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Construction price increases driven largely by oil, cement

Some dire predictions about soaring labor and other costs have not proved true, but that's not making building any less expensive.

By JAMES THORNER
Published April 20, 2006

Builders have long been lamenting the rising cost of putting up houses, offices and shopping centers.

But some of the usual suspects for the increase - expensive labor, scarce supplies and competition from hurricane-ravaged Louisiana - haven't always stood up to scrutiny.

Despite temporary shortages in some trades, construction workers remain plentiful and labor costs tame. The cost of concrete and cement may be spiking again, but prices for other vital building materials such as steel, lumber and gypsum are falling or about to fall.

And remember predictions that Gulf Coast hurricane reconstruction would vacuum up construction workers and building supplies? Didn't happen, at least not to the extent predicted last year.

"Worries that Louisiana will become a magnet for labor seem misplaced," said Ken Simonson, chief economist for the Associated General Contractors of America. "Living conditions are too unappealing, and the initial displacement of 30,000 construction workers from Louisiana by Hurricane Katrina means the state has exported far more workers."

But when the building industry grouses about escalating costs, it's not without foundation. Simonson, who spoke Thursday over lunch to a contractors group in Tampa, predicted material costs will rise 8 to 10 percent this year. He summed it up in two words: oil and cement.

Oil fuels construction trucks. One petroleum byproduct is the goop that goes into asphalt. The recent run-up in oil prices pushed fuel prices up 20 percent the past year and asphalt by a comparable amount.

Cement is likewise shooting up as demand outstrips supply. Its price rose 12 percent last year. The world is making plenty of cement, Simonson said. Even China, whose building boom is blamed for driving up cement prices, exports part of its cement production. The trick has been finding the ships, trains and ports to handle such a narrowly profitable bulk commodity.

That has created a headache for builders who rely on the material for everything from concrete block in houses to prefabricated slabs in apartment buildings.

"Unlike producers of consumer goods, contractors can't make it smaller, lighter or thinner," Simonson said Thursday.

Simonson is touring the country to spread the message among members of the contractors group. He predicted a slowdown in home construction this year, particularly in the saturated condo market, but was upbeat about Florida's long-term prospects.

The Tampa-St.Petersburg metropolitan area gained 31,000 residents last year. Simonson expects the migration to continue, driven by retiring baby boomers seeking a place in the sun. "I don't think they're all going to put on the brakes in the near future," he said.

Here's Simonson's forecasts for various building materials:

f,8.5,ux0,,10.8 STEEL: After a 50 percent price spike whacked builders in 2004, prices rolled back 4 percent last year. Prices this year should stay flat or fall slightly.

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PVC PIPE: This plumbing mainstay, created from natural gas, doubled in price in some places last year. Rising natural gas prices and a crippling fire at a Texas PVC resin plant were largely to blame. But the prices could fall this year as natural gas prices retreat and the plant comes back on line.

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GYPSUM: This main component of dry wall and other plaster products saw huge run-ups in 2004 and 2005. Prices should edge lower this year as factories boost production and housing demand slows.

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LUMBER AND PLYWOOD: Prices have fallen the past 18 months, helping prop up home construction, the largest consumer of these building materials. The trend should continue.

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CEMENT: After lobbying from the construction industry, the United States dropped import duties this month on Mexican cement from $26 to $3 per metric ton, but quotas on the foreign cement remain. Construction demand has overwhelmed stagnant domestic supply. Public aversion to noise and dirt has constrained construction of concrete plants. Expect price volatility to continue.

Simonson declined to stake his reputation on predicting oil and gas prices, which he said fluctuate too drastically based on international flareups. Oil could drop by $20 per barrel, or it could increase by the same amount.

"Prices could move far and fast in either direction," he said.

James Thorner can be reached at 813 226-3313 or thorner@sptimes.com

[Last modified April 20, 2006, 22:42:36]