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Labor Stats Show High Material Price Increases

Thursday, February 18, 2021

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New data analysis from both the Associated General Contractors of America and the National Association of Home Builders is showing price hikes for materials that are reaching record-setting levels and heavily burdening firms.

On the residential side, the NAHB says that stronger buyer demand has helped boost builder confidence and therefore offset these supply chain challenges, according to its analysis with the Wells Fargo Housing Market Index.

However, the AGC says that some other sectors are facing massive hardship and the organization is calling on the Biden administration to review and rescind a range of trade tariffs, including those for Canadian lumber.

“The extreme price increases, as reflected in today’s producer price index report and other sources, are harming contractors on existing projects and making it difficult to bid new work at a profitable level,” said Ken Simonson, the AGC’s Chief Economist. “While contractors have kept bids nearly flat until now, project owners and budget officials should anticipate the prospect that contractors will have to pass along their higher costs in upcoming bids.”

Previous Price Hikes

We saw construction material prices noticeably rising in the middle of last year, after the Bureau of Labor Statistics released a Producer Price Index in June.

Janifest / Getty Images

New data analysis from both the Associated General Contractors of America and the National Association of Home Builders is showing price hikes for materials that are reaching record-setting levels and heavily burdening firms.

Among the 11 subcategories, six experienced monthly increases, which include:

  • Fabricated Structural Metal Products increased by .6%;
  • Softwood Lumber increased by 11%;
  • Prepared Asphalt, Tar Roofing and Siding Products increased by 1.3%;
  • Crude Petroleum increased by 71.9%; and
  • Unprocessed Energy Materials increased by 16.8%.

Other stats include:

  • Plumbing Fixtures and Fittings decreased by 2.5%;
  • Iron and Steel decreased by .8%;
  • Steel Mill Products decreased by 1%;
  • Nonferrous Wire and Cable decreased by .5%;
  • Natural Gas decreased by 18.4%; and
  • Concrete Products remained stable.

“For many contractors, lack of demand for their services has emerged as the leading source of concern due to the COVID-19 pandemic, followed closely behind by a fear of inflation and a potential increase in materials prices,” said ABC Chief Economist Anirban Basu, at the time. “June’s PPI data indicate that they are right to be concerned.

“With global supply chains buckling and trade tensions elevated, materials prices are more likely to ratchet higher, even in the context of a global economy that will shrink markedly this year. While the recent rise in energy prices receives much of the attention, the price of softwood lumber is up nearly 19% over the past 12 months and was up 11% in June itself.”

The NAHB also released numbers at the time, noting that the Random Lengths Framing Composite Price hit $523 per 1,000 board feet for the week ending July 10, marking the first-time prices have topped the $500 level since July 2018.

The NAHB added that lumber prices in general have increased 50% since April 17 and it says that the primary drivers of the price increase include:

  • Mills closed in the spring due to stay-at-home and social distancing measures enacted by state and local governments;
  • When prices fell between March and April as a result of the COVID-19 pandemic, mills projected that housing would be adversely affected and therefore anticipated a large drop in demand;
  • Mills that remained operational substantially decreased capacity utilization;
  • Producers did not anticipate the massive uptick in demand from do-it-yourselfers and big box retailers during the pandemic;
  • Housing weathered the storm much better than most anticipated; and
  • DIY demand has not abated much as states reopen and construction demand has far surpassed lumber mills’ projections.

About the New Data

NAHB Chief Economist Robert Dietz echoes much of that, recognizing the steadily rising prices and falling inventories, though the residential building sector has had a stronger bounce  from the COVID-19 pandemic.

“Lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows,” said NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Florida. “Builders remain very focused on regulatory and other policy issues that could price out households seeking new homes in a tight market this year.”

The data shows that there not only has been a steady decline of bid prices since the beginning of the pandemic, but those numbers really jumped after April. According to the AGC, the index that measures the selling price for materials and services used in new nonresidential construction increased 2.5% from December to January and 10.7% since April.

Meanwhile, the producer price index for new nonresidential construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—increased only 0.2% over both the latest month and the nine months since April.

The AGC notes that steel prices are also at record levels and copper is also at an eight-year peak. The Bureau of Labor Statistics data shows that from January 2020 to January 2021, structured metal prices increased .2%, iron and steel prices increased 15.6%, steel mill products increased 7.4% and softwood lumber prices increased 73%.

The AGC recognizes that there are a range of reasons to account for the price spikes, but is urging the Biden administration to rescind some tariffs for relief, saying that they could undermine the economic recovery of the sector.

Recent Tariff/Import News

At the beginning of this year, the “Buy American” policies initially set forth by former President Donald J. Trump got a boost as President Joe Biden signed an executive order aiming at increasing government purchases of American-made products.

During comments surrounding the order, Biden mentioned his Build Back Better Recovery Plan, and noted that the Buy American order would help in the effort to rebuild infrastructure.

“Here’s what else we’re going to be doing. Under the Build Back Better Recovery Plan, we’ll invest hundreds of billions of dollars in buying American products and materials to modernize our infrastructure, and our competitive strength will increase in a competitive world,” Biden said.

