Economists: Relief In Building Materials Prices On
Washington, DC, November 3--Builders can expect modest relief from soaring materials prices in the coming year, with the notable exception of the cost of cement, which is expected to peak in early 2005 as Florida’s post-hurricane reconstruction efforts move into full swing, according to analysts at the National Association of Home Builders’ (NAHB) Construction Forecast Conference in Washington, D.C.
The conference, held twice yearly, brings together top experts from across the housing industry to discuss topical issues.
Led by scrap steel costs, which soared 80% since last year, several key building materials have posted double-digit increases over the past 12 months. Steel mill products jumped 43%, lumber prices are up 27%, gypsum 20% and cement 6%.
“This is a normal commodity price cycle and we are currently at the peak,” said John Mothersole, senior member of Global Insight’s Industry Practice. “We believe that commodity prices are topping out and moving on a downward slope. However, the bad news is that the ride down won’t be too steep in 2005.”
Commodity prices are determined by international factors, Mothersole noted, and while the U.S. consumes about 13% of the world’s steel products, China is now almost three times larger in terms of production and consumption.
China’s phenomenal growth has caused global demand to exceed capacity, leading to a huge price run-up, he said.
Shipping capacity has also been strained, causing transportation prices to soar. “A year ago, a tanker cost $35,000 a day. Today that cost is $135,000,” he said.
Mothersole forecast that steel prices will start declining in the current quarter and continue to ease through 2005 because of several factors: steel products are profitable, so more plants will be coming online; additional shipping capacity will be added; and, because U.S. steel prices are set above the global rate, there is an incentive to sell more product to the American market.
“We expect more significant price declines in 2006 and 2007 as ore and coke become more plentiful,” he said.
In the case of cement, with lean inventories on hand, the housing industry this year has been caught flat-footed by surging demand. High shipping rates and rail bottlenecks have exacerbated the problem, resulting in spot shortages and an 8% price hike from the second quarter of 2003 to 2004.
Eliminating costly tariffs on Mexican cement imports would help alleviate the shortages, but Mothersole said he does not expect this problem to be resolved soon. Import availability and transportation issues are not expected to be corrected in the next eight months, he added, and as a result of Florida’s massive rebuilding efforts, cement prices won’t reach their peak until next spring, after which there will be modest declines.
The price of gypsum has increased roughly 20% this year, but price gains for this product should fall into the 6% range next year, as sales slow and imports rise.
“Volatile” is the word that best describes lumber and panel prices, according to Al Schuler, research economist for the USDA Forest Service.
“Volatility is the nature of the beast, but we expect prices to moderate next year in response to a pullback in housing and increased supply,” he said.
A persistent problem with oriented strand board (OSB) is that its producers have failed to “read the tea leaves,” Schuler said. In the mid-1990s, the industry overbuilt capacity, resulting in weak pricing and miniscule profits. During the past few years, the industry underestimated demand and cut back production.
“Nobody wants to hold inventory because it costs money, but no inventory in the pipeline breeds volatility,” said Schuler, who noted that the top five structural panel producers account for 75% of the overall marketshare.
