Of course, it’s natural for prices to gradually increase over time. In fact, it’s the way of the U.S. economy as a whole. But in the past couple years, a sharp increase in construction costs has caught the attention of construction companies and equipment providers throughout the ethanol industry. Just as crude oil and gasoline prices have risen, so have the prices of basic construction materials, which ultimately affect the plant’s total cost. One of the reasons for this price increase seems to be a shortage of various materials, which causes a mill to raise the final cost of its products that are purchased by ethanol equipment providers, and paid for by general contractors and design/build firms. Eventually the ethanol production plant will pick up the noticeably larger tab.
Getting spendy
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Just how much more are ethanol plants paying in construction costs these days? Let’s take a look at the most expensive culprits, which appear to be raw materials steel and, to a lesser extent, cement. According to ICM Inc. President and CEO Dave Vander Griend, metal prices have doubled in the past two years. “Steel prices, both stainless and carbon …,” he told EPM. “Everything is made out of it: tanks, vessels, equipment. When those double in price, your plants have to go up [in cost] a minimum of 15 [percent] to 20 percent.”
Nickel shortages have affected stainless steel prices, while the overall scarceness of scrap metal and cement have boosted those price tags. Of course, raw material prices do fluctuate much like gas prices, but lately they’ve only been going up … with no signs of a decrease on the horizon. “The baseline is higher than it used to be,” Vander Griend said. “It dips down but not as low as it used to go. It’s peaking higher than it used to be. The trend is up on all building supplies. Obviously, there’s a significant amount of concrete and structural steel in a plant. That and equipment are the biggest cost of the plant.”
According to Bruce Langseth, chief estimator at Fagen Inc., the more drastic price increases are seen in steel tanks, vessels, pumps, evaporators and structural steel. Other materials, such as cement, are gradually becoming more expensive as well. “Some of the increases have been dictated by shortages,” Langseth told EPM. “The good news is everything I’ve been reading and hearing lately is that the increases are somewhat stabilizing now.”
With cement, Vice President Roger Laidig of Laidig Systems Inc. said prices have gone up 10 percent to 25 percent in the past year or two, depending on the plant’s location. “If you’re building a plant in Cedar Rapids, [the cement] will come from Cedar Rapids,” Laidig told EPM.
Indeed, the prices of steel and cement have steadied. However, the price spikes in 2004 have gotten everyone’s attention. It’s something everyone in the industry watches every day because any piece of ethanol production equipment is largely made of steel, whether stainless or carbon, or cement. For example, in a stainless steel tank that is fabricated at a plant site, the raw steel material represents 65 percent of the overall cost of the tank, according to Jack Suedbeck, sales manager for Brown Tank LLC. In a carbon tank, the material represents 50 percent of the cost. The remainder includes fabrication, engineering and field labor costs. But clearly, when steel prices go up, the cost of an ethanol plant is greatly affected.
Prices differ depending on the process design of the tank as well. Some tanks need higher pressure ratings, which affect the material makeup. “A pressure vessel like a column is a higher material column because it has a heavier wall,” said a WINBCO Tank Company spokesman, who requested not to be named. “Other tanks have a lower diameter, which is a cheaper configuration. [Steel] could be as little as 40 percent and as much as 65 percent [of the total cost of the tank].”
The cause
When exploring reasons why the prices of raw construction materials have gone up, several factors became apparent. However, the most common reason cited by EPM sources was the growing industrialism in China. Two years ago, Chinese companies bought a large amount of scrap steel, among other raw materials. Scrap steel includes recycled cars and other used steel materials that are remade into new steel products. “Because of China’s aggressive growth, it’s absorbing a lot of the scrap steel market,” Suedbeck said.
Like a chain reaction, the increase in Chinese purchases tightened the U.S. supply and caused other issues. Of course, steel prices rose drastically. As another example, Laidig Systems anticipated a limited supply of steel and ordered more steel in advance to make sure the company had enough supplies to make its silo reclaimers, which consist of steel augers, hoppers and many other steel parts. “Anybody that uses a lot of steel stocked up on it if they wanted to have steel on hand,” Laidig told EPM. “We bought inventories at a higher price, which kind of carried over into 2005 [spending].” In other words, because Laidig Systems purchased the steel in 2004 when prices were high, it used that expensive inventory well into 2005 when prices had receded.
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