Area Economy

Construction materials prices continue downward trend

February 19, 2016
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Construction input prices fell by 0.6 percent during January, according to an analysis of the Bureau of Labor Statistics Producer Price Index by the Associated Builders and Contractors.

Construction input prices are down 2.7 percent from January 2015 and have now decreased on a year-over-year basis for 14 consecutive months.

The implication is that global deflationary forces have now been in place for well over a year, which has translated into growing volatility in many regional economies and in financial markets. Prices for inputs to nonresidential construction have behaved similarly, falling 0.8 percent on a monthly basis and 2.7 percent on an annual basis.

Inputs related to energy — e.g., crude petroleum, natural gas and unprocessed energy materials — plummeted again in January, contributing heavily to overall construction input price declines.

A set of extraordinary circumstances has contributed to the ongoing decline in nonresidential construction input prices.

Global commodity prices have been trending lower for months with limited, sporadic exception. The end of China's construction bonanza certainly has contributed.

Decreased demand for inputs to construction ranging from copper to iron ore has served to flood global markets with excess supply, leading to falling prices.

Significant oil production among OPEC and non-OPEC nations alike has collided with flat demand, helping to push energy prices lower.

With Russia and Brazil remaining in recession and with the Chinese economy continuing to slow, input prices are likely to remain low for quite some time. While it is possible that prices will begin to rise, increases are likely to be gradual — absent some coordinated action by producers to limit supply.

Falling input prices certainly carry positives, but there are also large risks involved. Corporate bond defaults are up, particularly in the U.S. energy sector. Job losses continue among energy workers and several states are already in recession.

These factors alone are unlikely to drive the economy into recession, but rising defaults could make capital more difficult to access going forward, which could limit construction starts.

Four key input prices expanded in January on a monthly basis:

1. Nonferrous wire and cable prices expanded 2.1 percent on a monthly basis, but fell 5.2 percent on a yearly basis.

2. Iron and steel prices grew by 1.1 percent month-over-month, but have declined 22.3 percent year-over-year.

3. Softwood lumber prices expanded 0.7 percent for the month, but fell 7.2 percent on an annual basis. 

4. Prices for prepared asphalt and tar and roofing and siding products increased by 0.5 percent on a monthly basis, but are down 2 percent on a year-over-year basis.

Seven key input prices remained flat or declined on a monthly basis:

1. Crude petroleum prices plunged 23.1 percent from December 2015 and are down 38.6 percent from January 2015.

2. Unprocessed energy material prices fell 10 percent on a monthly basis and 26.4 percent on a yearly basis.

3. Natural gas prices shed 3.5 percent for the month and are down 31 percent for the year. 

4. Fabricated structural metal prices products fell 0.9 percent month-over-month and 1.9 percent year-over-year.

5. Prices for steel mill products fell 0.3 percent on a monthly basis and are down 19.2 percent on a yearly basis.

6. Prices for plumbing fixtures and fittings fell 0.2 percent for the month and are up only 0.8 percent from the same time one year ago.

7. Concrete product prices remained unchanged on a monthly basis, but have expanded 2.5 percent year-over-year.

Anirban Basu is chief economist with Associated Builders and Contractors.

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