Nonresidential and Residential Construction Materials Price Inflation Diverge

05/30/2013 by Bernard M. Markstein

Overview
Prices for inputs used in nonresidential construction fell for the second month in a row. Major areas behind the decline include drops in copper, steel, and oil prices. Residential construction benefits from the drop in these input prices. However, sharp jumps in prices for lumber, plywood, and oriented strand board (OSB) have offset these declines, leaving the weighted average for the price of materials used in residential construction higher.

The drop in prices for copper and steel are due to lower demand due to recession in Europe and a slowdown in U.S. nonresidential construction activity. Oil prices are down due to rising U.S. oil production. Also, high oil prices relative to natural gas prices have encouraged a shift in demand from oil to natural gas.

The increase in residential construction activity has increased demand for materials used in residential construction. However, the long period of minimal residential construction activity and the resulting slump in demand for residential construction materials led to many producers of these products (lumber, plywood, and OSB in particular) closing production facilities. Smaller (Mom and Pop) operations often simply went out of business (this was especially true for sawmills).

With limited supply and rising demand, prices for many of these materials have spiked. Higher prices are encouraging the reopening of shuttered plants and revitalization of expansion plans shelved during the residential construction recession (depression). As these plants come on line, prices will fall, but it will take time to reconstitute the old supply structure. Further, producers are cautious about expansion having suffered significant losses over the past few years.

Over the course of this year, expect nonresidential building materials prices to rise moderately in the second half of this year. Prices for residential building materials should flatten and drop a bit in the second half of the year. Stronger than expected growth would result in higher building materials price inflation. Lower than expected growth would put downward pressure on building materials prices.

Construction Materials Inflation
The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) for materials and components used in construction was unchanged on a seasonally adjusted (SA) basis in April after rising 0.3% in March. The index was 2.2% higher on a not seasonally adjusted (NSA) year-over-year basis and was 8.2% higher since April 2010. Meanwhile, prices for raw materials used in construction or to produce products used in construction declined 0.1% after increasing 0.3% in March. The index was 1.9% higher than in April 2012 and was 7.2% higher than in April 2010.

An index that measures inputs used in nonresidential construction (excluding capital equipment) was down 0.1% (NSA) in April after declining 0.2% in March. The index was 0.4% lower than in April 2012.

An index that measures inputs used in residential construction (excluding capital equipment) was unchanged (NSA) in April after increasing 0.2% in March. And unlike the index for nonresidential input prices, which fell on a year-over-year basis, the index was 1.4% higher than in April 2012.

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
  Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13
Composite Indexes (Exclude capital equipment)      
Construction Materials*
(Unprocessed materials)
-0.1 0.3 0.3 0.2 0.2 0.1 1.9 1.9 2.3 7.2
Materials and Components for Construction*
(Processed goods)
0.0 0.3 0.3 0.2 0.3 0.3 2.2 2.6 2.4 8.2
       
Inputs to Construction
(Residential and Nonresidential)
(Includes inputs to maintenance and repair)
-0.1 0.0 1.3 0.4 0.6 0.6 0.4 0.9 2.0 10.2
    Inputs to New Construction -0.1 0.0 1.2 0.4 0.6 0.6 0.5 1.0 2.1 10.2
        Inputs to Residential Construction 0.0 0.2 1.1 0.4 0.7 0.6 1.4 1.7 2.5 10.3
        Inputs to Nonresidential Construction -0.1 -0.2 1.3 0.3 0.5 0.6 -0.4 0.2 1.7 NA
            Inputs to Commercial Construction -0.1 0.1 0.8 0.3 0.5 0.4 0.4 0.8 1.6 NA
            Inputs to Industrial Construction -0.1 -0.2 0.9 0.2 0.4 0.4 -0.4 0.0 1.2 NA
            Inputs to Heavy Construction -0.1 -0.2 1.5 0.4 0.6 0.6 -0.6 0.0 1.6 NA
       
    Inputs to Maintenance and Repair -0.2 0.0 1.5 0.4 0.7 0.7 -0.7 -0.2 1.2 9.5
        Inputs to Nonresidential Maintenance
        and Repair
-0.2 0.0 1.4 0.4 0.7 0.7 -0.9 -0.4 1.0 9.2
        Inputs to Res Maintenance and Repair -0.1 0.1 1.4 0.5 0.7 0.6 0.8 1.3 2.4 11.2
       
