The worldwide surge in commodity prices drove construction materials prices up 2.0 % in July. This is the change from the second week of June to the second week of July. Since then the commodity price spike has begun to reverse. Prices have already fallen more than 205 for oil, natural gas, copper, and some grains. Construction steel prices are still rising although prices for flat rolled steel for consumer products no longer are. The first signal on how quickly this is happening will be the August Producer Price Index to be released on September 12th.

The price index has increased 6.6% in the last three months and 11.9% 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.

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

The largest July increases were for asphalt paving mixtures (14.5%), asphalt roofing (11.3%), non-ferrous pipe and tube (5.9%) and structural steel (4.3%).

Asphalt is an orphan product in the refinery industry. Asphalt capacity is being cannibalized to get more high value, light products, such as gasoline, kerosene and diesel. The recent price surge has more to do with capacity constraints than the price of crude oil. Unfortunately, this means that asphalt prices will remain stubbornly high while prices of other petroleum products decline in the next few months with declining crude oil prices.

Structural steel prices continued to increase at about a 50 % annual rate. A significant share of this is cost based, mostly higher oil prices, but most of the recent price surge represents better margins for steel mills, obtainable when inventories are low and delivery times are stretched. A few more months of very high price increases are expected. But there is no underlying shortage of commodities to make steel or mill capacity so some price rollback will occur around yearend.

Excepting asphalt, the price inflation for energy-based products is ebbing with some declines expected in the August of September price indexes.

The overall construction materials price 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.

Construction Materials Inflation – July 2008

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