Build Local, Price Global

A weakening dollar, rising oil prices, global demand, and the housing market collapse have resulted in record-high prices for most necessary building materials.

By Michael A. Moore

Structural steel’s 2004 quantum leap in price signaled the end of one era of construction pricing and the beginning of another.

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Basic construction materials became global hot commodities as the huge populations of India and China, with voracious appetites for automobiles and new high-rise buildings, dams, bridges and airports, entered the modern consumer world.

Four years later, construction materials continue to rise faster than the Consumer Price Index.

“From December 2003 to January 2008 the Producer Price Index for inputs to construction industries rose a cumulative 30.2% percent, compared to 14.5% percent for the CPI,” says Ken Simonson, chief economist for the Associated General Contractors of America in Washington, D.C., in the March 2008 AGC Construction Inflation Alert.

“This comparison is relevant because many public agencies use the CPI to project future costs. Such an index worked well in the past, when there was little difference between the change in construction costs and consumer prices.”

The collapse of the housing market and the subprime crisis have brought the prices for wood, cement and gypsum wallboard closer to the CPI, but business is not as usual.

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Life after subprime not so simple The major factors driving construction materials prices are the price of oil, the value of the dollar and the demand from India, China and other growing economies worldwide. Other factors include hurricanes, earthquakes, strikes, rebellions; the list is nearly endless.

Evidence of this is as close as the daily headlines. One example, from a recent Reuters dispatch, summarizes the picture: “Oil surged to records near $120 a barrel on Tuesday on the weaker dollar, export disruptions from Nigerian rebel attacks and concerns a Scottish refinery strike could hit North Sea production…”

“It’s like a butterfly that flaps its wings in Brazil and causes a hurricane in Houston” says Rick Driver, director of procurement for Aker Solutions, formerly Aker Kvaerner, with U.S. headquarters in Houston. Driver buys materials and equipment for Aker’s mine construction projects in the U.S. and South America. “Steel, oil, copper…I can’t order anything that involves a mineral base without an escalation clause.”

Controlling costs in the brave new world of global supply and demand is one where managers must “make decisions based on data,” says Arnold Woolvett, manager of construction for Bantrel, a Canada-based subsidiary of Bechtel. “You have to establish a set of metrics you can use to manage your suppliers so that you see potential problems before they become critical. Thirty years experience and a gut feeling don’t work anymore.”

Steel prices remain unpredictable.

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Steel prices volatile “The key word in steel prices is ‘volatile,’” says AISC John Cross, vice president of the American Institute of Steel Construction in Chicago. “The perspective has to be global, not domestic. We cannot just look at it from the point of view of a U.S. recession. We have not seen a significant decrease in demand on structural steel.”

Cross says the value of the dollar plays an important role in steel prices. “In a global market, when you see the dollar weakening, that’s going to force up the domestic price because [it is] competing against material traded in another currency.”

Another factor in current and future prices of steel is the lack of sufficient stocks of iron pellets and coke for the mills. Brazilian mining giant CRVD announced in February that Baosteel, the largest Chinese steelmaker, has agreed to a 65% increase in price of iron ore.

Cement prices holding for now U.S. cement prices have held steady even though overall demand has decreased due to ongoing commercial and industrial projects.

That situation is expected to change in the next two years, according to a recent report from the Portland Cement Association by PCA chief economist Edward Sullivan.

Cement prices have held steady because the struggling economy has reduced demand for housing.

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Total 2008 cement consumption is predicted to be 102.7 million metric tons, a drop of 10% percent, according to the report, followed by an additional 3.6% percent drop in 2009.

Sullivan foresees U.S. housing will take at least 18 months to recover. The economy will gain strength in the second half of 2009 as residential inventories are burned off and credit terms ease. This will lead to a 5.2% growth in cement consumption in 2010 followed by an even stronger gain in 2011.

Venezuela’s recently announced intention to nationalize the cement industry and possibly curb cement exports could impact Florida and the Gulf Coast states.

Florida imports a significant amount of cement. Loss of Venezuela’s supply could create a spike in prices, at least until anticipated imports from Mexico become available in 2009.

Aggregates are another potential problem in the near to long term. “There is a problem with availability of aggregates,” AGC’s Simonson says. In some areas, such as south Florida, delays in environmental permissions and local regulations have restricted access to new sources of sand and gravel.

Lumber rising slightly The weak dollar is impacting lumber and wood products prices. It’s helping them recover slightly.

A weak dollar is having an impact on lumber and wood products.

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Dimensioned lumber is starting to recover in price as the weak dollar spurs exports to Asia, says Joe Heitz, an associate editor at Random Lengths, a publisher of information about the lumber industry. Heitz mentions tighter supply due to mill closings and production cutbacks as additional factors.

The Random Lengths Framing Lumber Composite Price mid-May was $277 per thousand board feet, above the bottom of $238 in March.

The value of the U.S. dollar is also reducing lumber imports from Canada. The virtual parity of the U.S. and Canadian and Canadian currencies removes the price differential and the incentive to import, according to Heitz.

Learning to live with volatility How to deal with volatile construction costs depends on whom you ask.

State highway departments, caught between rising costs and lower revenues, are delaying new projects and struggling to maintain existing roadways.

Large contractors are employing pre-construction teams composed of subs and suppliers for critical items and services as a form of risk management and make advance buys of price- volatile materials such as copper wire and pipe.

Medium size and small contractors are also bringing innovative forms of risk management to the problems of price volatility. One example is Agate Inc. of Scottsdale, Ariz., a general contractor with a pre-engineered building division and steel fabrication facility.

“Steel is out of control,” says Jim Uhl, Agate’s president and CEO. “Prices cannot be predicted and will not be held.”

Uhl says that his strategy for dealing with unpredictable steel prices is to separate the steel package from the rest of the job, get mill prices and place the order within an hour of signing the contract.

“We just bid a large government project where we had everything ready,” Uhl adds. “When we knew we were the winning bidder, we got mill orders, and convinced the client to fast track the order.” Two days later, the contractor had its contract and three days later a 15% price increase hit. “If we had waited, we would have lost more than $600,000 in three months.”

Aware of the international aspects of local construction, Ulh has started to take advantage of NAFTA and is ordering rolled steel shapes from Mexico. “We recently brought in 20 loads,” he says. “The quality is up to standard, the price is good and they are available when I need them.”