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Materials Price Surge Continues

0 938 Market Intelligence

Construction materials prices appear to be entering another period of double digit inflation similar to what occurred in 2004 and again in 2008. The Bureau of Labor Statistics price index jumped 1.3% in March and is rising at a 10% plus pace for the first three months of 2010. The same materials that caused the two earlier price spurts are again responsible, says Reed Construction Data chief economist Jim Haughey.

Construction materials prices appear to be entering another period of double digit inflation similar to what occurred in 2004 and again in 2008. The Bureau of Labor Statistics price index jumped 1.3% in March and is rising at a 10% plus pace for the first three months of 2010. The same materials that caused the two earlier price spurts are again responsible. Prices increased 8-10% in the last three months for lumber, plywood, diesel, structural steel and steel pipe. Nonferrous pipe prices rose 5%. Gypsum prices were steady but price increases as high as 20% have already been announced.

The 2004 price spike was caused by an abrupt worldwide economic recovery which made intense demands on materials for both manufacturing and construction and caught suppliers unprepared. The 2008 price spike was caused by unexpectedly high worldwide economic growth, much of which turned out to be an overheated real estate bubble, which stressed supplier capacity.

The 2010 price spike will be very similar to the 2004 experience. A burst of demand for materials can not be quickly met by unprepared suppliers although there is an element of capacity constraints due to the 20% plus jump in materials demand in China. Note that both the 2004 and 2008 price spikes were followed by a year of nearly steady prices including price declines for raw commodities.

That suppliers can not meet the recent pickup in demand is readily seen in the wide gap between spot and contract prices. Spot lumber prices are well above contract and futures prices. The situation with metals is similar. Steel and nonferrous scrap prices have surged to double the year ago level as mills scramble to boost output in the short term when their margins are above average. Spot commodity prices will remain very high but will be declining later in 2010.

So far the price surge has not included cement and concrete products and will not for many months because this is a domestic market, largely isolated from international impacts until US construction activity expands enough to absorb domestic capacity and require a significant amount of expensive imports.

Estimators should assume that the priced of metal, lumber and oil/gas based products will be rising about 1% a month until very late in 2010 and then will be steady to slightly lower for much o 2011. However, the prices trends for processed and manufactured items as well as construction labor and equipment will be the opposite. These prices are largely set in the domestic market and are now steady to slightly falling in a depressed market.

The current trend for domestic job site resources will continue for much of 2010. A higher level of construction activity in the second half of the year will cause scattered sharp price increases in markets, such as gypsum products and aggregates, where the small number of suppliers permits them to exercise price management. Then in 2011, when commodity prices are about stable, prices for domestic materials and other resources will generally be rising at about a 3% pace.

by Jim Haughey

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