  (Indexes include installation and overhead)      
New Warehouse Building Construction 0.6 0.0 -0.4 0.1 0.2 0.2 2.2 2.2 2.5 8.4
New School Building Construction 0.4 -0.4 0.3 0.1 0.0 0.2 0.4 0.5 1.2 6.5
New Office Construction 0.3 0.0 0.0 0.1 0.2 0.2 0.9 0.9 0.9 6.1
New Industrial Building Construction 0.5 0.1 0.0 0.2 0.2 0.2 1.3 1.2 1.3 6.3
New Health Care Building Construction 0.5 -0.1 0.0 0.1 0.2 0.2 NA NA NA NA
       
Other Related Indexes      
PPI Finished Goods* -0.7 -0.6 0.7 -0.2 0.1 0.2 0.6 1.1 1.7 9.2
PPI Finished Goods less food and energy* 0.1 0.2 0.2 0.1 0.2 0.2 1.7 1.7 1.7 6.8
CPI Urban Consumer* -0.4 -0.2 0.7 0.0 0.2 0.2 1.1 1.5 2.0 6.7
CPI Urban Consumer less food and energy* 0.1 0.1 0.2 0.1 0.2 0.2 1.7 1.9 2.0 5.5
       
Production Index: Construction Supplies* -0.8 -1.5 2.3 0.0 0.6 1.3 2.4 3.5 4.5 11.6
Retail Sales: Building & Equipment Supplies* 1.5 -1.0 0.4 0.3 0.0 0.6 7.7 -5.2 0.3 7.1

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics; Production Index - Federal Reserve Board; Retail Sales - Census Bureau

Construction machinery prices were 0.4% (SA) higher in April after falling 0.4% in March. Construction machinery rental rates were up 0.2% (NSA) after inching up 0.1% in March. Excluding oil field equipment, rental rates rose 0.1% in both April and March.

NSA rental rates generally have been rising faster than purchase prices for close to a year due to an increase in the preference among builders and developers to rent construction equipment rather than purchasing equipment. On a year-over-year NSA basis, rental rates exceeded the increase in purchase prices — 5.0% versus 2.9%. Over a longer period, the increase in rental rates lagged that for purchase prices. Rental rates were up 8.1% from April 2010 while purchase prices were up 9.9%. However, rental rates excluding oil field equipment were up 12.2% over that same three year period. At least for the remainder of the year, rental rate increases are likely to generally rise faster than equipment purchase prices.

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
  Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13
Assembled Equipment      
Hand and Edge tools 0.4 0.1 0.0 0.2 0.2 0.0 3.0 2.5 2.3 5.2
Power Hand Tools -0.1 0.1 -0.2 -0.1 0.1 0.2 0.8 0.8 1.4 2.7
Appliances* 0.2 -0.4 -0.7 -0.3 -0.6 -0.2 0.1 0.5 1.0 5.8
Furnaces 0.4 2.8 -0.3 1.0 0.3 -0.4 2.2 1.7 -1.4 7.9
AC; Refrigeration; and Forced Air Heating Equip. Mfg. -0.4 1.0 1.1 0.6 0.5 0.4 1.5 1.8 0.6 8.5
Construction Machinery* 0.4 -0.4 0.2 0.1 0.1 0.3 2.9 2.8 3.5 9.9
Construction Machinery Rental (incl. oilfield equip.) 0.2 0.1 0.5 0.2 -0.1 -0.2 5.0 1.5 2.6 8.1
    Construction equipment rental and leasing 0.1 0.1 0.8 0.3 -0.3 -0.5 5.6 0.8 2.4 12.2
    Oilfield and well drilling equipment rental
      and leasing
-0.1 0.0 0.1 0.0 0.6 0.6 5.3 5.4 5.4 6.3
Trucks over 14,000 Ibs. GVW -0.4 -0.1 0.0 -0.2 0.0 0.2 1.0 1.7 1.9 7.4
Metal Doors, Sash and Trim -0.4 0.2 0.0 -0.1 0.1 0.0 0.7 1.1 0.9 9.2

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics

Cement and Concrete
Cement prices advanced 0.8% (NSA) after declining 0.3% in March. Prices were up 4.9% from April 2012, but were up a more modest 1.9% from April 2010.

Prestressed concrete products prices fell 0.4% in April after jumping 1.0% in March. On a year-over-year basis, prices were 2.5% higher, but were only 0.2% higher than in April 2010. Precast concrete products prices moved up 0.5% in April after falling 0.5% in March. Prices were 1.5% higher than in April 2012 and were 6.3% higher than in April 2010.

