News / New Construction Market

Materials Costs Rise, Contractors' Profits Don't

March 7, 2011
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Prices for construction materials increased in January 2011 by 0.9 percent, and have risen by 4.9 percent from January 2010, according to the February 16 Producer Price Index. Iron and steel prices rose 4.7 percent in January and are up 16.4 percent between January 2010 and January 2011.

Steel mill product prices went up 2 percent for the month and are up 11.5 percent from the same time last year. Prices for fabricated structural metal products were up 1.2 percent in January and up 4 percent from the same time last year. Prices for plumbing fixtures and fittings inched up 0.3 percent for the month and are up 1.4 year-over-year. Nonferrous wire and cable prices went down 0.8 percent in January, but are 9.1 percent higher from the same time last year.

Other construction materials also increased in January and are up year-over-year, over that same time period, with the exception of concrete product prices, which decreased 0.8 percent in January, and are unchanged year-over-year.

THE TAKEAWAY

Anirban Basu, Associated Builders and Contractors (ABC) chief economist, commented, “It may be that the inflation people have been predicting for months is finally here. Energy prices rose again, but the bigger story revolves around the broadening of inflation in other categories.”

A result of the rapidly rising material prices means, said Basu, that “For construction contractors, this puts additional downward pressure on already thin profit margins.”

Analysis by the Associated General Contractors of America (AGC) pointed out the amount contractors charge for completed projects remains flat and that the price trends are cutting into already tight bottom lines for contractors, undermining chances for an industry-wide recovery in 2011.

“The last thing contractors need after two years of depression-like conditions is to pay more to make less,” said Ken Simonson, AGC’s chief economist. “With margins continuing to shrink, few contractors are likely to benefit even if construction demand picks up this year.”

Then again, construction may not increase this year, according to Basu. “With the cost of construction rising in many instances, developers and others may choose to further delay construction starts,” he said.

“This, of course, represents bad news for an industry already associated with an unemployment rate above 20 percent and spending volumes that are nearly 25 percent below late 2008 levels.

“The hope is that speculators will not continue to pour money into commodities and that materials will be better behaved in the months ahead,” commented Basu.

Publication date: 03/07/2011

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