January 28, 2014
Will 2014 be a fourth straight year of mainly flat construction material costs? (Part 2)
Among more specific construction inputs, the largest percentage gains since January 2010 have been recorded in iron ore (+46.7%); diesel fuel (+45.2%); softwood lumber (+35.3%); gypsum (+33.1%); and gasoline (+30.8%).
For a number of these, the price spikes occurred early in the period covered. Only gypsum (+19.7%), iron ore (+18.9%) and softwood lumber (+15.4%) have continued to show strong price increases over the past year.
Iron ore prices can be extremely volatile and their percentage changes misleading. From beginning to end of 2010, they increased 100%.
Subsequently, they fell back to their starting point by September 2012. While exhibiting an upward tendency since then, they are still below their 2010 average.
The lumber price jump has resulted from a combination of improving U.S. housing starts and supply bottlenecks brought on by capacity reductions (i.e., sawmill closings).
The latter was an offshoot of the extended homebuilding slump that accompanied the Great Recession.
Moving in the opposite direction, the most notable price drop since January 2010 has come in natural gas (-41.3%). Over the past six months, it’s down 9.7% and during the last three months, -6.0%.
In North America, a rapid increase in the supply of natural gas — due to the wide-spread adoption of “fracking” technology — has pushed the price significantly downward.
Two other construction products have shown particular weakness of late: waferboard and particle board, -15.3% year-over-year and -26.7% during the last half-year; and asphalt, -8.8% versus May 2013 and -16.3% when compared with August 2013.
Looking at the wide panorama, however, reveals that there have been limited instances of dramatic price swings over the past several years.
Perhaps the bigger story is the relatively sedate pace of price movements exhibited by some of the most important construction material sub-categories.
For example, the price of ready-mix concrete has moved ahead only 6.5% in the most recent four years, dating back to January 2010. Versus November 2012, the gain in November 2013 was +2.4%.
There has been a similar price pattern for “fabricated structural metal”, a broad category which includes structural steel plate and concrete reinforcing bars. (As outlined earlier, the absence of more detailed product targeting is a loss to analysts.)
The “fabricated structural metal” sub-index is +5.8% since January 2010 and +1.9% year-over-year.
So much for the history; what’s the outlook?
In early 2014, owners contemplating building projects still have a window of opportunity during which construction costs will continue to crawl, not canter.
But as U.S. economic growth accelerates — thanks to greater energy self-sufficiency, improved foreign trade, lower consumer debt loads and rising demand for new housing and automobiles — all manner of commodity prices are more likely to awaken than continue their slumber.
Data source: Statistics Canada (Industrial Product Price Index series). Chart: Reed Construction Data – CanaData.