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Construction Materials Price Index Falls in October

0 4416 Market Intelligence

The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) for construction materials fell 0.6% in October after holding steady in September. Despite the recent decline, the measure was up 6.9% from a year earlier, and 5.6% higher than October 2008. Cement prices, which rose 1.3% in September, returned to their generally downward movement over the last three years, falling 0.7%.

The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) for construction materials fell 0.6% in October after holding steady in September. Despite the recent decline, the measure was up 6.9% from a year earlier, and 5.6% higher than October 2008. Cement prices, which rose 1.3% in September, returned to their generally downward movement over the last three years, falling 0.7%. Cement prices were down 1.0% since the end of last year, 1.7% since October 2010, and 10.7% since October 2008.

Energy prices continue to be a major factor driving construction costs. Diesel fuel prices, which were rising from late summer 2010 into spring of this year, have generally been trending down since April of this year. After rising 7.3% in September, they fell 5.5% in October. Since their recent peak in April (the highest they have been in about two and a half years), they were down 8.7%. Meanwhile, prices were up 27.3% from October 2010 but “only” up 10.1% from October 2008. One positive on the energy front continues to be 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 October, industrial natural gas prices fell 1.5% after a 0.6% decline the previous month. They were down 2.7% from October 2010, and down 30.7% from three years earlier.

Copper prices remain volatile. Since early September they have fallen below $4 a pound on the spot market, but remain high by historical standards, currently trading around $3.35 a pound. Prices for copper ores dropped 9.1% in October after falling 7.8% in September. From October of last year, prices were down 13.4%, but were up 31.8% from three years prior. Prices of copper base scrap fell 5.5% after rising 5.9% in September. Since October 2010 prices were up a modest 1.9%, but were up 55.2% from October 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 spending cuts in response to their respective central government deficit/debt problems. Contractors should expect a two or more quarter window with their materials costs 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. Paradoxically, despite continued soft housing construction activity, prices for softwood lumber, softwood plywood, and gypsum all experienced sharp price increases in October. For the month, they rose 3.6%, 5.0%, and 3.0%, respectively. On a year-over-year basis they were up 5.1%, down 0.4%, and down 1.0%.

The movement in softwood lumber appears to be more bouncing around its recent price of $260 per thousand board feet, a still relatively low (though certainly not the lowest) price on a historical basis. It is not unusual for lumber prices to move up in late fall and winter as the weather forces a curtailment of logging operations. This is partially matched by a normal seasonal slowdown in residential construction activity, though the two are not always perfectly matched. Potentially more troubling from a longer-term price perspective is that Canada, responding to weak U.S. demand and impediments to exporting to the U.S. arising out of the Softwood Lumber Agreement (SLA), has focused much effort to expanding exports to other countries with Asia, China in particular, a chief target. That effort appears to be paying off and may explain some of the recent price movements.

Gypsum prices are another matter. Gypsum producers have suffered a number of years of weak demand and therefore a weak pricing environment due to the sharp decline in residential construction. Producers have responded by shuttering their least efficient plants, layoffs, and other cost cutting measures. They have been helped by lower natural gas prices, a key cost of production. Nonetheless, the pressure of lower gypsum prices on producers has been painful and led to several attempts to raise gypsum prices, which so far have ultimately failed. The latest attempt is a recent announcement by six gypsum producers that they are raising prices 35% in January. This appears to already be causing ripple effects among suppliers, pushing gypsum prices higher. However, without more single-family construction it is unlikely that this effort will prove any more successful than past efforts. It will most likely result in some temporary price increases that are eventually rolled back, probably by February or March.

The gypsum case does point out that producers will raise prices at the first opportunity. With housing construction forecast to post only modest gains over the next twelve months, these materials prices are projected to remain soft. A sharper rebound in single-family construction will send these prices higher.

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 on a sustained basis. The expected slowdown in government highway construction activity will be a counter force to this improvement, though probably not enough to prevent some increase in prices.

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.

