What the Data Says: Steel Cost Trendcasting Through Q3 2018

By Matthew Kelliher-Gibson, Data Scientist at Gordian

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 would like to add our insight. We’ll regularly examine the long-term cost trends of the industry’s most vital materials. In this edition of What the Data Says, we’re taking our second look at steel.

Where We Left Off

Last month, we examined steel costs from 2011 through August of 2018 to measure what, if any, impact U.S. steel tariffs have had on costs. We did this by tracking the growth of an index of steel materials over the entire time period and on a quarter-to-quarter basis. 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 was so predictable you could set your watch to it. Interestingly enough, this predictability was achieved in a volatile way with large increases followed by near-identical decreases that resulted in one percent growth.

We started taking a monthly look at the index value in April of this year in anticipation of announced U.S. tariffs on steel. There was a lot of talk in the construction industry and beyond about the tariffs, and we wanted to cut through all that noise and deliver objective data.

After a small uptick in Q1, the steel index grew 12 percent in Q2, smashing the established pattern of large quarterly increases followed by decreases. This represented the largest quarterly increase since 2016 and the first back-to-back quarterly increases since 2014. Overall, the index showed a steel price surge of nearly 26 percent through the end of August, suggesting this was not a normal fluctuation. This was unchartered territory. We now have steel cost data through the end of the third quarter, and it is showing us something interesting.

Steel Index Graph

The Data: A Quick Reminder

These graphs are crucial to your understanding of what our data is uncovering, so here’s a brief reminder of how to read them. We’re charting the growth of the steel material basket index. The numbers you see along the vertical axis are not dollars. For our analysis, 100 is the index’s baseline value; it’s a reference point. From there, we monitored 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. Now you’re up to speed.

Steel Material Basket Index September
Figure: Index is the cumulative percent change of tracked steel materials (basket) from 2011 Q2

What We Know After Q3

After two consecutive months of over five percent growth, September ended with a two percent increase. Combined with July and August, Q3 ended with a total increase of 13 percent. That’s growth every quarter of the year, a break from the historical pattern.

Historical steel cost growth versus 2018 growth.

But there might be a bright spot in the data. September saw the smallest increase since April. Year-to-date prices have increased 28 percent. That sounds enormous, but it is equal to the historic growth rate (one percent/quarter) plus the 25 percent tariff. It is too early to say for certain, but this may mark the end of tariff-related price increases. If steel costs return to historical norms, expect a small increase or possible decrease in Q4. That’s a big “if,” but there is reason to believe it will happen.

Early steel cost reports from October confirm this return to normalcy, showing a two percent decrease. It will be interesting to see how the rest of the quarter plays out, especially with the Federal Reserve raising interest rates and stepping away from its policy of inflation avoidance. Higher inflation rates will mean higher prices for commodities like steel. We will continue using our cost database to monitor steel prices, so you know what the data says.