Prices for Construction Materials Bottom Out and Begin To Rise Despite Dim Prospects for Near-Term Building

Increases in Materials and Supply Costs Complicate Recovery For Nonresidential Building Sector

Prices of construction materials and supplies edged higher in November, likely foreshadowing future hikes in nonresidential construction costs, according to figures released by the Labor Department this week.

At the same time, the tight credit market continues to chill all but the faintest demand for commercial and other nonresidential construction, with the Architectural Billings Index, a leading indicator of future construction spending, falling again in November after hitting its highest point in more than a year, according to a report just released by the American Institute of Architects.

In the strongest evidence yet that construction costs are heading back up after a year of decline, the new November producer price index (PPI) report from the Bureau of Labor Statistics showed sharp increases in the prices of key materials such as diesel, copper and brass mill shapes.

The overall index for inputs to construction industries, a weighted average of all materials used by contractors, rose 0.6% in November compared with the previous month after falling 2.3% over the past 12 months. Certain key materials prices increased sharply on a month-over-month and three-month basis, including diesel fuel, up 6.3% over the previous month and 6.4% over three months; copper and brass mill shapes, 4.6% and 11.3%, and steel mill products, down slightly in November but up 4.1% over three months.

"All of these items had dropped in price compared to a year ago but the declines have bottomed-out or reversed," noted Ken Simonson, chief economist for the Associated General Contractors of America. "More increases are likely soon, as the dollar loses value and construction picks up in key foreign markets."

The Architecture Billings Index, which tracks demand for architects and other design services, fell 3.3 points in November to 42.8, the lowest level in three months, according to the American Institute of Architects. The index, which tracks the approximately nine- to 12-month lag time between architecture billings and construction spending, has been below 50 since January 2008.

The November index erases gains made in October, which posted the highest number since August 2008.

"There continues to be a lot of uncertainty in the construction industry that likely will delay new projects in the near future," said AIA Chief Economist Kermit Baker.

Construction analysts have speculated that lower prices would eventually prompt more projects to move forward, helping fuel the recovery of the nonresidential sector, said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. Unfortunately, rising materials prices are instead likely to delay the segment’s ultimate recovery, Basu said.

"Public agencies and private owners contemplating construction projects should treat today's figures as a warning shot," said Simonson. "Prices for many materials have stopped falling and are poised for increases."

Simonson noted that major steel mills have already announced January price increases for construction products. Owners that have been holding back in the hope of lower prices could see major price spikes and fewer contractors bidding on projects over the next few months. Rising prices reflect increasing demand for materials in the U.S., China, India and Brazil, Basu said.

By: Randyl Drummer
Source: CoStar Group