AGC: Steel, Fuel Prices Raising Construction Costs

“Red-hot” steel prices, combined with record diesel fuel costs, are making construction unaffordable, according to Ken Simonson, chief economist for The Associated General Contractors of America.

Washington - “Red-hot” steel prices, combined with record diesel fuel costs, are making construction unaffordable, according to Ken Simonson, chief economist for The Associated General Contractors of America.

Simonson recently commented on the producer price indexes for March reported by the U.S. Bureau of Labor Statistics.

Simonson said the PPI for inputs to construction industries — materials used in all types of construction plus items consumed by contractors, such as diesel fuel — soared 2.1% in March. The increase was propelled by a 24% increase in diesel fuel costs and a 5.5% rise in prices for steel mill products, he said.

“Unfortunately, there is worse to come,“ Simonson said. “Steel suppliers have been burning up the fax wires announcing huge price increases and canceling previous quotes. And the Energy Information Administration reported that the average price of highway diesel crossed the $4 per gallon mark in all regions for the first time, with a 10-cent increase in the national average … to $4.05 per gallon. These figures won't show up in the producer price index until next month, but contractors are paying them now.”

Simonson noted that public agencies and private owners need to adjust to the recent statistics.

“Too many of them are still assuming construction costs are rising no faster than the consumer price index, when in fact the PPI for construction inputs has gone up 6.5% in the past 12 months and 34% since steel prices first surged in December 2003,” he said. “That is more than double the run-up in the CPI.”

Simonson added that current diesel prices are more than 60 cents a gallon higher than the $3.44 average price for gasoline.

“This puts a triple burden on contractors, who use diesel to power off-road equipment and construction trucks and also pay a fuel surcharge on the thousands of deliveries and backhauls at a large job site,” he said.

Asphalt prices also are poised to increase as the highway-paving season gets under way Simonson said.

“Asphalt at the refinery costs 13% more in March than a year ago. But many states and the federal government are running low on highway funds because motorists and truckers have been driving less. It is imperative that Congress pass additional funding in the next few months to keep highway construction funds flowing and not choke off funds with an ill-advised moratorium.“

Additional information is available at www.agc.org/march08ppi.