Construction 2006 Material Shortages

December 27, 2005
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GRAND RAPIDS — The Associated General Contractors of America reported that construction spending hit a record $1.3 trillion in October, and that spending in the three major construction categories was 9 percent higher for the first 10 months of this year compared to the same period last year.

Ken Simonson, AGC’s chief economist, said the spending spree was led by an 11 percent gain in private residential spending. Year over year, public construction spending was up 8 percent, and private nonresidential spending was 5 percent higher.

But the price of construction materials remains a major concern. Most districts in the country have reported increasing prices, particularly in the cost of energy-related products, construction and raw materials and transportation. Fuel surcharges, for instance, have become commonplace.

“When the price of diesel goes up, the contractors pay it directly,” Simonson said. “They’re also paying indirectly in fuel surcharges that are placed on just about every delivery to a job site these days. People also have the misimpression that the oil crisis is over.”

The one big worry is cost and availability of materials, Simonson said. The industry has seen tight supplies of building materials like PVC (polyvinyl chloride) pipe, rising prices on steel, copper, plastic resins and aluminums, and sharply rising prices on materials such as gypsum and cement. In fact, the contractors group is urging the Commerce Department to end the duty on Mexican cement, which has pushed its price up 55 percent.

Simonson said supplies are likely to remain tight next year for concrete and PVC pipe, with periodic spot shortages. He joined Ed Sullivan, chief economist of the Portland Cement Association, and John Cross, vice president of the American Institute of Steel Construction, in a recent conference call to discuss the outlook for construction spending in 2006.

Sullivan said tight market conditions in the United States have existed for the last two years, primarily in the southern, western and mountain regions of the nation.

Just prior to Hurricane Katrina, there was some evidence of easing in certain regional markets, Sullivan said. At mid-summer about 30 states were characterized as having tight market conditions; now only half that many are characterized as such.

“You have to understand that winter is the time when your inventories are being built by the cement producers,” Sullivan explained. “These inventories are built in expectation that you’re going to have a strong building season commencing in the spring, but there are some issues in terms of how strong that spring selling season might be. As of right now, we still have some shortages, but there’s some easement in that as we head into the winter.”

He said the likelihood is that the nation will still have a strong economy in 2006, and even if there is some easement in residential construction, construction will be relatively strong. But there are some wild cards.

Hurricane Katrina’s wrath increased energy prices, and home heating bills this winter are expected to rise 30 percent to 50 percent as a result. In the first quarter of 2006, it’s still going to be relatively cold, particularly in the North, Sullivan pointed out.

Simonson added that so far supplies of natural gas are adequate, but if there is a lot of cold weather this winter, there won’t be enough natural gas to serve both the heating customers and the industrial and power plant customers.

“What you can see is that these energy prices exert an adverse weight on overall economic growth,” Sullivan said. “It’s conceivable that the first half of 2006 economic growth could be a lot slower, and that means, potentially, that the construction markets may have a little bit of a pause.”

Additionally, there’s some indication that mortgage rates are now heading upward at a slightly more accelerated pace, a condition that could ease residential construction.

“Looking at the states that were most intensely hit with shortages, they have a high concentration in terms of their dependence on the residential market,” Sullivan said. “In Florida, for example, 40 percent of total state cement consumption is in the residential market. In the context of the possibility that interest rates may rise faster, a state like Florida conceivably could have a disproportionate cooling in that market. My gut feeling is that we’ll probably see some shortages reoccur. The magnitude and the intensity is still unclear.”

Cross, whose organization represents steel fabricators, structural producing mills and structural steel warehouses, said it’s clear to his organization that the current and anticipated demand for structural steel can be fully supported by U.S. production capacity.

“We don’t see any shortage of structural material today, and we don’t anticipate any in the coming years,” Cross said.

However, he noted that over the past year there has been some modification in how the word “availability” is defined: What types of structural materials are available, where are they available, are they available on the shelf or the end of a six-week rolling cycle, and at what price are they available?

“When we went into 2005, the mills had a significant inventory of structural material, and we were in a mode where many of the service centers and fabricators were using kind of an informal, just-in-time approach to secure ordering to supply project needs,” Cross said.

As a result, there was a decline in the level of inventories being held by service warehouses, which handle about 60 percent of structural material, he pointed out.

In January the warehouses had 3.2 months’ worth of inventory; by July that had been trimmed down to 2.5 months. A significant upturn in demand for structural material in August reduced mill and warehouse inventories to just under two months of inventory. 

“Today, production and utilization rates at the mill level are returning to a more normal level,” he said. “Service center inventories are increasing — we’re back up to over 2.2 months (worth of inventory) at this point, and the industry is resuming a more normal pattern of material acquisition.”

Simonson pointed out that the construction industry outpaced the overall economy in adding jobs in November, accounting for 37,000 new jobs out of 215,000 added to payrolls last month. He predicts strong job growth in nonresidential construction next year, and expects factory, hospital and some types of retail construction will be especially hot. He foresees residential construction staying strong at least during the early months of 2006.    

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