Rising Steel Prices: Impact on Ag Equipment

Those who have been in an industry that uses metal products, are familiar with the volatility of the steel market. As an agriculture equipment dealer, Redline Equipment has received a number of notifications from equipment and parts manufacturers regarding the increase of prices for 2021, due to the rising costs of raw materials to produce steel products and availability due to …..

Between the global pandemic and an economic recession, 2020 was full of unexpected surprises. The dramatic swings are unsettling, however, familiar. But like everything else that has defined 2020, this recent spike is just another event we are ready to see the other side of. No business, market or economy has gone unaffected by the short-term effects of the global pandemic, and the steel industry has been no exception.

The imbalance between supply and demand is the main trigger of US steel prices increasing. With limited capacity—both planned and unplanned—the scales have firmly tipped in the steel industries’ favor. These prices are intricately connected to the global market for steel, and because other countries are coping with similar challenges, a solution is farther away than we would like.

KEY INDUSTRIES CONTINUE CONSUMPTION AT PRE-COVID LEVELS

The give-and-take that affects steel prices is fundamentally a simple supply and demand relationship. The ag industry started in a cautionary mode in 2020 due to weather issues in 2019 and the looming pandemic. Deemed an “essential business,” farming in the US continued to move ahead without hesitancy. However, with unstable equipment sales and production due to these issues, steel prices in the ag industry were going to be affected.

The automotive industry, which is the second largest consumer of steel products, continued at full speed. In fact, while most manufacturers were expected to halt production through October due to COVID-19, they surprised the market, and some produced at higher levels than previous years.

Many construction, auto and consumer appliance companies have announced price hikes for their products from January 2021 as a result of lingering supply-side concerns. For cars and commercial vehicles, prices are likely to go up between 1% to 4% from January. Prices of farm equipment, such as tractors, are also on the rise with many manufacturers and suppliers making price increase announcements starting in January. 

HEALTH PRECAUTIONS REDUCE MILL CAPACITY

Due to the highly-contagious nature of COVID-19, government and health authorities have recommended that building operators and companies reduce the number of people confined within a space—in some cases to as low as 50 percent. For this reason, retail operations and manufacturers have reduced building capacity or adopted alternating shift schedules. The steel mills are no exception to this, putting further constraints on capacity. This has directly affected lead times, extending them to historical highs and making late shipments increasingly common.

Any time that a mill halts or slows production—planned or unplanned—industry supply is affected and adds pressure to the price of these raw materials.

IMPORTS SLOW

When domestic production is lacking, large steel consumers typically look to foreign suppliers to offset the supply shortage. Leveraging the benefit of globalization is an obvious solution to close the gap. However, given the global implications of the pandemic, mills around the world are facing the same general challenges with some political pain-points sprinkled in. The effort for steel consuming industries to source internationally is not for lack of trying—but the economics don’t currently support it.

WHAT TO EXPECT

Given the supply challenges the steel industry is facing, prices will continue rising until the supply curve intersects with the demand curve. This is the case across any steel-consuming industry which means continued inflation through the automotive, appliance, construction and agriculture industries.

We are optimistic that this is only short-term, pending the widespread distribution of a COVID-19 vaccine and consequently increased capacities. Unrelated to the pandemic, there is an unusually high amount of mill capacity scheduled to open in 2021. This brings us hope that even if all other factors continue to put pressure on price, we will see some relief in the coming year and restore some semblance of normalcy.

We’re already beginning to see the first glimpses of economic rebound and recovering demand. In fact, surveys by the Steel Market Update showcase how global steel mills have been busy filling up orders since mid-November. 

The good news is that it appears the worst is behind us. The global economy is expected to go through recovery in 2021. Beyond general economic recovery, the agricultural market is responding positively to these changes with an increase in commodity prices, government assistance programs kicking in, has instilled confidence in the farmer’s buying behavior.

Based on these figures, it’s likely the uptick in steel demand we’re currently seeing is only the beginning. There’s no telling what the future holds, but there may be even more price increases to come. 

So what does this mean for our farmers?

Planning will be key to the ag recovery going forward. Not only will this place pressure on the buyer, but on the manufacturer and ultimately the equipment dealer who may find capacity for desired equipment will be at a premium in 2021… Forecasters recommend that you lock in your new equipment purchases now and keep watch of used equipment prices and availability!

SOURCES:

Rising cost of raw materials spells troubles in 2021: December30, 2020. TheLivingMint.com

Rising Steel Prices: A Look at the Economic Factors: December 3, 2020. Heritage Building Systems