Two years of relentless materials price escalation has pushed construction costs into new territory. Contractors and owners are dealing with the reality of a permanently higher cost structure, especially for steel, concrete and petroleum-based products. Materials with a high-end use in the residential market, such as lumber and plywood, may get some price relief later in the year with the expected slowdown in housing. But this will be countered by higher energy costs that will prop up a broad range of prices and a weak dollar that is cutting off cheap imports.

“We are really looking for this year to be a mirror image of last year,” says Karl Almstead, vice president with Turner Construction who is responsible for putting together the Turner cost index. He forecasts escalation in 2006 to be between 8 and 10% after increasing 9.7% last year. “Everything is continuing to escalate but just not at the crazy rates of the past few years,” he adds.

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Costs are running “absolutely” higher in California and Florida than the rest of the country, says Almstead. He expects construction costs to increase at least 15% this year in California. “Then you get into Florida and costs are just insane.”

“High prices are bad but uncertainty is worse,” says John Anton, steel analyst for the Washington, D.C.-based forecasting firm Global Insight. “While we still have high prices, we no longer have the massive volatility. People are adapting,” he says.

Steel prices, which kicked off the new wave of inflation with a 40%-plus price hike during the first quarter of 2004, have been “moving sideways” ever since, says Anton. He predicts that prices for structural steel will peak at $595 per ton during the first quarter and then ease back to $531 by the fourth quarter of 2006. That is far higher than the $301 recorded in the first quarter of 2003.

“If the dollar was as strong as it was three years ago, imports would be much higher,” says Anton. “Right now, the  steel market is only importing enough to meet immediate needs but not enough to drive out domestic product.”

The energy-intensive copper industry also is grappling with higher energy costs. In February 2006, the copper price on the London Metals Exchange was up 53% from a year earlier. That follows an 18% increase the previous year (see p. 31). This is leading to higher prices for copper water tubing, electrical wire and engines. “Anything with a motor in it is being hit hard by copper prices,” says Don L. Short, president of the estimating firm Tempest Co., Omaha. In general, Short says he “just does not see price decreases happening.”

“The fear of energy prices is in the back of everybody’s mind,” says Turner’s Almstead. “Throw that into the mix when trying to determine how to price things.”

For example, the benchmark West Texas Intermediate crude oil price averaged 36% higher last year, following a 33% increase in 2004 and a 19% increase in 2003. Global Insight predicts that prices will increase another 9% this year  with WTI averaging around $62 a barrel.

Higher energy prices are working their way into many construction products, most notably asphalt paving and PVC pipe. ENR’s 20-city average price for paving asphalt and the Bureau of Labor Statistics producer price index for asphalt paving mixture are both up 15% for the year. PVC pipe prices are up between 25% for 12-in. water pipe and 39% for 4-in. sewer pipe, according to ENR’s 20-city average prices.

“During the second half of 2005, hurricanes in the Gulf of Mexico severely disrupted supplies of ethylene and natural gas,” says Michele Halickman, construction materials analyst for Global Insight. “But since then, a lot of capacity has come back on line, taking pressure off some key ingredients. I don’t expect to see the cost pressure on PVC pipe that we had over the past six months.”

On the other hand, Halickman does not expect prices to fall more than a few percentage points by the end of the year. Global Insight predicts that prices for polyvinyl chloride resins will average 12% higher this year, after climbing 20% in 2005 and 25% in 2004.

Halickman believes that higher raw material costs will be somewhat muted by falling demand for materials in the housing market, where starts are expected to decline 8.2% in 2006 to 1.9 million units. “We don’t expect to see any significant declines in any material prices, but the markets will be more balanced and we won’t see the strong increase that we have had,” she says.

The anticipated slowdown in housing during the second half of the year also should help ease upward pressure on cement prices. The Global Insight forecast calls for cement prices to increase another 1.9% in the second quarter, following this quarter’s 3.8% gain. After that, prices will slip 0.5% in the third quarter and another 1% in the fourth quarter of the year. Prices by year-end will still be 26% higher than the beginning of 2004, which was just before they started their long climb.

The agreement this quarter between the U.S. and Mexico on imports of Mexican cement will have a very limited impact on prices, Halickman says. “It will marginally improve supply in Florida, the Gulf Coast and the Southwest, where the market has been the tightest. But there will still be a cap on the amount of Mexican cement that can be imported.”

The slowdown in housing will have a greater impact on wallboard, lumber and plywood prices. The supply situation in wallboard is promising. More capacity coming on line, which will lead to strong declines for wallboard prices, says Halickman. She expects wallboard prices to slip in each of the remaining quarters of 2006. But once again, year-end prices will be 37% higher than the fourth quarter of 2003.

Capacity expansion in the lumber and plywood sectors already is starting to chip away at prices, even with residential construction in January running 6.3% ahead of 2005’s opening month, according to seasonally adjusted annual data published by the U.S. Commerce Dept.

After years of strong demand and profitable price levels, “mills ramped up capacity to feed an annual market of two million new housing units,” says Shawn Church, editor of Random Lengths, a Eugene, Ore.-based publication specializing in lumber and plywood prices. “The evidence is pretty clear that we have some slowing in the housing market. Certainly, two million units is not there right now,” he adds.

Random Lengths composite mill price for framing lumber in February was $379 per thousand board ft, or 10% below 2005’s level. But prices have just fallen back to 2004 levels and still are 26% above February 2003.

The story is the same for plywood and other structural panel prices. Random Lengths composite structural panel prices have fallen from record levels set in 2004. But even with a two year decline, prices still are 41% above 2003.

(Photo above by Michael Goodman for ENR)