Construction material prices diverge from usual indicators

Prices for many construction materials climbed at double-digit rates in 2004 and through September 2005 after little change in 2001 through 2003, while overall consumer and producer price indexes have remained moderate, according to a report by the Associated General Contractors of America.

The first edition of the Construction Inflation Alert analyzes how producer price indexes for construction categories and specific materials have performed since 2001. It compares two common inflation measures, the consumer price index for urban consumers and the producer price index for finished goods, against PPIs for construction materials.

Consumer prices increased about 2 percent annually through 2004, although they have accelerated to almost 5 percent in the past year as oil prices have set new records. The PPI for finished goods, the broadest measure of prices paid by businesses or consumers, has also been “well behaved,” according to Ken Simonson, chief economist for AGC and author of the report. After moving in step with overall PPI in 2001, 2002 and 2003, construction material prices bucked the trend and rose dramatically during the past two years.

Even though the alert doesn’t reflect the effect of Hurricane Rita and only partially the influence of Katrina on producer prices, the news is not good for the construction industry.

The run-ups in steel, petroleum and cement prices in the first half of 2004 affected nonresidential and multi-family home construction more than single-family home construction, which relies less heavily on these inputs. The further increases in cement, diesel fuel and asphalt prices in 2005 also had a negative effect on highway and street construction.

The AGC alert says the problems affecting the construction industry in 2004 and 2005 developed for a variety of reasons, including:

· Prices for most construction materials either declined or experienced modest increases in 2001 through 2003. Consequently, many contractors and owners were making little or no provisions for price increases in 2004.

· Many prices exploded in the 12 months preceding September 2004: steel and copper/brass products for construction (19 to 62 percent higher), gypsum products (up 21 percent), asphalt and lumber/plywood (both up 12 percent), and insulation materials (up 11 percent). Equipment prices also rose 7 percent at the producer level.

· Contractors were affected in two ways in 2004 by higher diesel prices. Since prices set new records in 2004, contractors with significant fuel costs — earthmovers, highway contractors and dump truck operators – were directly affected. In addition, the trucking market tightened significantly, partly in response to new hours-of service rules for truck drivers that lengthened delivery times in some cases, and partly because a robust economy created strong demand for trucking services. Trucking companies passed along higher fuel and wage costs to contractors in the form of fuel surcharges and base delivery charges.

At a time when demand for construction materials is strong and many domestic producers are operating at capacity, cost increases at the raw materials stage are more likely to be passed on, Simonson said in the report, particularly if one or two materials are major portions of the cost of the construction input. Prices for crude petroleum, industrial natural gas, iron ore and copper base scrap increased 20 percent or more from October 2004 to September 2005. Costs for those raw materials rose more during that time period than they did in the preceding 12 months.

Simonson also said the global building boom has strained supplies of key construction components and may continue to produce large increases in demand for a wide variety of building materials in the future.