In last year's September cost issue, ENR reported there initially would be a severe economic shock in the wake of the terrorist attacks on the U.S., but the economy would rebound by the first half of 2002. Right on cue, Federal Reserve Board Chairman Alan Greenspan testified before Congress on March 7 that "an economic expansion is well under way." If true, the recession would be one of the shortest and mildest on record.
It may be several months before statistics verify or disprove Greenspan's optimism. However, price trends for several materials already are in the recovery mode. Prices for wood products, gypsum wallboard, PVC pipe and structural steel all appear to be firming after a long period of decline and stagnation.
During the first quarter, lumber and plywood checked six months of steep price cuts with ENR's 20-city average price jumping 3.6% for lumber and 3.3% for plywood. The Bureau of Labor Statistics producer price index for lumber started the year with a 6.9% increase.
Greenspan's declaration of victory over recession may cut this price rally short since many economists believe it signals the Fed's willingness to raise interest rates sooner rather than later. "The strength in the lumber market is not going to last," says Amy Carneal, an economist with DRI-WEFA, Washington, D.C. She believes that Fed action will push mortgage rates higher and weaken housing. DRI-WEFA forecasts lumber prices will ease in the second half of 2002 and end the year 0.1% lower than 2001.
Gypsum wallboard prices also are starting to pull out of a tailspin. With several new plants coming on line over the last two years, the market became flooded with wallboard and prices collapsed 21% in 2001. However, manufacturers are becoming more cautious about bringing new capacity on line and are starting to curtail existing production, says Carneal. Prices appear to be responding. "One major producer has increased prices three times since last September and increases are sticking," she says. DRI-WEFA forecasts wallboard prices to increase 4.5% this year.
Inflation will increase in the coming months as these material prices bottom out and turn the corner. Falling material prices will no longer offset the strong 4% annual increase in union wages tracked by the Construction Labor Research Council, Washington, D.C.
Prices posting the largest turnaround may be for steel products affected by the recent tariffs slapped on imports. Earlier this month, President Bush announced tariffs that will be in effect for the next three years. Flat-rolled products, including plate, will be hit with a 30% tariff in the first year, followed by 24% and 18% for the next two years, respectively. Reinforcing bar imports will face tariffs of 15%, 12% and 9% over the next three years. Tariffs for stainless steel wire will be 8% each year.
Most of construction will dodge the tariff's impact. Structural steel shapes, steel decking products and steel joists are not covered by the tariffs. "President Bush's recommendations should have no effect on the price or availability of structural steel," says H. Louis Gurthet, president of the American Institute of Steel Construction Inc., Chicago.
Domestic structural steel prices may even face further downward pressure with the scheduled opening later this year of a new mill in Indiana. The new plant by Steel Dynamics Inc., Fort Wayne, Ind., will add over a million tons of structural steel and rail capacity to the market when it comes on stream.
Initially, the tariffs will have little impact on prices, according to John Anton, the steel analyst for DRI-WEFA. "In 2001, total imports for the products targeted by the tariffs were at their lowest level since 1984," he says. However, tariffs will prevent imports from undercutting price increases anticipated for later this year and in 2003.
DRI-WEFA predicts that hot-rolled sheet prices will bounce back from last December's all-time low of $210 per ton to $265 by the fourth quarter of this year. "It's a big percent increase but far below the historical peak and not much above the $240 break-even point that the industry needs to cover production costs," says Anton.
ANGRY ALLIES. Reacting angrily to the announced U.S. steel import tariffs, the European Commission is recruiting support from Japan, China, Brazil and Korea to raise a formal complaint with the World Trade Organization. At the same time, the EC, representing the 15 European Union countries, will initiate moves to fend off a feared surge in imports of steel products initially intended for the U.S. market but diverted to Europe.
According to the U.K. Steel Association, Eastern Europe and the former Soviet Union accounted for 430,000 tonnes of rebar sales to the U.S. last year. Asian imports were higher, at 600,000 tonnes, while the EU contributed 260,000 tonnes. EU steel exports of all kind to the U.S. run at about 4 million tonnes a year, of which over half will be affected by new tariffs, says EU Trade Commissioner Pascal Lamy.
Bush's decision to impose import tariffs was politically motivated and contrary to WTO rules, claims Lamy. While WTO's Safeguards Agreement allows protection at times of import surges, sales of foreign steel in the U.S. have actually fallen 33% since 1998, while increasing in Europe by 18%, he says. With existing anti-dumping measures, the average price of steel in the U.S. already is 25% more than in Europe, he adds.
