Construction materials cost rose 1.2% in April from March with similar increases expected in May and June. Construction materials costs are expected to increase much faster than overall inflation at least well into next year. The widening inflation gap between construction supplies and the rest of the economy is due to the relatively large share of commodity or lightly processed materials used in construction that are priced in world rather than domestic markets.

The commodity price surge results from a combination of the falling dollars which raises import prices, exceptionally high commodity demand growth in the newly industrializing countries in Asia and elsewhere and politically inspired supply disruptions for energy and metal products. None of these inflation drivers are yet exhausted. The supply disruptions will continue as long as commodity prices are high enough to make the return from controlling commodity supplies attractive. The growth in Asian commodity demand will ebb slightly over the next year as Asian GDP growth slows a bit. But the move of Asian countries to the industrial world necessarily involves a period of many years of rapid growth in energy and metals demand. Indeed, this has been happening for almost a decade but only became dominant in world pricing in the last few years. The value of the $US dollar is nearing its bottom and will not contribute significantly to rising construction materials costs in the second half of 2008.

Overall, the surge in construction materials costs will ebb slightly later in the year and in 2009. Huge price increases for construction plastics and steel have already announced for June and will appear in the June and July price reports.

The most significant price increases in April were structural steel (6.2%), aluminum (4.5%) and asphalt roofing (2.6%). Expect more large price increases for these products because steel scrap prices jumped 32.2% in April and copper scrap prices rose (5.3%).

The ongoing rise in energy costs will continue to pressure prices of all products. Diesel prices are up 30% and industrial natural gas prices are up 15% in the last three months. The prices for both have continued to rise since the survey week in early April.

Cement and concrete prices are on a different trend. The 15% drop in usage has substantially reduced the need for imported cement so pricing is again “domestic” rather than “international”. This will persist into next year. Cement prices are off 0.2% from a year ago. Ready-mix prices are up only 1.6% and block prices only 1.9% from a year ago. The current demand-supply balance will keep concrete prices from rising significantly over the next year. But there is a price spike ahead when the US again has to turn to imports for a substantial share of supply.

Construction Materials Inflation – April 2008

Source: Producer Price Index, Bureau of Labor Statistics,
US Department of Labor, Federal Reserve Board, Census Bureau

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