The worldwide surge in commodity prices drove construction materials prices up 1.8% in June. The price index has increased 5.7% in the last three months and 10.4% in the last year. For comparison the 2004 price surge was 6.9% in the first six months of that year. Metal and energy based products lead the price surge while the prices of lumber, gypsum and materials priced in domestic US markets are steady or only slightly higher.

Energy based product and metals prices moved markedly higher since the June survey so another price rise on the same scale is anticipated for July. The cost index is likely to increase at a double-digit annual rate -0.8%.month or more — through the summer. Then the price index is expected to stall, possibly decline a little, at the end of 2008 and in early 2009. The overall index is forecast to increase 10% this year and 5-6% next year.

This is exactly what happened in 2004-05. The earlier surge in inflation ended when suppliers eventually caught up with the rapid rise in commodity demand that began late in 2003. The current inflation surge is more likely to end when high prices in a weakening world economy cause a drop in demand.

US contractors are caught between declining demand as new project starts slow and soaring costs, largely due to events outside the US.

The largest June increases were for steel pipe (6.9%), diesel fuel (5.7%), structural steel (4.4%) and asphalt roofing (3.2%). Buyers of gypsum, aluminum and nonferrous pipe enjoyed prices cuts from May.

Generally, prices of products prices in US domestic market are steady or falling slightly while pieces set in world market are rising rapidly due to the declining dollar and the new dominance of Asian buyers in world commodity markets.

Steel
The huge jump in steel prices is not yet over although it may pause during the summer. Iron ore suppliers and steel mills have announced higher prices that are not yet in the price index. As in 2004, this price surge began when steel inventories were unusually low. This is another inventory cycle. It is now nearing its end. There will be periods in the next few years, as there were in 2005-06 when steel prices are slightly below the peak in the inventory cycle.

Oil
The market dynamics for crude oil are different. The recent price doubling began when inventories were near normal. This is not an inventory cycle. We have experienced a real and sustainable rise in demand at the same time that rebellions in the oil fields worldwide have restrained supplies. In the last few days, Brazilian oil workers have shut down an offshore oil field.

Rising demand and at best steady supplies have pushed inventories below normal operating levels resulting in the ongoing price surge which has turned into a bubble as investors flooded into the oil futures markets. Like any bubble it will pop soon when speculative activity sufficiently reduces the demand for oil. This process is underway.

So far the US has had to bear almost the full burden of adjusting demand to the new higher prices because much of the world’s oil is sold at government subsidized prices and the rest of the world has enjoyed a huge price discount as their currencies appreciated against the $US. The $US has recently steadied and cash strapped foreign governments will soon cut subsidies and raise energy prices, as much as 50% in some cases.

Construction Materials Inflation – June 2008

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