March 25, 2004

Spiking costs shadow construction market

  • Just as local contractors are emerging from a slow market, they are being hit with more expensive steel, plywood, insulation and other construction materials.
    AGC of America


    A wave of price increases is swamping the construction industry. Steel prices are the most notable example, but recent surveys by the Federal Reserve and a national association of purchasing managers turned up more than 40 inputs that were rising in price since January, versus only a few with falling prices.

    That's a dramatic reversal from just a few months ago, when prices were flat or falling for most items. Now contractors are reporting that steel prices are rising so fast that suppliers won't even provide firm quotes for more than a few days. While that is a problem for many customers, it hits construction especially hard: contractors have to submit fixed-price bids for projects that may not require steel until months or even years after the bid is accepted.

    Steel prices are rising so fast that suppliers won’t even provide firm quotes for more than a few days.

    The run-up in steel prices results from a number of causes. Steel is made from scrap steel or iron ore and coke. China has been buying record amounts of scrap to feed its mills, leaving supplies tight here and worldwide. Meanwhile, the Pinnacle mine in West Virginia, the biggest supplier of the special coal used to make coke, has been shut down by a disastrous fire for several months and is not expected to reopen until late in 2004 or 2005. And the fall in the dollar has made the U.S. a cheap source of exports, while imported steel has become more expensive.

    Steel is not only expensive but getting scarce. Contractors report some suppliers are “allocating” steel — delivering less than promised or selling only to select customers. That could leave some projects stuck in midstream.

    In addition to steel, contractors have reported price spikes for copper wire and fittings, plastic pipe and insulation, plywood and oriented strand board, and petroleum products, such as asphalt and diesel fuel for offroad equipment and trucks. Near-record diesel prices, along with new hours-of-service rules for truck drivers, have driven up delivery charges for construction materials. Costs have continued on a three-year upswing for all types of insurance, from workers' compensation and employee health coverage, to builders' liability policies to sureties for public projects.

    The price wallop comes at a delicate time for Washington contractors. The state has clearly started to dig out of its economic hole. Preliminary employment data show that seasonally adjusted employment in December was at a two-year high, while construction employment was just a few hundred shy of its all-time record.

    In the Seattle metro area, overall employment in December was just 3,000 below the December 2002 count, a significant improvement from the 87,000 jobs that disappeared in the previous two years. Construction employment has stabilized in the past two years after falling sharply from 2000 to 2001. Meanwhile, in Tacoma, employment overall and construction set December records in 2003, building on gains achieved in 2002 as well.

    Another sign of the economy's health comes from housing prices. The price of houses that were sold or refinanced in the last three months of 2004 rose 5.5 percent statewide, 5.3 percent in the Seattle-Bellevue-Everett metro area, and 7.5 percent in the Tacoma market, according to the Office of Federal Housing Enterprise Oversight.

    Taken together, these indicators suggest that the demand for both residential and nonresidential construction in Washington has begun to revive. With the national economy growing at a strong and apparently steady pace, the overall outlook for a further buildup in construction is sunny. But the soaring cost of so many materials and services used by the industry throws a dark shadow over the prospects for profitability.

    Ken Simonson, as chief economist for the Associated General Contractors of America, tracks economic influences on construction and the role construction plays in the economy. He has more than 30 years experience analyzing, advocating and communicating about economic trends and policy, and is the author of a weekly column called “Data DIGest.”

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