US Construction-Related Price Indexes

  Percent Change
  Monthly
from Previous Month

NSA data unless
otherwise indicated
3-Month Moving Average
from Previous Month

NSA data unless
otherwise indicated
Year-over-year
NSA data
3 Years Ago
NSA data
  Oct-11 Sep-11 Aug-11 Oct-11 Sep-11 Aug-11 Oct-11 Sep-11 Aug-11 Oct-11
Construction Commodities
Dimension Stone -0.2 0.5 0.0 0.1 0.2 -0.5 2.3 1.6 1.5 8.0
Cement -0.7 1.3 -2.3 -0.6 0.1 -0.5 -1.7 -1.5 -3.0 -10.7
Construction Sand, Gravel & Crushed Stone* 0.1 0.0 0.3 0.1 0.0 0.3 1.2 1.7 1.3 6.0
Softwood Plywood 5.0 -4.2 0.3 0.3 -0.3 0.4 -0.4 -7.5 -7.0 -4.1
Hardwood Lumber -1.1 -0.6 -0.4 -0.7 -0.2 0.1 -3.9 -3.2 -3.5 1.1
Softwood Lumber* 3.6 -1.2 2.8 1.7 0.4 1.4 5.1 3.8 4.8 5.0
Other Commodities
Industrial Natural Gas* -1.5 -0.6 0.8 -0.4 -0.6 -0.4 -2.7 -1.4 -4.3 -30.7
Plastic Resins & Materials -3.9 3.1 -2.2 -1.0 0.9 -0.3 9.5 16.2 12.5 5.9
Insulation Materials 0.2 -2.1 1.1 -0.3 0.4 1.2 6.0 6.3 9.9 10.6
Iron & Steel Scrap -2.0 0.8 -0.5 -0.5 0.1 0.5 23.1 20.7 23.9 76.4
Iron Ore 7.9 0.0 -0.4 2.5 0.0 0.0 12.9 4.7 4.7 17.8
Copper Ores -9.1 -7.8 1.7 -5.0 -0.9 2.4 -13.4 7.0 21.6 31.8
Copper Base Scrap* -5.5 5.9 -6.4 -2.1 -0.2 -1.0 1.9 18.6 17.2 55.2
Manufactured Materials
Gypsum Products 3.0 -1.7 -1.7 -0.2 -1.3 -0.3 -1.0 -4.6 -4.7 -8.3
Diesel Fuel* -5.5 7.3 -5.9 -1.5 -0.4 -2.0 27.3 39.4 32.9 10.1
Asphalt 0.2 -4.9 4.4 -0.2 -1.4 2.0 25.1 23.1 19.6 -10.8
Asphalt Roofing 2.5 -2.3 -1.6 -0.5 -0.3 1.3 7.5 3.7 4.5 8.3
       
Paint 0.3 0.1 0.0 0.1 0.0 0.0 5.4 5.3 5.2 8.3
Plastic Construction Products 0.0 -0.5 0.7 0.0 0.1 0.6 5.6 6.3 6.8 5.6
Vitreous Plumbing Fixtures 0.0 0.0 0.0 0.0 0.1 0.3 1.6 1.6 1.6 6.1
Ceramic Tile 0.0 0.0 0.5 0.2 0.1 0.0 -0.1 -0.5 -0.3 -1.7
Flat Glass -0.2 0.3 1.8 0.6 0.7 0.7 2.1 2.8 3.7 -3.1
       
Hot rolled bars, plates & structural shapes -0.5 0.1 1.9 0.5 0.6 0.6 16.7 18.6 19.9 -3.6
Extruded Aluminum rod, bar and other shapes -1.4 -1.6 -0.1 -1.0 -1.1 -0.8 6.6 8.5 14.0 -2.4
Architectural Metalwork -0.3 -0.3 0.4 -0.1 0.2 0.4 4.8 5.4 5.1 -3.1
Metal Plumbing Fixtures* 0.3 0.1 0.0 0.1 0.3 0.3 2.8 2.8 2.8 4.6
Builders/' Hardware 0.2 -0.6 1.9 0.5 0.4 0.7 7.5 7.0 7.5 5.5
Sheet Metal Products 0.6 0.3 0.1 0.4 0.3 0.3 6.6 5.8 5.0 3.9
       
Steel Mill Products 0.4 -0.6 -1.0 -0.4 -0.4 -0.6 13.6 13.5 14.3 -5.9
Steel Pipe and Tube* 1.9 0.0 -1.1 0.3 -0.8 -1.0 12.9 10.5 10.8 -0.4
Copper and Copper Products -8.0 -2.6 -2.0 -4.2 -0.3 0.9 -2.2 13.8 21.1 22.9
Copper and Brass Mill Shapes -8.3 -0.7 -3.3 -4.1 0.3 0.8 -0.2 14.8 21.0 18.9
Nonferrous Pipe and Tube -1.6 -0.4 -2.7 -1.6 1.3 1.3 8.3 15.1 24.6 38.4
       
