Sam Grooms, president of systems integrator Hy-Tek Material Handling, is reminded that the price of steel is going up monthly every time he goes to the mail.

"I have a stack of letters on my desk an inch thick from various manufacturers, all adding a steel surcharge to the price of their equipment," says Grooms.

Materials handling equipment manufacturers are approaching the problem in a variety of ways. Some of Grooms' suppliers are tacking on a surcharge to their standard list price; others are raising list prices and altering their discount structure. "Either way, the net result is an average 6% increase in prices across the board," says Grooms.

Call it the dark side of the emerging economic recovery in the U.S. and the explosion of business in China. Although manufacturers expected a stabilization of prices when federal tariffs on steel were lifted on December 4, 2003, the opposite has happened.

"Since January, we've seen monthly increases of from 13 to 30% on steel," says Bill Hawthorne, vice president of marketing for Hytrol Conveyors.

Brian Reh, president of Gorbel, has also seen 25 to 40% increases in steel prices, depending on the type of steel. "In January, our suppliers told us that our long-term contracts were no longer valid, and from now on they were going to give us monthly pricing," Reh says. "It is uncertain and out of control."

Hytrol and Gorbel have tacked 6 to 9% surcharges on to the price of their equipment. They're not alone. Rack providers have had to increase prices more than most. In March, Interlake Material Handling Solutions increased the surcharge on all rack products from $0.0475 per pound to $0.075 per pound based on the shipping weight of all Interlake rack products. One of Grooms' lift truck suppliers now provides prices with an asterisk, indicating that prices may change without notice.

Systems integrators like HK Systems are in a slightly different position, since steel is less of a component and the cost of a large system often involves customized services. All the same, HK has also had to take the price of steel into consideration. "We are reducing the length of time on proposals and adding that the price is subject to adjustment," says John Hines, CFO. "We have not seen anyone postpone a project yet, but there's a concern that if pricing gets too out of line we'll see some shrinkage."

At least Hytrol, Gorbel and HK can get steel at a price. Other smaller manufacturers, especially those who buy steel on the spot market, are reporting an inability to get steel to produce their product. "We have one supplier who can no longer get steel strapping to strap crates together," says Hawthorne.

On March 10, U.S. Representative Donald A. Manzullo (R – Ill), chairman of the House Committee on Small Business, held a hearing where industry experts identified several factors driving up the market.

• China's steel consumption has grown much faster than anticipated and has put a strain on the global raw-material industry.
• The metals industry has not expanded capacity in recent years, leading to a classic supply and demand equation. Add in a fire at a U.S. coke-producing plant which restricted the supply of raw materials, and insufficient fleet capacity to transport dry bulk that has put upward pressure on the demand for scrap steel. In the U.S., prices are up from $110 per ton in 2002 to as much as $300 today.
• The weak dollar has made the U.S. an unattractive market for foreign steel makers.

Despite these increases, the steel industry argues that producers are not getting rich. "Some steel companies are in bankruptcy today and most U.S. steel companies have been unprofitable in almost every quarter since 2000," Wilbur L. Ross, Jr., chairman of International Steel Group, told legislators. Ross added that the industry will be profitable this year, but those profits are muted by a rapid rise in raw materials costs, not all of which, he says, is reflected in the price of steel.

Following the hearings, the consensus view was that steel prices are likely to peak soon and begin to decline by the end of the summer. "We believe this is a short-term situation that will correct itself before anything Congress can do to correct it," said Rich Carter, spokesperson for the House Small Business Committee.

Still, there are concerns that the high price could nip the recovery of the materials handling industry in the bud. "This is a problem that has the potential to slow the recovery," says John Nofsinger, CEO of the trade association Material Handling Industry of America.

The slowdown hasn't happened yet, and customers are accepting the price increases. "Since our competitors are following suit, customers are seeing increases wherever they look," says Reh of Gorbel, who adds that order activity has held up.

In fact, Hy-Tek's Grooms says some customers are ordering and storing equipment now that they won't need until later in the year as a hedge against further price increases.