Growing Pains

Strong economic growth is likely to keep many construction materials’ inventories tight and prices high in the near future, according to Jason Schenker, Chief Economist, Wachovia, who participated in an audio conference on construction materials costs presented by the Associated General Contractors of America (AGC) on June 7.

Schenker said market analysts are seeing indicators of strong growth in U.S. GDP and worldwide GDP. “What does this mean?” he asked. “In the near term, it means greater upside risks for commodity markets, especially markets with tight inventories,” like metal markets.

Nickel stainless is among materials commanding the highest prices on the market today, said Bob Garino, Economist, Institute of Scrap Recycling Industries (ISRI), who also participated on the panel. “Nickel is the one market that has outperformed all other LME metals,” Garino said. “Stainless production continues to set the pace, and U.S. mills continue to struggle with high prices and soft orders.”

He added that prices are so high that consumers are looking for substitutes for nickel-containing stainless. “People looking to alternatives, and once consumers get used to that and find performance is good enough, it’s going to be tough for the market to switch back,” he said.

Global steel markets, paced by Chinese production, are supplying plenty of steel, Garino said. “Last year, more than 1.3 billion short tons were produced globally,” he said. “This year global production is expected to increase by 5 percent or more, another 70 million tons looking for homes.” Overall market sentiment has cooled regarding finished steel demand for flat rolled products and scrap prices response, and market analysts have developed a more conservative third quarter outlook, according to Garino. “Summer could be soft,” he said. “The steel industry is experiencing a “’soft patch.’”

Asphalt prices, which are tied to the price of crude oil, will also remain high by historic standards for the near future, added Ken Simonson, chief economist for the AGC.

On the other end of the pricing spectrum, the market for gypsum, used widely in both home construction and non-residential buildings, is likely to remain very weak. Prices have begun to fall and are likely to remain down, according to Simonson, based on the lagging construction market in the U.S.

Schenker added that PVC and other products tied to oil and natural gas are also likely to experience climbing, if not surging, prices. “As long as oil remains high and long as natural gas prices trend upward, it’s hard to imagine significant price alleviation on PVC,” he said. “PVC prices are driven by natural gas, and there is some softening in demand from residential demand, but there is much non-residential and non construction demand so we’ll continue to see high prices.” 

Given the economic outlook, the analysts agreed that markets for many materials will remain tight, leading to higher prices. “These markets are about supply and demand,” said Garino. “Supply is tight growth continues and that means risks are to the upside. There are some very expensive raw materials out there.”

More information is available at www.agc.org.