Record US steel prices push cost of data centre construction

12 July 2021 | Melanie Mingas

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Record steel prices in the US pose a risk to the construction of new data centres at a critical point in the industry's growth trajectory.

Last week, the US set a new record for hot rolled sheet steel prices, which reached $1,800 per metric ton (MT). In the US, the prior record for sheet was approximately $1,200/MT, set in early 2008.

Speaking to Data Economy on 8 July, John Anton director of pricing and purchasing at IHS Markit said: "It's a bad story for Europe, it's a horrible story for the US.

"In the US, bar makers, most of your construction steel, is made in electric furnace makers and they have largely just passed on high input costs. Hot roll sheet is up, as of recently, about $1,300, so a $1000 expansion in margin. Prices were down in the $480-$500 per metric ton range at the worst of the recession. In the US normally they are centred around $700/MT. It was low during the recession, down to about $500, but just reached over $1,800 this week for hot rolled," he continued.

Commenting on how this compares to 2008, Anton continued: "Not only has this broken the record but it shattered it.

"Rebar is normally around $600/ MT and is pushing $900. It is expensive; that's 50% above normal, but it's nowhere near as bad as sheet," he added.

JLL's 2020 Year-End Data Center Outlook showed that at the end of 2020 data centre construction too reached "near-record levels", with a pipeline of 611.3MW in the US alone.

Outlook to 2022

The current global demand dynamics look set to continue – potentially until mid-2022 –  causing headaches in the data centre construction sector.

Joe Cusick, CEO of Soben's new US unit, expects a continued impact on construction costs for those building new data centres.

On the price of steel he said: "Yes it’s going to stay elevated. There is no end in sight to that and it is the availability, the supply chain, it’s the cost and schedule and logistics of getting that stuff shipped or manufactured in country."

As a result, contractors re revising their prices and shortening the terms on quotes.

Cusick  said: "The bidding process is getting impacted by it obviously. Contractors have elevated pricing and they are almost hedging their numbers as well, based on if some of the biggest contractors or fab plants can stock pile this stuff. You have it less for steel but certainly for commodities like copper they have it all stockpiled and they can take advantage of the market."

Cusick is based out of Soben's new Chicago, US headquarters. Prior this role he was as director at Linesight, a professional services consultancy focused on the global construction industry, where he led the project controls delivery on a $2 billion data centre programme and was engaged on more than $8 billion in construction projects.

Anton reports that allocation – i.e. rationing – caused issues between March and May, creating a situation where "people were ignoring pricing to get supply". By way of example he said an order for 10,000 tons would deliver 9,000. 

Sharing his outlook, he continued: "Availability is better now than it was a month and a half ago for sheet steel. It's still quite bad but should improve. Imports are coming and supply should rise, which is the first piece of good news. Prices should fall which is the second bit of good news, but it won't be quick. Early 2022 should be better than it is now, but it could be late 2022 before things are back to approaching normal."

Industry impact

In Utah, Novva Data Centers is preparing to open a 1.5 million square foot facility in September.

Commenting on the construction process, CEO Wes Swenson said the firm is monitoring prices.

He told Data Economy: "At Novva, we are recently dealing with shortages, supply chain constraints, and inflation. More so than we have with past construction.

"In general, we look at the market long term, and have seen similar episodes in the past few years. One example is the growth of enterprise centric hyperscale data centers, such as Facebook, purchasing from the same vendors as colocation operators. We are competing for the same supply chains, and it ebbs and flows," he added.

Advising that preparation is key, he continued: "It can and will probably result in higher prices over the next few years, especially as inventory is absorbed, and expansion building comes under more financial pressure. These types of events also create a new window of opportunity to innovate with more modular builds, and consolidation of key components in power management into smaller footprints… The higher commodity prices have not affected our plans for construction and expansion at this moment, but we are monitoring it daily. Demand for data centres seems unabated by the pandemic, and surging to meet the demands of new applications, storage, analysis and performance."

Jonathan Gibbs, SVP of design and construction at Prime Data Centers said that projects are not being delayed, but some have been modified.

“Keep in mind that the core and shell construction cost is relatively small with respect to the overall build in comparison to the supporting MEP infrastructure. That said, we feel that this inflationary environment gives Prime an advantage given our ability to customize our building designs and development schedules given our national vendor partnerships. Generally speaking, we have seen a skew from what traditionally would be speculative builds towards build-to-suits. We’re happy with either model. At the moment, we’re not delaying our projects.”