Build local, price global

Rising material prices alter construction landscape

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.

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%, compared to 14.5% for the CPI,” “ says Ken Simonson, chief economist for the Associated General Contractors of America in Washington, D.C., in the March 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.

Life after subprime crisis

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 today’s headlines.

“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). 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,” he adds.

Controlling costs in this 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 Bechtel subsidiary. “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 volatile

“The key word in steel prices is ‘volatile,’” says AISC Vice President 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 they’re competing against material traded in another currency,” he adds.

He says another factor in current and future prices of steel is the lack of sufficient stocks of iron pellets and coke for the mills.

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.

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

Sullivan says 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 recent 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. The AGC’s Simonson says, “There is a problem with availability of aggregates” in some areas, such as south Florida, where delays in environmental permissions and local regulations have restricted access to new sources of sand and gravel.

Lumber rising slightly

The weak dollar is also having an impact on lumber and wood products prices, which is helping them recover slightly.

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 says tighter supply due to mill closings and production cutbacks are additional factors.

The Random Lengths Framing Lumber Composite Price in 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, Heitz says.

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 preconstruction teams of subs and suppliers for critical items and services as a form of risk management and are making 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.

Agate Inc. of Scottsdale, Ariz., is 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 getting a signed contract with the client.

“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. We had our signed contract two days later and immediately confirmed our steel order. Three days later, a 15% price increase hit. If we had waited we would have lost over $600,000 in three months.”

Uhl is aware of the international aspects of local construction. He 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.”