If you plan to order material handling equipment in the next few months, you're in for a nasty shock. Prices, which have already risen 5 percent or so in the first months of this year, are set to soar this summer by 25 to 30 percent. The reason?

A convulsion in the international steel market.

March 1 saw the majority of material handling equipment manufacturers reluctantly adding surcharges, typically of $30 a ton or about 5 percent, to customers' equipment bills to compensate for higher steel costs. Those increases reflect both an overall rise in steel raw material costs and a scarcity of steel altogether.

Things will only get worse over the summer. For manufacturers of conveyor, storing and moving equipment, steel accounts for at least 25 percent of finished costs, which means the current surcharges reflect a 15- to 20-percent rise in steel prices. If steel prices surge to levels up to 85 percent above where they were in December, as manufacturers and analysts predict, increases from material handling equipment vendors could go as high as 25 percent.

"It's a major factor now, and unfortunately if the steel producers are right about the way things are going, it's going to be a huge factor," says Alex Herman, director of integrator sales at FKI Logistex, whose divisions sell around $50 million worth of equipment a year through integrators and distributors. Worse, Interlake reports that some steel producers are demanding up-front payment from manufacturers in order to guarantee a supply of steel, meaning those that can't pay in advance face running out of steel altogether.

Feeling the squeeze
Dan Ikenson, trade policy analyst at the Cato Institute in Washington, D.C., says the reasons for the price hike are fairly simple, although unexpected in some quarters. "The steel industry here in the United States has been heavily protected for some time, and the big to-do has been about the decision to repeal those protections and slap some sense into the administration," Ikenson says. Last year, the European Union ruled that protectionist steel tariffs imposed on foreign steel producers supplying U.S. manufacturers were illegal. This helped force the Bush administration to abolish them in December 2003.

"The steel industry said prices would go down and they wouldn't be able to make a profit," observes Ikenson. "But 2004 was going to be a good year for steel producers for many reasons, including the fact that China's demand has gone through the roof. There's a shortage of scrap and pig iron and usable coke and China is sucking up a lot of the usable supply. Also there's been some recovery in the United States—some business investment and an increase in demand for steel here. It's just a textbook supply and demand situation, which is foreign to the steel industry because there's been so much government intervention. These are good times for the steel industry."

U.S. steel producers are feeling their own squeeze, though, with a shortage of coke caused by a fire in a West Virginia mine last year that closed that facility and shut off its supply of coking coal. Furthermore, the demand in China for scrap metal used by socalled mini mills has pushed the price of scrap up.

Unalloyed dismay
Meanwhile, the House Small Business Committee, chaired by Don Manzullo, announced it would investigate how those cost increases are "threatening job creation in America.

"These recent dramatic price surges in steel and other metals are pummeling our small manufacturers, who are trying desperately to hold onto their businesses," Manzullo says. "The lifting of the steel tariffs should have provided relief to these small business owners. Instead, the opposite has occurred. They are now faced with even higher prices. We must get to the bottom of these price surges quickly. Our economic recovery and thousands of American jobs are at stake."

Gary Slater, vice president of sales at Unarco in Springfield, Tenn., and other material handling manufacturers have reported that some customers are holding off with new orders, waiting for prices to drop again. "But some of them can't wait, so they're saying, 'Well, OK, we'll go along with this, but we don't like it,'" Slater says.

In the meantime, vendors say all they can do is try to make customers aware of the unprecedented situation. "The crisis hasn't hit the consumer market, so most people don't know what's going on," says Bob West, director of distributor development at Hytrol in Jonesboro, Ark. "We look at this as an education process."