policy that starts with localized prices. Here’s the tricky part: There are different types of steel material, each with their own costs. To account for the variance, we analyze steel in an index containing reinforcing steel, welded wire fabric, metal decking and studs and electrical conduit. Using this index, we can track the cumulative percent change of aggregate steel prices, like how the U.S. Bureau of Labor Statistics calculates the Consumer Price Index.

The Analysis

We collected steel cost data each quarter of every year from 2011 through 2017 from across the U.S and examined price changes in two ways: Cost index over time and percent change in price by quarter. Pay careful attention here because this part is important to understand. The numbers you see along the vertical axis are not dollars; we are not saying the steel material basket index was worth $100 in 2011. What we’re saying is that 100 is the index’s baseline value; 100 is a reference point. From there, we analyzed how the value of the index changed relative to the baseline. If the index value dropped 15 percent from 100, the index value was 85; if it increased 20 percent, the index value was 120. As the index grows, steel costs grow with it.

Graph of Steel Index Data

2011-2017 - 1% growth per quarter

 

We found the steel material index has a slight upward trend over time—about one percent per quarter on average from 2011 through 2017. The growth is so consistent, it’s boring. But if you look at the index quarter-to-quarter, the data shows us something intriguing. Large increases one quarter are predictably followed by a proportional decrease the following quarter. These swings are significant—about 13 percent in either direction—but over time all that flux amounted to steady one percent growth.

 

The Change

In April of 2018, we began tracking prices monthly in response to the announcement of possible steel tariffs. It was an anxious time for many American industries, including construction. Analysts, reporters and TV pundits were all making predictions about what would happen if the tariffs went into effect and it inspired us to ask a simple question: What does the data say? Turns out, the data says the days of predictable one percent growth are over.

Steel Index Graph

The steel index increased eight percent in May 2018, before the steel tariffs went into effect. That jump was the highest increase since the beginning of 2017, but within the expected volatility range. The effects of the steel tariffs began revealing themselves in the summer with a 5.5 percent increase in July and another five percent jump in August. We saw something particularly interesting when we analyzed the index by quarter.

After a small uptick in Q1, Q2 saw the index grow each month for a double-digit increase of 12 percent for the quarter. This is the largest quarterly increase since 2016 and the first back-to-back quarterly increases since 2014. Remember, historically a large increase in the index was followed by a proportional correction the following quarter. That pattern has broken.
Q2, 2018 - 12% growth

The data suggests the Q2 increase is not a normal market fluctuation, but a response to recent policy changes and increased uncertainty. A new element has entered the market and the market is reacting. With a month to go in the third quarter, the steel index increase has already matched that of Q2, and it is still climbing. This represents the longest consecutive streak of quarterly increases since 2014. Overall, the index reflects a steel price surge of nearly 26 percent since the start of the year.

Effect on Construction Projects

Changes in our steel material index have real consequences for the construction industry and the industries that support it. News stories of small businesses reeling from increased steel costs are already published regularly. But there is a silver lining: Steel materials only make up a portion of construction projects, so the data tells us the impacts of a steel price increase will be less dramatic for large construction projects. We’ve used predictive cost analysis in RSMeans data to project future prices, using MasterFormat division 05 metals as a proxy for steel. We’re predicting steel materials will represent just over five percent1 of the total value of a new construction project, an increase just shy of half a percent. To put it in real dollars, new construction valued at $10 million will now cost $131,070 more2 because of the bump in steel prices.

Conclusion

The data shows conclusively that the steel tariffs created a shift from the market norm. Steel costs are on the rise and falling outside our index’s established pattern of volatility. We haven’t charted these waters in recent memory and that adds to greater price unpredictability. That is not an opinion. That is what the data says.


1 Based on 75 commercial building cost models
2 $10,000,000 * 5.1% * 25.7% (total increase from Q4 2017 to May 2018)