Wednesday, April 28, 2010

Rising Construction Costs

According to Ken Simonson, chief economist at The Associated General Contractors of America, as residents in Louisiana, Mississippi and Alabama struggle to put their lives back together in the wake of Hurricane Katrina, the looming reconstruction efforts spell higher construction costs for the entire country.* As victims begin to rebuild, construction companies are expecting to see an impact on the cost and availability of building materials. Construction sites from Rhode Island to Hawaii will have to scramble as supplies are diverted for hurricane repairs.

In response to supply constraints and worldwide demand – especially from developing countries, such as India and China – the costs for framing, lumber, steel and cement have gone up over the past year. According to Keith Schwer, director of the UNLV Center for Business and Economic Research, an event, such as a hurricane, that would further stretch those resources is bound to have an impact on the availability and cost of certain construction materials.**

Simonson agrees. “Cement was already in short supply in 32 states and the District of Columbia last month. This disruption to ocean, barge and rail transportation from Katrina, and the loss of power to cement plants in the storm’s path, will cut further into cement supplies.” ***

Katrina caused more damage than most other hurricanes, because of the flooding. Homes that have been soaked and ruined are going to need millions of sheets of plywood, gypsum board and roofing materials.

Lumber mills in Louisiana, Mississippi and Alabama that mill southern yellow pine, used for plywood, have reported production disruptions. Some of the mills have sustained damage, while others are intact but not producing due to power outages. And lumber, like all commodities, is priced based on supply and demand. If a natural disaster disrupts the supply, it can lead to shortages that push up the price.

According to David Beattie, who manages inventory for West Kingston lumberyard in Rhode Island, the price of plywood has already gone up about 5 percent, from $280 to $300 per 1,000 board feet.****

So what can the average consumer expect? According to a special report put out by Reed Construction Data entitled Hurricane Katrina Implications for Construction*****, initial demand will be for the materials, equipment and specialized labor that’s used in the clean up and the reopening of utilities, bridges, roadways, etc. Look for a rise in costs for the use of construction equipment and operators, and specialized utility equipment and tradesmen, especially in areas near the Gulf.

After a few weeks, demand will jump for materials like plywood and roofing, which is used to make buildings more secure. The major work of rebuilding New Orleans won’t begin until some time around the end of the year, depending on how fast the water recedes and when contractors are allowed into the city. This phase in the rebuilding efforts will start in earnest early next year – and continue on for several more years – producing rising cost pressures for all materials, equipment and labor, especially concrete and steel.

Luckily, Hurricane Katrina hit when the plywood, panel and roofing markets had reasonably steady prices and adequate supplies, so the effects on the national supply from added demand in the Gulf Region should be small and short-term.

However, the concrete, construction equipment and metals markets are much tighter. Even though steel prices have dropped this past year, the excess inventory that caused this is largely exhausted. Katrina’s impact on the price of these materials will be more significant and longer lasting.

*The Associated General Contractors of America – Construction News - Accessed 09/12/05.

**LV likely to see shortage of materials as Gulf rebuilds, by Jennifer Shubinski, Las Vegas Sun, September 01, 2005, Accessed 09/12/05.

***The Associated General Contractors of America.

****Ripple effect feared – R.I. businesses worry that disruptions in lumber and oil production will drive up construction and other costs, by Lynn Arditi, The Providence Journal, Thursday, September 1, 2005, Accessed 09/12/05.

*****Reed Construction Data, Special Report, Hurricane Katrina Implications for Construction, September 6, 2005

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