The Measure Was up 8.1% From a Year Earlier

The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) for construction materials held steady in September after a dropping 0.6% in August. Meanwhile, the measure was up 8.1% from a year earlier, although only 3.3% higher than September 2008. Cement prices, which have generally been falling over the last three years, rose 1.3% after a 2.3% drop in August. This marks the fifth monthly increase this year. Nonetheless, cement prices are down 0.2% since the end of last year, 1.5% since September 2010, and 10.1% since September 2008. Energy prices continue to be a major driver of construction costs. In the 11 months starting in August of last year through June of this year, diesel fuel prices rose every month except one (May). From July 2010 through June 2011 prices rose 53% on a seasonally-adjusted basis. However, in August and July diesel prices fell 5.9% and 2.1%, respectively. Meanwhile, prices were up 39.4% from September 2010 through September 2011, but down 7.3% from three years earlier. Higher energy prices are showing up in related product prices like plastic resins and materials prices, which have increased every month but two this year. For September, they were up 3.1% after falling 2.2% in August. Since September of last year, they were up 16.2%, and since September 2008, 7.8%. One positive on the energy front is industrial natural gas prices, which have generally been falling for the last three years. With advances in technology and discovery of new reserves, the outlook is for natural gas prices to remain relatively low for the next several years even as demand is likely to ramp up. In September, industrial natural gas prices edged down 0.6% and were down 1.4% from a year earlier, and down 36.8% from September 2008. Copper prices remain volatile. Since early September, they have softened somewhat, falling below $4 a pound on the spot market, but remain high by historical standards. Prices for copper ores fell 7.8% in September after rising 1.7% in August and 7.0% in July. From September of last year, prices were up 7.0%, and were up 11.2% from three years prior. Prices of copper base scrap provided little solace having risen 5.9% in September. Though that followed a 6.4% drop in August, prices were still up 18.6% from September 2010 and 29.3% from September 2008. Slow economic growth worldwide and the generous surpluses of both production capacity and labor continue to keep construction materials price inflation contained. Recent strength in the U. S. dollar in response to the Euro debt crisis has been another positive holding down commodity prices for U. S. buyers. The pricing environment will remain weak for materials suppliers for the next six to twelve months. Little change in the price index is expected, with a few monthly price declines possible. Given that commodity prices generally rise faster than overall inflation during the mature phase of an economic recovery, the current low inflation environment will end a few months after world economic growth turns about from the current slow pace to near an average (3% plus) rate. The earliest that this could happen is spring of 2012, but there is a high likelihood of delay due to both the United States and Europe implementing immediate spending cuts in response to their respective central government deficit/debt problems. Contractors should expect a two or more quarter window with their materials cost rising the same or less than overall inflation. Note that most price weakness has been in the most economically sensitive materials where prices are set largely in domestic markets _ softwood lumber, softwood plywood, gypsum products and concrete products. With the exception of concrete, single-family housing construction is the main driver of demand for these materials. With housing construction likely to post only modest gains over the next twelve months, these prices are likely to remain soft even as producers look for opportunities to raise prices. A sharper rebound in single-family construction will send these materials prices higher faster. Although residential construction contributes to demand for concrete, commercial construction projects typically are the major driver of demand. With commercial construction projected to show stronger growth than overall economic growth and multifamily housing construction _ which uses more concrete than single-family construction _ improving, cement and concrete prices are most likely to be the first to move upward. Assuming the economy avoids falling back into recession over the next several months, which we believe to be the most likely outcome, construction materials prices will move roughly in line with general inflation over the next six months. Faster than projected economic growth (in excess of 2.5% at an annual rate) will speed up commercial construction activity and push materials price inflation higher than general inflation. Source: Reed Construction Data