August 13, 2021

Construction material prices continue to spike

Extreme price increases continued in July for a wide range of goods and services used in construction, according to an analysis by the Associated General Contractors of America of government data released yesterday.

“July was the sixth-straight month of double-digit price increases for construction inputs,” said AGC Chief Economist Ken Simonson in a news release. “In addition, lead times to produce or deliver many items keep lengthening. Many reports since the government collected this price data in mid-July show the trend will continue, at a minimum into the autumn and likely beyond, unless tariffs and quotas are removed.”

The AGC is trying to get the Biden administration to end tariffs and quotas on steel, aluminum, lumber and other essential construction items in an effort to fight inflation in the construction industry. It said some countries have opted for quotas on steel and aluminum in place of tariffs, making supplies even tighter.

The Associated Builders and Contractors, another construction industry group, noted that nonresidential construction input prices rose .8% in July and are up 23.4% from a year ago.

Graphic from AGC [enlarge]

The gap between input costs and bid prices has widened substantially over the past year.

“One's definition of transitory needs to evolve with these data,” said ABC Chief Economist Anirban Basu in another news release. “While it is quite likely that there will be less inflation a year from now, a rebounding economy, ongoing supply chain disruptions and limited productive capacity have conspired to generate rapid price increases. Many economists insist that the current situation is merely temporary; still, today's input price increases can meaningfully affect contractor fortunes by trimming margins and delaying the onset of projects.”

The AGC noted that there were double-digit percentage increases in the selling prices of materials used in every type of construction over 12 months: steel mill products were up 108.6%; lumber and plywood jumped 56.8% despite a large drop in mill prices from May to July; copper and brass mill shapes rose 49%; aluminum mill shapes increased 33.2%; plastic construction products rose 26.7%; gypsum products climbed 21.6%; insulation materials rose 11.8%; and prepared asphalt and tar roofing and siding products were up 10.9%.

On top of that, the index for truck transportation of freight jumped 13.8% over the year. Fuel costs also jumped significantly.

“The good and bad news is that the economy is flush with liquidity,” Basu said. “Injections of money supply by the Federal Reserve, which has yet to indicate when it will begin to moderate its quantitative easing program, have helped create large pools of investable money. A significant fraction of that money is being invested in real estate, which often translates into construction projects.

“One can only conclude that the economy will continue to run hot into 2022 despite the malign impacts of the delta variant, producing both hefty advances in gross domestic product and unusually elevated inflation,” Basu said. “The fact that steel prices are rising is not only an indication of the recovery transpiring in goods-producing industries like construction and manufacturing, but also of the difficulty global suppliers are having keeping up with demand. That dynamic does not appear poised to change substantially in the very near-term, though there was some evidence of moderating inflation in the most recent Consumer Price Index report.”

Basu said contractors should build contingencies into their contracts to protect themselves from additional materials price spikes.

“Given that construction firm services are in high demand, contractors should have enough negotiating leverage to accomplish that under most circumstances,” he said.