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What’s It Cost? – March 2014

While the unusually cold weather through February are unlikely to change the magnitude and direction of trends for construction materials and building products over the long haul, the disruption caused by the inclement conditions has impacted prices during the 2014 winter construction season. The short-term steep decline in construction starts has significantly dampened demand for products, making it especially difficult for manufacturers to hold price increases. Winter’s unusual disruption of transportation and logistics has also pinched supply channels for many items – especially the heaviest construction materials – putting upward pressure on scarcer products.

Even with reduced homebuilding demand prices for dimensional lumber and plywood increased by seven percent the first two weeks in February due to the severe weather, which caused many lumber mills to shut down for several days. The shortages and longer-than-usual lead times are expected to last through March, which would push prices even higher if demand increases in March and April when residential construction picks up.

U. S. rebar mills were holding the line on prices through March, even though softer demand reduced scrap steel prices. Domestic supply disruptions opened markets to cheaper imported rebar in March, however, making the likelihood of declining rebar prices higher in spring. Weak sales of polyethylene products held prices of sheeting and construction plastics during the winter months despite two separate price hikes for resin – a base material in plastics manufacturing.

Bureau of Labor Statistics (BLS) introduced a new producer price price index (PPI), called the PPI for final demand, when it reported results in February. This index is more comprehensive than the older PPI for finished goods because it incorporates changes in the costs of services and construction purchased by businesses and government. The new final demand construction index is a weighted average of indexes for construction for private capital investment and government construction.

The producer price index (PPI) for final demand increased 0.4 percent, not seasonally adjusted in January and 1.2 percent over 12 months. The PPI for final demand construction rose 0.6 percent, not seasonally adjusted, in January and 3.1 percent over 12 months, as did the PPI for construction for private capital investment, which makes up 69 percent of the final demand construction total. The PPI for inputs to construction rose 0.6 percent and 1.2 percent year-over-year.

Major construction materials with notable price swings included gypsum products (7.4 percent in January and 11.6 percent year-over-year); insulation materials (1.5 percent and 8.2 percent, respectively); lumber and plywood (2.4 percent and 7.7 percent); steel mill products (1.2 percent and 0.5 percent); and diesel fuel (-1.9 percent and -3.3 percent).

Prices for materials used in all construction and for nonresidential building both increased more than overall prices for “final demand” in January, according to a new analysis by the Associated General Contractors of America (AGC). As a result, margins remain very tight for most construction firms even as private-sector demand for construction continues to grow.

“Although contractors on average were able to raise bid prices in line with materials cost increases, the results varied widely by commodity, building type and specialty trade,” says Ken Simonson, AGC’s chief economist. “Several key construction materials, or ‘processed goods,’ experienced substantial price increases that in many cases exceeded what contractors could pass on last month. It will take a few more months to see if these costs increases are sustained—putting a squeeze on contractors’ margins—or a one-time blip.”

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Biehl
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  • Bob Biehl
  • Director, Assurance & Business Advisory Services
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