Pricey Steel Is Creating Big Headaches For Data Center Builders

A steel shortage is raising construction costs for data center developers in the U.S.

The cost of steel has skyrocketed in the U.S., up 215% since March of 2020. A hot-rolled coil of steel — a standard industry benchmark — sold for less than $1K per ton as recently as January. Last week, that same coil fetched a record $1,840 per ton.

These ballooning steel prices are raising costs for developers in a data center construction industry that is itself growing at close to record pace. 

"It's a horrible story for the U.S.," said John Anton, director of pricing and purchasing at IHS Markit, according to Capacity Media. “Not only has this broken the record but it shattered it.”

According to analysts, steel producers, expecting a long-term recession, reduced capacity at the beginning of the coronavirus pandemic in 2020. They were subsequently caught off guard by the surge in demand for household goods, home improvement products, cars and other consumer products.

The result was a severe supply shortage and high prices. Other construction materials, particularly lumber, also saw significant price increases over the course of the pandemic. 

But while the price of lumber has begun to stabilize, steel prices have continued to climb.

Fastmarket’s metals specialist Thorsten Schier told Fortune that as demand for many home construction and consumer goods tails off, the reopening economy means that major steel consumers, such as oil and gas companies, are more than making up for that lost demand as they spool up operations. Any easing of the global chip shortage could also drive prices up further, particularly if chip availability allows automakers to ramp up production.

"I don't think we've hit the peak for steel prices," Schier said. "It is just that supply is that tight.”

And experts don’t expect prices to come down anytime soon. Joe Cusick, CEO of construction consultancy Soben’s U.S. division, told Capacity Media that those building new data centers should expect prices to remain at or near current levels well into next year.

“It’s going to stay elevated,” he said. “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."

Steel prices hovering near record levels have the potential to create problems for a packed data center construction pipeline as providers work to meet the seemingly insatiable demand for cloud capacity. According to JLL, there were 611.3 megawatts of data center development underway in the U.S. at the end of last year — a number that is expected to grow further in 2021. 

Soben’s Cusick said data center developers will see contractors revising cost estimates and giving price quotes with shorter terms.

“The bidding process is getting impacted by it obviously,” he said. "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 stockpile this stuff.”