Construction Materials Prices Higher in December 2010

"For contractors in the U.S., this cannot be viewed positively. Rising materials prices put even more downward pressure on already slender profit margins." —ABC Chief Economist Anirban Basu.

The cost of construction materials continued to rise in 2010, closing up 0.9 percent in December, according to the January 13 producer price index (PPI) report by the U.S. Labor Department. Overall, producer prices last month were 5.4 percent above December 2009 levels.

Leading the increase, softwood lumber prices jumped 3.4 percent in December and are up 6.3 percent over the previous twelve months. Iron and steel prices rose 2.3 percent last month and were 16.9 percent higher than prices in December 2009. Nonferrous wire and cable prices increased by 2.2 percent from last month, 11.1 percent over the last three months, and 12.2 percent over the last twelve months. Prices for fabricated structural metal products rose 0.9 percent in December and are up 3 percent from December 2009. Steel mill product prices increased by 0.5 percent in December and are up 12.5 percent compared to levels one year ago. Prices for plumbing fixtures and fitting inched up 0.3 percent and are 1.3 percent higher from December 2009. Prices for concrete products are also up 0.3 percent for the month but are down 0.3 percent on a year-over-year basis.

In contrast, prices for prepared asphalt, tar roofing, and siding fell 1.0 percent in December but were up slightly, 0.9 percent, over the last twelve months.

Crude petroleum prices rose 7.7 percent in December, as natural gas prices soared 23.4 percent, accounting for 90 percent of crude energy price gains. Year-over-year, crude energy prices are up 6.2 percent.

Meanwhile, the nation’s wholesale prices increased for the sixth straight month, up 1.1 percent in December, and are up 4.1 percent from December 2009. Producer prices in 2010, on average, were 4.3 percent higher than in 2009, but 2.6 percent lower than 2008 levels.

“For three consecutive months, construction materials prices have been surging,” said Associated Builders and Contractors Chief Economist Anirban Basu. “The latest numbers from the Labor Department come from December when materials prices rose another 0.9 percent for the month.

“Over the past three months, the monthly increases have been 0.6 percent, 0.5 percent, and 0.9 percent. These increases appear to be in conjunction with broader increases in import prices, which have also risen substantially over the past three months, largely due to rising energy prices,” said Basu.

“The gains in materials prices were broad based, including in the softwood lumber, iron and steel, and nonferrous wire and cable categories. These increases are occurring despite the fact that construction levels remain suppressed in both residential and nonresidential categories,” Basu said. “Likely explanations for the rise in materials prices include a shift of investors’ money from bond funds into the commodities market, and the rapid expansion of a number of large emerging countries where construction is vibrant.

“For contractors in the U.S., this cannot be viewed positively. Rising materials prices put even more downward pressure on already slender profit margins,” said Basu. “Moreover, the increase in project costs associated with rising materials prices makes it more likely that certain projects will remain on hold. However, given recent stability in the U.S. dollar, it may be that materials prices will not increase as forcefully as in the past months."