Building Brick 0.2 -0.4 -0.3 -0.2 -0.2 0.0 -4.3 -3.4 -3.2 -4.0
Ready Mix Concrete* 0.4 0.0 0.0 0.1 0.0 0.0 -0.2 -0.2 -0.5 -2.2
Concrete Block & Brick* 0.8 0.0 0.0 0.3 0.0 0.1 1.9 0.9 0.9 0.9
Prestressed Concrete 0.0 0.2 -0.2 0.0 -0.2 0.0 -1.6 -1.8 -2.3 -8.6
Precast Concrete Products 0.8 0.2 0.3 0.5 -0.2 -0.1 2.6 2.0 1.4 4.9
Concrete Pipe 0.0 0.3 -0.2 0.0 0.0 -0.1 1.7 1.4 1.1 -5.4
       
Wood Kitchen Cabinets 0.1 0.0 0.1 0.0 0.0 0.0 2.0 1.9 2.1 3.8
Millwork (window,door, cabinet)* 0.2 0.0 0.3 0.2 0.2 0.2 1.1 0.8 0.9 2.3
Engineered Wood Products* -0.2 0.3 -1.2 -0.4 -0.2 -0.4 1.0 1.4 0.6 -1.8
Laminated Plastics -0.2 1.7 0.0 0.5 0.8 0.2 3.5 3.8 2.3 4.3
Assembled Equipment
Hand and Edge tools 0.0 0.3 -0.2 0.0 0.2 0.0 1.1 1.1 1.0 1.6
Power Hand Tools 0.1 0.0 0.0 0.0 0.0 0.0 1.0 0.8 0.8 0.8
Appliances* 0.3 0.3 0.2 0.2 0.2 0.2 1.9 1.5 1.5 3.4
Furnaces 1.4 0.3 -1.1 0.2 0.4 0.4 6.2 2.3 1.6 4.6
Construction Machinery* 0.0 0.7 0.3 0.4 0.6 0.5 4.1 3.8 3.9 6.5
Construction Machinery Rental
(incl. oilfield equip.)
0.6 -0.3 3.2 1.2 0.4 1.7 2.6 2.1 3.4 0.8
Trucks over 14,000 Ibs. GVW 1.3 0.1 0.5 0.6 0.2 0.2 2.6 1.3 1.4 9.9
Metal Doors, Sash and Trim 0.3 -0.2 0.0 0.0 0.1 0.6 6.6 6.8 7.1 6.1
Summary
Construction Materials (commodity level) 0.3 -0.2 -0.2 0.0 0.0 0.2 4.7 4.3 4.4 0.5
Inputs to Construction -0.6 0.0 -0.6 -0.4 -0.1 -0.1 6.9 8.1 7.9 5.6
Inputs to Residential Construction -0.4 0.0 -0.4 -0.3 0.0 0.0 5.9 6.7 6.6 6.1
Inputs to Commercial Construction -0.3 -0.1 -0.5 -0.3 -0.1 0.0 6.4 7.1 7.1 NA
Inputs to Industrial Construction -0.4 0.3 -0.6 -0.2 0.0 -0.2 6.3 7.3 6.9 NA
Inputs to Heavy Construction -0.9 0.2 -0.9 -0.5 -0.1 -0.3 8.1 10.0 9.5 NA
 
  (indexes incl. installation and overhead)
New Warehouse Building Construction 1.6 0.0 0.0 0.5 0.4 0.4 3.9 2.8 2.7 -0.2
New School Building Construction 1.8 -0.1 0.0 0.5 0.3 0.4 4.3 3.0 3.2 7.5
New Office Construction 1.0 0.0 0.0 0.3 0.3 0.3 3.3 2.7 2.6 -0.2
 
Production Index: Construction Supplies* 0.1 0.4 -0.4 0.0 0.3 0.2 4.0 4.9 4.3 -10.7
Retail Sales: Building & Equipment Supplies* 1.5 0.1 1.6 1.1 0.4 0.8 6.3 6.9 10.5 -1.6

*Seasonally-adjusted data for monthly percent changes for monthly and 3-month moving average data
NSA=Not seasonally adjusted
Source: Producer Price Index. Bureau of Labor Statistics
Source: US Department of Labor, Federal Reserve Board, Census Bureau

by Bernie Markstein

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