"The tariffs are on plate and flat products and not wide-flange so they won't hurt us too bad," says David Schuff, chairman of the board of the nation's largest steel erector, Phoenix-based Schuff Steel. "What is hurting us is foreign fabricators," says Schuff. "It is ridiculous to put tariffs on steel imports, then permit foreign fabricated steel to be used on U.S. projects."
For example, Schuff lost out to a low bid from an offshore fabricator on the San Diego Padres stadium project, says Schuff. "Bridge work…that's all going overseas," he says. "We don't even bid bridges in California anymore because it's a waste of time."
Despite backlog being down 25% from the previous year, Washington Ironworks won't consider facing unfair competition in the California bridge market either, agrees Daniel Welsh, president of Gardenia, Calif.-based firm.
Although structural steel fabricators and erectors dodged the most recent tariff, they already face high tariffs on Korean and Japanese structural imports, says Robert Abramson, CEO of Interstate Iron Works Corp., Whitehouse, N.J. This puts the domestic industry at a disadvantage to foreign competitors, especially Canadian firms purchasing Japanese steel that enjoy a huge cost advantage due to the exchange rate. "It's a two-edge sword…and it makes it difficult to compete against these guys."
Not only are margins thinning, but the time from bid award to mobilization is growing, says Welsh."We are seeing jobs taking six months to even a year from the time of award of bids to the actual award of the job," he says. "Owners are taking more time to study alternatives, and are reluctant to commit to capital spending."
"We won't see a significant impact [from tariffs] on job costs," says Gary Broad, president of Midwest Steel, Detroit. Slowing construction markets are more of an issue, he says. "People are bidding jobs far below what they are worth and there is far more competition than in the past," Broad says. "The numbers on bid day are ridiculous. Projects are being bid 10% to 15% lower than a year ago."
Minneapolis-based erector Sowles Co. already has laid off 40% of its work force. "Our business volume looks like it might drop about 30%," says Daniel Sowles, president. "All of our competition is in the same boat, and prices are plummeting. If you want a job, you figure it as cheap as possible, then take 20% off that. There's absolutely no money to be made in this market."
CONSTRUCTION MATERIALS PRICE MOVEMENT IN 2001-02
|AGGREGATES||Monthly % chg.||+0.2||+0.2||+0.1||+0.1||+0.2||+0.0||+0.4|
|Annual % chg.||+3.4||+3.5||+3.2||+3.2||+3.4||+3.5||+2.8|
|ALUMINUM SHEET||Monthly % chg.||+0.0|| 0.2|| 0.9|| 1.8|| 0.2|| 1.0|| 0.1|
|Annual % chg.|| 0.6|| 1.2|| 3.2|| 4.3|| 4.0|| 4.7|| 5.1|
|BITUMINOUS CONCRETE||Monthly % chg.|| 0.1|| 0.4|| 0.1||+0.3|| 0.6|| 0.2||+0.3|
|Annual % chg.||+3.7||+3.3||+2.4||+2.8||+2.2||+1.1||+0.3|
|BRICKS||Monthly % chg.||+0.1|| 0.1|| 4.5||+3.4||+0.2||+0.0|| 4.3|
|Annual % chg.||+3.9||+3.9|| 0.7||+2.7||+2.8||+2.3|| 3.9|
|CEMENT||Monthly % chg.||+0.3||+0.0||+0.0||+0.2|| 0.1|| 0.1|| 0.1|
|Annual % chg.|| 0.1||+0.2||+0.3||+0.7||+0.5||+1.1||+0.4|
|COPPER, PIPE AND TUBE||Monthly % chg.|| 1.7|| 1.7||+3.3|| 2.2||+0.8|| 2.6|| 2.4|
