Builders steel themselves for higher prices

The high price of steel is hurting the Swiss construction industry Keystone Archive

China’s voracious appetite for raw materials is pushing global commodities’ prices through the roof.

In parts of Europe, including Switzerland, soaring steel prices are hurting the construction industry and threatening to put some firms out of business.

China’s rapidly expanding economy is sucking in raw materials at an explosive rate. In the first six months of the year, the price of steel rocketed by 60 per cent as China overtook the United States as the world’s largest steel consumer.

“Prices started to shoot up in January,” says Arthur Schläpfer, purchasing manager at Debrunner & Acifer, Switzerland’s largest steel importer. “Since then they’ve been rising non-stop.”

Some products used in the construction industry cost double what they did before China’s latest growth spurt. Industry specialists – long used to cyclical markets – say a rise in demand on this scale is something they haven’t seen before.

“Because of the economic slump in the 1990s there was little investment in base metal capacity,” recalls Robert Chardon, an industrial analyst at Lombard Odier Darier Hentsch & Cie (LODH).

“Now, the economic turnaround in the West and especially the rapid growth in China have dried up a lot of reserves, pushing up prices.”

Stockpiling

To make matters worse, many American and European firms – concerned about further price hikes – have been stockpiling huge quantities of steel.

And they’re not just buying girders, pipes and sheet metal, but even nails, screws and bolts.

“Many customers are filling their warehouses because they’re afraid they’ll have to pay even more dearly in coming months,” Schläpfer explains.

But many European firms with shaky finances, or without the means to build up steel reserves, are already struggling to stay afloat.

“A lot of construction firms that signed contracts with their customers last year are now in serious financial trouble given the cost of the materials they need to build,” says Schläpfer.

Steel components generally make up no more than five per cent of the total price of a building. But that still translates into tens or even hundreds of thousands of francs.

Price hike

The price hike has had its most dramatic consequences in glass and steel construction, and for many civil engineering works such as bridges.

In addition to construction, the steel crisis has hit various other sectors of the economy, including machinery. Even Europe’s central banks have started to feel the pinch.

Euro coins, which are based on steel, have started to run short over the past few weeks because the steel cannot be found to keep the mints producing at full capacity.

In June, Germany’s central bank announced that the planned release of one billion new coins would be delayed.

The Swiss National Bank, by contrast, has avoided similar problems since Swiss coins contain mostly copper and nickel, and prices for those have risen more slowly.

Reform

Experts say that after, two decades of economic reform, China is having a deepening impact on the world economy, which goes beyond simply being able to produce goods more cheaply than most other countries.

China currently accounts for four per cent of the world economy. But its spectacular growth is destabilising certain commodity markets – Chinese steel consumption, for example, now absorbs 25 per cent of global production, more than the United States.

“Pressure from China is also starting to affect precious metals, like silver, gold and platinum,” warns Robert Chardon. “And its impact on oil prices is far from insignificant.”

Over the past two months the Chinese authorities have applied the brakes in an effort to prevent the economy from overheating and to keep inflation under control. The impact so far is seen as limited and likely to be short-lived.

“The monetary measures taken to raise interest rates and tighten credit will do little to curb the growth of a full-throttle economy like China’s,” says Robert Chardon.

The weak dollar is helping to undermine the authorities’ efforts, since oil and other raw materials tend to be priced in the American currency.

“For the next few years, China may no longer see double-digit growth,” predicts Chardon. “But the pace will still be very close to ten per cent.”

swissinfo, Armando Mombelli

Key facts

The price of steel has risen by 60% since the start of 2004.
Nickel now costs more than double what it did at the beginning of 2003.
During the same period, the price of copper has risen 75%.

In brief

China accounts for 4% of the world’s economy.

Last year, the country accounted for 16% of global economic growth.

At the moment, China consumes up to 20-30% of the global production of certain raw materials, including steel.