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
  Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13
Construction Commodities      
Dimension Stone -0.4 2.8 -0.5 0.6 1.4 0.5 4.5 4.8 1.8 7.3
Cement 0.8 -0.3 1.8 0.8 1.3 1.2 4.9 5.3 5.2 1.9
Construction Sand, Gravel & Crushed Stone* -0.1 0.3 0.3 0.2 0.3 0.1 2.0 2.0 2.4 6.7
Softwood Plywood 3.2 1.5 1.1 2.0 2.0 2.0 14.9 14.0 17.8 13.7
Hardwood Lumber 1.6 2.8 0.9 1.7 1.8 1.0 8.7 7.1 4.7 8.0
Softwood Lumber* 2.5 4.4 2.0 3.0 4.3 3.6 33.1 30.0 27.0 27.2
Other Commodities      
Industrial Natural Gas* 6.2 0.8 0.1 2.4 0.3 0.4 9.6 2.0 0.3 -8.5
Plastic Resins & Materials -1.1 2.6 1.5 1.0 2.1 1.2 2.7 4.5 3.3 10.6
Insulation Materials -1.3 -0.1 2.1 0.2 1.2 1.4 4.0 5.3 5.9 16.2
Iron & Steel Scrap -2.3 6.6 -3.5 0.2 1.1 -0.7 -13.7 -13.0 -17.9 -11.4
Iron Ore -0.7 0.1 -24.6 -10.0 -8.4 -7.8 -33.5 -31.4 -31.3 -8.0
Copper Ores -5.9 0.7 2.7 -0.9 0.9 1.8 -7.1 -4.5 -5.4 -1.0
Copper Base Scrap* -4.8 -3.4 -2.0 -3.4 -1.8 -0.3 -6.5 -5.2 -1.6 3.0

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics

Energy and Related Products
Diesel fuel prices dropped for the second month in a row, down 3.5% (SA) in April after plunging 12.8% in March. They were down 6.0% (NSA) from April 2012, but were up 32.9% from April 2010.

Industrial natural gas prices on the other hand jumped 6.2% (SA) in April following a 0.8% increase in March. Prices were 9.6% higher than in April 2012, but were 8.5% lower than in April 2010.

Natural gas remains a substantial bargain compared to oil. The price differential between the two has encouraged a shift in demand to natural gas away from oil (many companies and utilities are able to switch between the two relatively easily), putting upward pressure on natural gas prices and downward pressure on oil prices. The differential has also encouraged U.S. producers to shift to oil production at the expense of natural gas production, adding to the different price pressures for each.

Petroleum refineries prices fell 1.8% in April after tumbling 2.5% in March. Prices were down 9.8% from April 2012, but were still up 28.1% from April 2010.

Those lower prices are beginning to show up in downstream products. Plastic resins and materials prices declined 1.1% (NSA) in April after increasing 2.6% in March and 1.5% in February. Prices were 2.7% higher than in April 2012 and were 10.6% higher than in April 2010.

Asphalt prices soared 5.2% (NSA) in April following a 0.4% increase in March. However, prices were down 16.2% from April 2012, but were up a relatively mild 3.3% from April 2010. Asphalt roofing prices rose 2.1% in April after increasing 0.3% in March. Prices were up 6.0% from April 2012 and were up 3.9% from April 2010.

Plastics pipe prices dropped 1.6% (NSA) in April after falling 1.0% in March. They were up 0.9% from April 2012 and were up 14.6% from April 2010. Plastics plumbing fixtures prices slipped 0.3% in April after no change in March. Prices were 0.9% lower than in April 2012, and were 4.1% higher than in April 2010.

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
  Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13 Mar-13 Feb-13 Apr-13
Manufactured Materials      
Gypsum Products 0.3 0.7 4.4 1.8 5.3 5.4 19.6 17.9 17.8 32.3
Petroleum refineries -1.8 -2.5 8.0 1.1 2.0 2.2 -9.8 -7.7 1.0 28.1
Diesel Fuel* -3.5 -12.8 6.1 -3.6 -2.2 3.2 -6.0 -6.7 3.8 32.9
Asphalt 5.2 0.4 -3.2 0.7 -3.1 -4.2 -16.2 -17.8 -15.9 3.3
Asphalt paving mixture & block mfg. -0.8 -0.1 -0.1 -0.3 0.1 0.1 -1.8 0.7 1.0 10.5
Asphalt shingle and coating materials mfg. 1.7 0.2 -1.2 0.3 -0.2 -0.4 4.2 6.1 4.0 6.3
Asphalt Roofing 2.1 0.3 -1.5 0.3 -0.2 -0.5 6.0 8.6 7.2 3.9
       
