Input Prices Still a Material Concern

The latest report from the Bureau of Labor Statistics (BLS) on producer prices shows that costs for construction materials have not settled down. The broadest industry measure, the producer price index (PPI) for construction materials and components, rose 1.1 percent from December to January and 6.2 percent over the past 12 months.

The figures are worse for the lines of business most AGC members engage in. These segments have experienced steeper 12-month price increases: highways and streets, 14.6 percent; other heavy construction, 8.4 percent; multi-unit residential, 7.6 percent; nonresidential buildings, 7.3 percent; and single-unit residential, 7.0 percent. The rise was smallest in single-family (and residential repairs, not shown), because that segment benefited from a drop in prices for lumber and wood products, which are little-used in multi-family and nonresidential construction.

The differences among segments reflect variations in price increases for key materials. For instance, the PPI for diesel fuel, which is most important in highway and other heavy construction, slipped 0.7 percent in January but
jumped 39 percent over 12 months. Asphalt climbed 2.2 percent last month and 37 percent over 12 months. Concrete products went up 2.7 percent and 9.8 percent. Plastic construction products climbed 1.1 percent and 22.5 percent. Gypsum products were up 2.5 percent and 19.5 percent. Steel mill products (including products for other industries) fell 0.2 percent and 5.4 percent, but fabricated structural metal products were up 0.1 percent and 2.0 percent.

There has been some good news lately. Natural-gas futures have dropped more than 50 percent from their peaks after Hurricane Rita, so the price of polyvinyl chloride (PVC) pipe and other construction plastics should come down in the near term. Oil prices have been very volatile but have stayed more than 10 percent below their highs, which should help keep diesel fuel and asphalt prices from rising soon. Indeed, on-highway diesel prices have been virtually flat, staying within a nickel of this week's $2.45 average for nearly three months. Gypsum and oriented-strand board (OSB) prices should stabilize or drop if new capacity comes on stream and homebuilding
slows, as most forecasters expect this year.

Steel prices could move either way. Steelmaking capacity and consumption worldwide are both increasing, and prices are likely to swing in either direction as the supply-demand balance shifts from month to month.

But concrete prices seem headed upward again, despite a tentative agreement to reduce the antidumping duty on Mexican cement. That agreement, now expected to be formally signed in early March, with an April 1 effective date, would lower the duty from $26 per metric ton currently to $3 per metric ton for three years, then end the duty altogether. During those three years, Mexico would be allowed to send 3.0 million metric tons (mmt) into the U.S. That is only a small increase from the 2.2 mmt sent in 2005, compared to total U.S. imports of some 35 mmt and total consumption of roughly 130 mmt. The agreement may make shortages less likely, given the possibility of getting cement from Mexico faster than current deliveries from Asia and Europe. But the tight cap will not stop prices from rising as long as nonresidential construction keeps growing and using more concrete.

For more on the outlook for construction materials and market segments, sign up for AGC's next economic outlook audio conference, from 2 to 3:30 p.m. Eastern Standard Time on Tuesday, February 28. Go to www.agc.org/econupdate to register. The audio conference will feature Ken Simonson, National Association of Home Builders Staff Vice President for Economics Michael Carliner, and Polyisocyanurate Insulation Manufacturers Association President Jared Blum. Subscribers can submit questions in advance and during
the conference.