•  Inflation May Cause Construction Material Prices to Creep Upward

    One analysis expects global demand to affect some products more than others in 2011.

    By: John Caulfield

    Construction materialsCore measures of inflation in the United States are at their lowest levels in 50 years. But prices for certain building products have been rising lately, and there are concerns in some quarters that inflation is rearing its head again, despite exceedingly low demand from the domestic construction sector.

    PPG Industries′ recent decision to raise its prices for industrial coatings by an average of 5% to 10% on Dec. 1 was positioned by the Pittsburgh-based paint supplier as its response to rising raw materials costs. On Wednesday, Reed Construction Data predicted that the recent run-up in lumber prices would continue through the spring of 2011, and that global demand could send the prices of metal- and oil-based products soaring by between 5% and 8% next year.

    In a webinar Wednesday morning, the financial and economic analysis firm IHS Global Insight provided its broader perspective about where supply and demand might be headed next year, based on its projections of capital expenditures in different countries. It concluded that, while inflation isn′t expected to be a problem, commodities prices are rebounding, driven mostly by demand in emerging markets such as China and India.

    Additionally, while Global Insight is anticipating a capital expenditure "boom" over the next few years, the research firm doesn′t think that boom′s pressure on building materials products will be uniform worldwide. "A great deal of excess capital will restrain prices in certain sectors over the near term," stated John Mothersole, the firm′s senior principal economist for pricing and purchasing.

    More than half of projected capital expenditures in 2011 will be in two sectors, Mothersole says: utilities (30% to 35%) and mining (20%). In Australia—the only developed nation that didn′t get crushed by the global recession —capital expenditures for mining alone are expected to grow by 57% in 2011. A "surge" in capital expenditures globally has already increased lead times for certain key components and equipment and is creating some backlog.

    However, the impact on prices is expected to be erratic, depending on the product and geography. Global Insight expects copper prices to reach record highs next year, at around $9,450 per metric ton. Worldwide demand for copper—particularly in China where "imports have been holding steady," said Mothersole—has been exceeding supply since last summer, and that deficit is expected to expand to 250,000 metric tons by next year, especially given that mining production has been "sluggish" and is likely to be problematic over the next eight quarters.

    A different story can be told about cement and asphalt. Despite rising oil prices, Global Insight′s economist Robert Martin does not expect the capital expenditure boom to have a major impact on these commodities′ prices over the next two years.

    Developing counties such as Brazil have been increasing their cement production, and demand has jacked up cement prices in India by 50% this year. But cement shipments in the United States "are trending sideways," said Martin. And while nonresidential demand in America is expected to "turn the corner" positively in 2012, government spending on construction projects will "fade" as stimulus money expires.

    "The worst is over" for cement prices, which should bottom out in 2011 and start rising again by 4% in 2012, said Martin.

    Higher prices for asphalt in the United States are expected to stabilize next year, as supply "heads upward." Martin made these predictions despite his expectations that street and highway construction in the United States and European Union would be stronger in 2011 and oil prices would continue rising. Martin also noted that road asphalt prices in China are 24% higher than a year ago and could keep increasing next year, though at a slower pace.

    During the webinar, Global Insight′s director of pricing and purchasing Laura Hodges shared her thoughts about wage inflation. In the United States, she said that compensation was "inching higher," primarily because of increasing benefits, which are projected to go up 2.4% in 2011. However, because unemployment is still so high, it is unlikely that employers will need to offer better wages to attract employees. "Employers will pay only slightly more for workers next year," she said.

    John Caulfield is senior editor for BUILDER magazine.

    Article from the January 2011 issue of Builder Magazine