Paint -1.2 0.4 -0.5 -0.4 0.2 0.0 -0.6 0.6 0.3 18.1
Plastic Construction Products -1.2 0.5 0.0 -0.3 0.3 0.0 0.2 1.5 1.4 8.2
    Plastics Pipe -1.6 -1.0 1.1 -0.5 0.5 0.7 0.9 3.6 5.8 14.6
    Plumbing Fixtures -0.3 0.0 1.0 0.2 0.3 -0.5 -0.9 -0.3 -0.2 4.1
Vitreous Plumbing Fixtures 0.7 -3.6 0.1 -1.0 -1.0 0.4 -2.0 -2.6 0.9 1.1
Ceramic Tile -1.6 1.3 5.1 1.5 2.4 1.5 3.8 5.6 3.9 3.3
Flat Glass -0.9 0.6 0.3 0.0 0.2 -0.2 2.1 2.5 2.1 5.0
       
Steel Mill Products 0.4 -0.4 -0.9 -0.3 -0.4 -0.1 -8.9 -9.5 -9.7 0.8
Steel Pipe and Tube* -0.2 -3.4 -2.3 -2.0 -2.7 -1.5 -12.3 -12.4 -11.6 5.3
Hot rolled bars, plates & structural shapes 2.0 0.6 -2.0 0.2 -0.3 -0.1 -7.1 -9.6 -10.8 4.6
Extruded Aluminum rod, bar and other shapes -3.2 0.0 -1.1 -1.4 0.7 0.6 -5.7 -4.3 -2.9 -1.8
Architectural Metalwork -0.5 -0.5 1.0 0.0 0.2 0.4 0.7 1.4 2.4 6.4
Metal Plumbing Fixtures* -0.5 -0.3 0.3 -0.1 0.0 0.2 0.8 1.0 1.7 5.2
Builders’ Hardware 0.1 -0.5 0.7 0.1 -0.1 0.0 -0.1 0.3 0.6 6.5
Sheet Metal Products -0.7 -0.2 0.6 -0.1 -0.1 -0.1 -2.0 -1.4 -1.2 4.2
       
Copper and Copper Products -4.1 -0.6 0.6 -1.4 0.2 1.2 -6.6 -4.9 -4.1 -2.0
Copper and Brass Mill Shapes -2.7 -2.6 0.7 -1.5 -0.6 0.6 -6.0 -5.5 -2.1 -3.4
    Nonferrous Pipe and Tube -2.0 -1.5 -3.3 -2.3 -1.0 -0.5 -7.2 -6.1 -3.7 -7.0
       
Building Brick 0.6 0.1 0.4 0.4 -0.3 -0.2 -0.4 -1.1 -1.0 -5.8
Ready Mix Concrete* 1.6 0.2 0.5 0.8 0.2 0.3 3.8 2.3 2.4 5.2
Concrete Block & Brick 0.6 0.6 -0.1 0.4 0.2 0.1 1.5 1.1 0.7 3.2
Prestressed Concrete -0.4 1.0 1.1 0.5 0.2 0.6 2.5 2.6 1.6 0.2
Precast Concrete Products 0.5 -0.5 0.1 0.0 0.0 0.4 1.5 1.6 2.1 6.3
Concrete Pipe 0.6 -0.2 0.1 0.2 0.2 0.3 4.8 4.2 5.2 6.0
       
Engineered Wood Products 0.8 1.6 1.1 1.2 1.7 1.3 16.0 16.8 16.1 20.3
Wood Kitchen Cabinet and Countertop Mfg. 0.4 0.1 0.7 0.4 0.6 0.6 3.6 3.3 3.6 6.5
Millwork (window, door, cabinet)* 0.4 0.2 0.0 0.2 0.4 0.4 3.0 2.6 2.7 6.8
Wood Window and Door Mfg. 0.1 0.3 -0.6 -0.1 0.5 0.5 1.4 1.1 0.8 7.8
Metal Window and Door Mfg. -0.3 0.0 0.0 -0.1 0.0 0.0 0.5 0.9 0.8 8.7
Laminated Plastics 0.0 -2.6 6.1 1.1 1.1 2.1 4.3 4.3 7.1 9.4
Nonresidential Electric Lighting Fixture Mfg. 0.0 -0.1 -0.1 0.0 -0.1 0.1 0.2 0.2 0.2 5.7

*Seasonally-adjusted data for percent changes for monthly and 3-month moving average data
NSA = Not seasonally adjusted, NA = Not Available
Source: Producer Price Index (PPI) - Bureau of Labor Statistics

Copper and Copper Products
Copper ores prices plunged 5.9% (NSA) in April after advancing 0.7% in March. Prices were 7.1% lower than in April 2012 and were 1.0% lower than in April 2010.

