SIMONSON SAYS: Risk Rises for Materials Price Increases

Materials prices, which had been well behaved for nearly two years, have started to act up—with emphasis on UP. The producer price index (PPI) for inputs to construction industries—a weighted average of the cost of all materials used in every type of construction, plus items consumed by contractors such as diesel fuel—surged 0.6 percent in October and 4.8 percent year-over-year. Since those prices were collected by the Bureau of Labor Statistics in mid-October, retail diesel prices and copper futures shot to two-year highs earlier this month. Both prices have backed off slightly: the Energy Information Administration (EIA) reported on Monday that the national average retail price of on-highway diesel fell 1.7 cents per gallon from the previous week, and copper futures closed Monday on the Comex division of the New York Mercantile Exchange at $3.77 per pound, down about 25 cents from the recent peak. Any relief may be short-lived, however. EIA’s latest Short-Term Energy Outlook, posted November 9, forecasts diesel averaging $3.19 in 2011, up 22 cents from the projected 2010 average. Most investment advisory firms predict copper will also go higher next year, with Bank of America Merrill Lynch suggesting an eye-popping average of $5.10. One plumbing supplier reported, “We have seen 20-30 percent increase on PVC [polyvinyl chloride] pipe in November. Several pipe manufactures are telling us to expect even more increases on pipe over the next few months.  PVC fitting manufacturers announced three increases in 2010 that were implemented and then rescinded.  There is a 10 percent increase by all PVC fitting manufacturers that went into effect in October.” Recent increases, as well as predictions of further hikes, appear based more on movements of the dollar and rumors about Chinese demand than on any pickup in U.S. construction activity. Since the future course of the dollar and the Chinese economy are inherently speculative, it is likewise difficult to have confidence in any forecasts about materials costs. But it seems likely that materials that are traded globally, such as oil, copper and steel (especially the scrap that forms the raw material for most construction steel), have a greater risk of near-term price spikes than materials for which demand stems from domestic construction, such as concrete, asphalt, wallboard and lumber. Consequently, contractors may face a two-tier pricing picture in 2011: volatility and large spikes for some materials, stable and shrinking prices for others. Meanwhile, owners are likely to be as resistant as they have been in 2010 and 2009 to pass-throughs of any price increases. Contractors will need to be sure they or their subcontractors can absorb possible price spikes. For more information, contact Ken Simonson at simonsonk@agc.org.