ACG economist predicts double-digit increases in construction material costs

Prices for construction materials such as cement, steel, copper, gypsum and petroleum-based products will increase at least 10 percent next year, an economist for the Associated General Contractors of America said Sept. 19, during a presentation at the group’s mid-year meeting.

Ken Simonson, AGC’s chief economist, upped his previous prediction — made prior to Hurricane Katrina — of a 6 to 8 percent price increase. Simonson also thinks the supply of fuel will remain constricted.

“Consumers will continue to pay much more than they did a year ago and somewhat more than they would have paid in the absence of Katrina,” he said. “More than 50 producing platforms in the Gulf of Mexico have been washed away. It takes many months or years to hook up the production of those again.”

In addition to the 50 producing platforms, four major land refineries are expected to be down for months, further increasing fuel costs. These cost increases will show up as freight surcharges on the thousands of deliveries to a typical construction site.

The storm will affect the supply of materials as well as demand. The areas affected by the storm have a significant number of wood product facilities that may have been damaged or destroyed, according to a report by economists for the National Association of Home Builders.

“Lumber and plywood spike in price as they always do after a hurricane, but there is a possibility that those prices will wind up lower,” Simonson said. “There is literally a windfall of perhaps millions of trees in Louisiana and Mississippi that have been flattened.” If they can be harvested in time, there may be a greater supply in those regions than before.

“Cement was already in short supply in 32 states and the District of Columbia last month,” Simonson said. “The disruption to ocean, barge and rail transport from Katrina, and the loss of power to cement plants in the storm’s path, will cut further into cement supplies.” At the same time, the need to stabilize and rebuild roads, other infrastructure and buildings will increase demand for cement.

AGC has been working to get tariffs on Mexican cement lifted, and on Sept. 16 sent a letter to the U.S. Department of Commerce urging the Bush administration to allow imports of cement from all countries without duties or quotas in light of the emergency created by Hurricane Katrina.

“Commerce is finally showing some signs of considering changes in the anti-dumping duty that has forced cement importers to go as far as China and South Korea to compete for expensive shipments while ignoring supply that is readily available in Mexico,” Simonson said.
But according to U.S. trade law, the Commerce Department can’t revoke the tariff until U.S. organizations like the Southern Tier Cement Committee repeal their complaints. Joe Dorn, a lawyer for STCC, has said lifting the duty will not alleviate supply issues. “The duty doesn’t prohibit cement being imported from Mexico, it only ensures that it is fairly priced,” he said.

As far as labor is concerned, Simonson thinks the net effect is going to be small, even though it may cause some major changes in construction activity.

“We have had 1 million people displaced by the storm. That includes a lot of construction workers,” he said. “Because some of the evacuees don’t plan on returning home, this could cause long-term effects on labor supply elsewhere.”

For the next few quarters, there will be less retail activity in the Gulf Coast, less manufacturing and less distribution to supply it, Simonson said. This will cause slower growth in the demand for construction of all these kinds of facilities.

“It will be a long time before we see a large increment of commercial construction going on in Louisiana and Mississippi,” he said.

Since the time table for rebuilding is uncertain, many of the effects of Hurricane Katrina will continue to be felt by different segments of the construction industry and could be “very long lasting,” Simonson said.