Construction material prices to rise by 6% to 8%

WASHINGTON "A welcome slide in energy costs gave producer prices, including those for construction, much-needed relief in October," said Ken Simonson, chief economist for the Associated General Contractors of America, in midNovember. "However, there is still a huge gap between construction materials prices and the generally benign inflation in most of the economy." Simonson was commenting on the Nov.

WASHINGTON — "A welcome slide in energy costs gave producer prices, including those for construction, much-needed relief in October," said Ken Simonson, chief economist for the Associated General Contractors of America, in midNovember. "However, there is still a huge gap between construction materials prices and the generally benign inflation in most of the economy."

Simonson was commenting on the Nov. 14 producer price index report from the U.S. Bureau of Labor Statistics.

"Plunging petroleum prices drove down the overall producer price index for the second straight month and lowered the PPI for construction materials and components for the first time since Hurricane Katrina struck in August 2005," he said. "The PPI for finished goods dived 1.6% for the month and for the 12 months back to October 2005. The PPI for construction materials and components slipped 0.2% for the month but had a year-over-year increase of 6.5%.

"The 12-month increase for most construction inputs was milder than in recent months, thanks to easy comparisons to the immediate post-hurricane period and to fast-shrinking demand from home builders."

Aside from wood products and diesel fuel, however, most construction prices still show hefty year-over-year increases. For example, from October 2005 to October 2006 the PPI showed double-digit increases for copper and brass mill shapes, up 64%; asphalt paving mixtures and blocks, 30%; steel mill products, 21%; gypsum products, 15.5%; and aluminum mill shapes,12.5%.

"For projects under way, the cost of materials was even greater and was not anticipated by contractors or owners," he said. "Owners should expect future bids will reflect the risk of further sudden price spikes."

Commenting on the BLS report a month earlier, he noted that the PPI for construction materials and components rose 0.3% in September, the same as in August, and had a year-overyear increase of 8.1%, nine times as much as the overall index.

"The 12-month increase for most construction inputs was milder than in the August report but still hard for contractors to either absorb or pass on," Simonson said. "For instance, the PPI for copper and brass mill shapes soared 75% from September 2005 to September 2006. Other large gains included asphalt paving mixtures and blocks, 33%; steel mill products, 23%; gypsum and plastic construction products, 19% each; aluminum mill shapes, 14%; and concrete products, 9.3%."

As of mid-September, diesel fuel prices had retreated about 35 cents per gal. from their highs in August. Crude oil prices were down roughly the same amount. Moreover, diesel prices set an all-time high in October 2005, following shutdowns and damage to oil platforms and refineries caused by Hurricanes Katrina and Rita. Because similarly catastrophic damage did not occur this fall, diesel prices should stay below year-earlier levels for the next few months.

Copper futures prices more than doubled from the beginning of January to mid-May. Since then, they have retreated slightly. But worldwide demand for copper remains high for consumer, industrial and infrastructure uses. Meanwhile, few large mines are supplying copper ore, and labor or political unrest has beset several of these mines and has kept supply from expanding. Therefore, copper pipe, wire and sheets and brass fixtures are likely to remain much costlier than a year ago.

Thefts of copper from inventories, equipment and structures will remain a headache. The soaring price of copper has encouraged thieves to take copper out of worksites and even completed projects.

Plastics prices should drop, barring conditions such as those following the 2005 hurricanes. In late 2005, PVC prices were pushed even higher by a plant shutdown at one of the major suppliers of vinyl chloride resin. With weaker demand from residential markets, prices and supply for construction plastics should be favorable for the next few months.

As of mid-September, the futures price for natural gas was 20% to 40% lower than a year ago and more than 70% below the post-Rita record. Large inventories of natural gas in storage will also hold down prices, unless unusually cold winter weather depletes stocks. Simonson explained that two factors make future construction cost explosions likely.

"First, the industry must generally use a fixed quantity of materials, unlike manufacturers that can make products smaller and lighter, or service businesses that use few materials," he said. "These materials are often in high demand worldwide, with limited supplies. A current example is the nickel used to make stainless steel.

"Second, materials must be physically delivered, making them subject to high freight and fuel costs, as well as transportation bottlenecks."

Construction materials costs over the next year should rise at least 6% to 8% vs. 2% to 4% for the overall economy, Simonson said.