Copper base scrap prices tumbled 4.8% (SA) in April after falling 3.4% in March. Prices were down 6.5% (NSA) from April 2012, but were up 3.0% from April 2010.

Prices for copper and copper products dropped 4.1% (NSA) in April after decreasing 0.6% in March. Prices were 6.6% lower than in April 2012 and were 2.0% lower than in April 2010.

Copper and brass mill shapes prices were down 2.7% in April after slumping 2.6% in March. Prices were 6.0% lower than in April 2012 and were 3.4% lower than in April 2010.

Other Metals
Steel mill products prices rose 0.4% (NSA) in April after decreasing 0.4% in March. Prices were 8.9% lower than in April 2012 and were only slightly higher than in April 2010 (+0.8%). Hot rolled bars, plates, and structural shapes prices increased 2.0% in April following a 0.6% increase in March. However, prices were 7.1% lower than in April 2012, but were 4.6% higher than in April 2010.

Extruded aluminum rod, bar, and other shapes prices dropped 3.2% (NSA) in April following no change in March. Prices were down 5.7% from April 2012, and were down 1.8% from April 2010.

Softwood Lumber and Gypsum
Softwood lumber and gypsum products demand is largely determined by single-family housing construction activity. With the improvement in the single-family housing market, demand has increased for these materials.

The PPI for softwood lumber increased 2.5% (SA) in April following a 4.4% surge in March. Prices were up 33.1% from April 2012 and were up 27.2% from April 2010.

Canadian softwood lumber exports to the U.S. are regulated by the Softwood Lumber Agreement (SLA). Each month the level of exports permitted and any relevant export fees are determined by the average price of softwood lumber over a specified four week period prior to that month falls within a four tier regime. The categories (or tiers), from most restrictive to least restrictive and the related prices per thousand board feet determining which category is in force for the month are as follows:

Increased single-family construction activity and repair activity following Hurricane Sandy together with supply bottlenecks drove prices for softwood lumber to a level that resulted in tier 4 — no restrictions on Canadian exports — for the first six months of 2013. The limits to supply appear to be lessening and are likely to disappear over the next few months. The table below summarizes recent average prices and the resulting tier (category) including for June.

Average Prices to Determine
SLA Canadian Softwood Export Restrictions

  2012 2013
  November December January February March April May June
Average Price $326 $334 $357 $385 $395 $416 $443 $407
Tier 2 2 4 4 4 4 4 4

Source: Foreign Affairs and International Trade Canada

Last year several gypsum producers announced price increases of 25% to 30% effective at the beginning of this year. To date the gypsum producers have had some success pushing the higher prices, but the gains seem to be slowing. Gypsum prices rose 0.3% (NSA) in April after increasing 0.7% in March. Since December, gypsum prices were up 17.9%. They were up 19.6% from April 2012 and were up 32.3% from April 2010.

Outlook for Construction Materials Prices
The U.S. economy is growing at a barely acceptable pace. Sequestration (a total of $85 billion of across the board cuts for federal spending), the need to provide funding for the federal government beyond the end of the current fiscal year on September 30, and the approaching federal debt ceiling in the fall are major challenges for the economy. Meanwhile, Europe is in recession, reducing demand for imports from the United States.

Despite these and other economic risks, the Reed Construction Data forecast is that the United States economy continues to grow at a moderate pace. The forecast is for nonresidential construction activity to turn in modest growth this year and show more strength next year. Along with continued expansion of the residential sector, this will create moderate upward pressure on construction materials prices. Recent spikes in building materials prices for products used mainly in residential construction will flatten. In several cases these prices will decline somewhat as supply ramps up and supply bottlenecks are eliminated. The outlook is for 2013 building materials prices to rise at roughly the same pace as or slightly lower than overall inflation.

If the U.S. economy exceeds our forecast of real (inflation-adjusted) gross domestic product (GDP) growth of 2.1% for the year, there will be increased construction activity and greater increases in materials prices. Faster growth in the rest of the world would also mean higher construction materials price inflation. Significantly higher energy prices for a sustained period would contribute to a greater rate of building materials price inflation.