“That means millions of good-paying jobs, using American-made steel and technology, to rebuild our roads, our bridges, our ports, and to make them more climate resilient, as well as making them able to move faster and cheaper and cleaner to transport American-made goods across the country and around the world, making us more competitive. It also means replenishing our stockpiles to enhance our national security.”

photovs / Getty Images

On the residential side, the NAHB says that stronger buyer demand has helped boost builder confidence and therefore offset these supply chain challenges, according to its analysis with the Wells Fargo Housing Market Index.

The new order mainly reinforces the government procurement and procedure rules, making it harder for federal agencies to purchase imported products or to get an exception to the Buy American rule. In his comments, Biden noted that in 2018 alone, the Defense Department spent $3 billion on foreign construction contracts, “leaving American steel and iron out in the cold.”

Around the same time, a group of several domestic steel industry associations wrote to President Joe Biden, urging him to keep steel tariffs and quotas that were set in place by the Trump administration.

The letter was signed by the American Iron and Steel Institute, the United Steelworkers, the Steel Manufacturers Association, the Committee on Pipe and Imports, and the American Institute of Steel Construction.

The letter referenced the tariff and quota program that was established in 2018 as a means to allow the U.S. to “restart idled mills, rehire laid-off workers and begin investing tens of billions of dollars in new and upgraded plants.”

However, the letter notes, those plans suffered a significant setback because of the COVID-19 pandemic. The organizations add that continuing the tariffs and quotes is “essential to ensuring the viability of the domestic steel industry in the face of this massive and growing excess steel capacity.”

Buy American Background

Trump expanded the Buy American platform almost in tandem with his steel and aluminum tariff initiatives.

The first executive order, known as Buy American and Hire American, was signed on April 18, 2017, and the second, Strengthening Buy-American Preferences for Infrastructure Projects, was signed on Jan. 31, 2019. Though Trump’s tariffs did provide a short boost for both prices and manufacturing, the import taxes did not result in a boom in manufacturing jobs.

“Things came back down to earth this year because the demand pulled back and industrial economy has softened,” said steel industry analyst Phil Gibbs at the time. “Now you’ve got a year where spending in the energy sector is down, auto is down, nonresidential construction is down and durable-goods orders are falling. You do have real demand weakness in the U.S. industrial economy.”

In July of 2019, Trump signed an order that expanded the use of American-made iron and steel in federal projects, pushing the domestic content threshold from 50% to 95%.

Simultaneously, in March 2018, Trump imposed tariffs to affect steel and aluminum imports from other countries across the globe. The assigned duties were 25% on steel products and 10% on aluminum.

Companies that felt they needed to use steel or aluminum from another country—because that particular product wasn’t made in the U.S., for example—had the opportunity to apply for an exemption.

By June, the U.S. allowed the tariffs to go into effect for Canada, Mexico and the European Union, after months of discussion of possible exemptions. The U.S. Department of Commerce also announced the first round of exemptions, while noting that it would be investigating whether some companies in the market were taking advantage of the duties and raising prices unduly.

In May of the following year, Trump continued work on updating the USMCA, Steel Dynamics CEO Mark Millett went on the record to say he believed a quota system would replace the current tariffs that the steel and aluminum industry were subjected to.

However, some in the aluminum industry were reportedly against the quotas, in fear that they would raise prices on aluminum-dependent goods. That same month, Trump later announced that the U.S. would lift its steel and aluminum tariffs imposed on Canada and Mexico in exchange for a new monitoring and enforcement system that will prevent import surges into the U.S. As a part of the agreement, Mexico and Canada would also lift its retaliatory tariffs on American products.

By December 2019, officials from Canada, Mexico and the United States signed a deal once again. The United States-Mexico-Canada Agreement replaced the North American Free Trade Agreement, and both the U.S. United Steelworkers union and the AFL-CIO labor voiced their approval of the deal.

At the beginning of 2020, Trump announced an expansion of tariffs on foreign steel and aluminum, claiming that the existing tariffs were not as successful as he’d hoped in restoring American production.

While imports of steel and aluminum into the United States have declined since the tariffs were established in 2018, imports of products made with the same materials have had a significant increase, according to Trump.

And, in August, the U.S. announced that it was reinstating its 10% tariffs on raw aluminum imports from Canada.

   

Tagged categories: Asia Pacific; Building materials; Economy; EMEA (Europe, Middle East and Africa); Good Technical Practice; Latin America; North America; U.S. Bureau of Labor Statistics; Z-Continents

Comment from Michael Halliwell, (2/18/2021, 1:31 PM)

I'm not surprised. When you are interlinked with another country fairly tightly and then bring in policies to try to protect or restore certain industries, there are bound to be consequences. If internal industry forecasts are off or there is a disruption (like COVID) and the trading partner has been forced to find new markets, you get left with a lack of product until those industries rebuild / restart. Canada has been a traditional source for cheap and plentiful wood and petroleum products for the US market for years, but recent policies have been changing the relationship between Canada and the US. With Keystone XL being shut down, I'm sure Trans Mountain will end up exporting petroleum products to Asia...and I know the forestry companies are fighting with the oil companies and farmers to send product by rail to the west coast for shipping to other markets as well. I know things will never be the same as in the "hay day" between Canada and the US, but hopefully there will be a return to a more stable relationship in the not too distant future (the yo-yo / on-again-off-again tariffs were a real pain and didn't boost market confidence for Canadian companies looking to export to the US).


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