|Annual % chg.|| 3.3|| 6.9|| 5.7||10.1|| 8.6||10.4||10.8|
|FABRICATED STEEL, BLDG.||Monthly % chg.|| 0.3||+0.1||+0.0|| 0.7|| 0.1||+0.1|| 0.2|
|Annual % chg.|| 2.1|| 1.8|| 1.7|| 2.4|| 2.5|| 1.8|| 1.8|
|GLASS, FLAT||Monthly % chg.||+0.1|| 0.1|| 1.2|| 0.1||+0.1|| 2.5||+0.0|
|Annual % chg.||+0.4||+1.8|| 0.7||+0.2||+0.3|| 2.6|| 4.4|
|GYPSUM PRODUCTS||Monthly % chg.||+0.2||+0.1||+5.4||+2.1||+8.6|| 3.4|| 1.0|
|Annual % chg.||26.1||23.4||16.7||10.7||+0.9||+0.2||+3.4|
|INSULATION||Monthly % chg.||+0.8|| 0.1||+0.3||+2.7|| 0.7|| 1.3||+0.7|
|Annual % chg.|| 1.2|| 0.3||+1.6||+4.4||+0.5|| 0.7||+0.0|
|LUMBER, SOFTWOOD||Monthly % chg.|| 5.9|| 0.6|| 1.0|| 5.1|| 0.4|| 2.2||+6.9|
|Annual % chg.||+1.0||+2.9||+3.5|| 1.7|| 1.2|| 2.8||+6.7|
|PAINT||Monthly % chg.||+0.0||+0.2|| 0.1|| 0.1||+0.1||+0.1||+0.9|
|Annual % chg.||+2.4||+2.9||+2.5||+2.4||+2.1||+1.9||+2.4|
|PLYWOOD||Monthly % chg.|| 5.8||+4.5|| 1.6|| 6.6|| 0.1|| 1.5||+0.2|
|Annual % chg.||+1.8||+7.3||+3.1|| 3.0|| 1.5|| 1.9||+1.0|
|PVC, PIPE||Monthly % chg.|| 0.2|| 0.9|| 1.8||+1.5|| 0.6|| 0.2|| 0.2|
|Annual % chg.|| 3.2|| 3.3|| 4.5|| 2.2|| 1.8|| 1.9|| 0.8|
|READY-MIX CONCRETE||Monthly % chg.||+1.1||+0.1||+0.6|| 0.1||+0.4|| 0.1||+0.1|
|Annual % chg.||+2.1||+2.1||+1.8||+1.9||+2.6||+2.5||+2.9|
|REINFORCING BARS||Monthly % chg.||+0.4|| 2.0||+0.0|| 0.5|| 2.6|| 0.1|| 1.3|
|Annual % chg.||+2.0|| 0.1|| 0.1||+0.3|| 2.2||+0.1|| 0.8|
|SHEETMETAL||Monthly % chg.|| 0.1|| 0.3||+0.0||+0.0||+0.1|| 0.1||+0.1|
|Annual % chg.|| 0.3|| 0.8|| 0.8|| 0.9|| 0.8|| 0.9|| 0.7|
|STAINLESS STEEL||Monthly % chg.||+1.7|| 0.3|| 0.9|| 0.6|| 0.9|| 1.6||+0.4|
|Annual % chg.||16.2||14.6||14.6||14.4||12.7||11.9|| 9.0|
Source: Bureau of Labor Statistics
ENR'S 20-CITY AVERAGE FIRST QUARTER PRICES
|ALUMINUM SHEET||135.09||149.68||146.80||141.18|| 3.8|
|ASPHALT, AC-20||116.49||143.15||154.17||142.76|| 7.4|
|CONCRETE BLOCK, 8" X 8" X 16"||101.92||106.33||108.57||110.67||+1.9|
|CONCRETE READY MIX 5,000 psi||70.56||71.76||75.18||79.43||+5.7|
|CRUSHED STONE, base course||6.51||6.94||7.09||7.83||+10.5|
|COPPER PIPE, 1/2"||0.63||0.68||0.68||0.76||+11.6|
|CORRUGATED STEEL PIPE, 60"||49.97||50.56||50.75||46.37|| 8.6|
|DUCTILE IRON PIPE, 8 "||9.46||10.32||11.19||11.47||+2.5|
|GYPSUM BOARD, 1/2"||185.35||236.25||206.58||196.61|| 4.8|
|LUMBER, common||510.30||532.46||474.10||429.94|| 9.3|
|PARTICLE BOARD, 5/8"||297.48||325.21||325.42||334.25||+2.7|
|PORTLAND CEMENT, type one||78.06||80.38||80.63||81.89||+1.6|
|PLYFORM 3/4" thick||835.63||896.69||872.60||821.82|| 5.8|
|PLYWOOD, 5/8" thick||515.50||521.90||496.63||482.41|| 2.9|
|PVC, sewer 8"||2.31||2.94||2.72||2.64|| 2.9|
|water, 12"||9.23||11.76||11.54||11.27|| 2.4|
|REINFORCING BARS, grade-60||25.49||26.50||24.60||23.96|| 2.6|
|REINFORCED CONCRETE PIPE, 24"||18.54||18.94||19.20||19.40||+1.0|
|STAINLESS STEEL PLATE 5/8" 304,1/4"||126.78||137.39||134.32||122.76|| 8.7|
|STAINLESS STEEL SHEET, 16-gauge||121.37||137.54||125.78||113.03||10.1|
|STRUCTURAL STEEL SHAPES, average||27.13||28.10||26.57||27.00||+1.6|
Source: ENR Construction Economics Dept. Percent change is March 2002 versus March 2001. Price quotes are per ton for asphalt and aggregates, msf for plywood and gypsum board, ft for pipe and cwt for steel, rebar and metal products.