Economist: Materials' Costs Rising 'Dramatically'

Construction costs are rising dramatically, and key construction materials like diesel fuel, gypsum and copper have seen double-digit price increases in both 2004 and 2005, an analyst is warning.

Ken Simonson, chief economist of the Alexandria, Va.-based Associated General Contractors of America, has issued an analysis of the cost of construction from 2001 to 2005 which examines reasons for the dramatic rise in construction costs in the past two years as compared to the general rate of inflation.

Simonson has compared two common inflation measures, the consumer price index for all urban consumers and the producer price index for finished goods, against a variety of PPIs for construction materials and groupings of materials and finds that, "construction costs have risen dramatically in 2004, 2005 or both, after having moved similarly to the overall PPI in the previous three years."

In contrast, consumer prices have remained moderate through the entire period, although they have accelerated in the past two years as oil prices have set new records.

Hurricanes Katrina and Rita struck especially hard at the supply of construction inputs
ranging from diesel fuel to plastics to cement. As of late October, the majority of Gulf of Mexico crude oil and natural gas production was still shut in, virtually assuring that construction materials that use oil or natural gas as a feedstock would be much higher-priced, at least through the winter heating season, than if the storms had not occurred.

Katrina also interfered with imports of cement and natural rubber, and the hurricane damaged plants that produce gypsum, lumber and plywood, and liquid hydrogen for galvanizing steel.

"Major construction materials all showed price spikes in 2004 and 2005, after declining or experiencing very modest increases between 2001 and 2003," Simonson said.

Consequently, many contractors and owners were making little or no provision for price increases in 2004, had not locked in materials prices and had to absorb huge, unexpected cost increases. For example, metal fabricators that had contracted to provide products at fixed prices were squeezed by scrap surcharges and base-price hikes from mills. Some fabricators declared bankruptcy, and many stopped guaranteeing prices beyond a short period.

Simonson added, "Record high diesel prices in 2004 also directly affected contractors for which fuel costs were significant, such as earthmovers, highway contractors, and dump truck operators."

The global building boom strained supplies of key construction components and may continue to produce large increases in demand for a wide variety of building components in the future, he added.

Equipment Makers Forecast Business Gains

Construction equipment manufacturers expect industry growth to continue through 2006, but at a somewhat slower pace than 2005, with gains predicted across American, Canadian and other worldwide markets, according to an annual business forecast conducted by the Association of Equipment Manufacturers.

Each year, the Milwaukee-based based group polls its construction-equipment-manufacturer members on anticipated industry performance.

Construction equipment business in the U.S. is anticipated to close on a strong note for 2005, with increases of 13.9 percent, followed by 2006 growth of 9.3 percent.

"Our economy has been robust, and equipment sales very strong, with 2004 and 2005 among the industry's best in recent years," said AEM Chairman Charles Stamp, vice president public affairs worldwide for Moline-based Deere & Co.

For Canada, machinery sales are predicted to gain 13 percent by year-end 2005 and then increase 8 percent in 2006. The forecast for other worldwide markets is 8.4 percent growth for 2005, followed by 2006 gains of 9 percent.

The forecast covers 68 whole machine product types and 18 types of attachments and components, grouped into seven general categories. The survey outlines manufacturers' estimates of year-end business volume for the current and next year.