Building Material Shortages

Delays, slowdowns notwithstanding Count on facing big shortages of building materials
By Alan J. Heavens
Inquirer Real Estate Writer
Posted on Sun, Feb. 26, 2006

Neither a slowing residential-construction market nor lengthy delays in reconstruction of the areas affected by Hurricane Katrina seem likely to help prevent shortages of some building materials and the resulting increases in their prices, many builders and industry analysts say.

A warmer-than-normal January, combined with lower-than-expected interest rates, already has added to supply problems by fostering unexpectedly vigorous building activity.

That was especially true in the Northeastern section of the country, which saw an increase of almost 30 percent in new-home and apartment construction this year over January 2005.

"The surge in housing starts was mainly weather-related," said David Seiders, National Association of Home Builders' chief economist. "Market fundamentals suggest that this pace of activity will be hard to sustain, and NAHB's survey of single-family builders points toward some cooling down in coming months, largely because of eroding affordability conditions."

Builders are understandably happy about the weather, but materials suppliers don't universally share the joy.

"Cement producers take advantage of the cold weather to build up inventories for the spring construction season," said Ed Sullivan, Philadelphia-based chief economist for the Portland Cement Association. "With the weather being so warm, inventories aren't rebuilding, so there's a potential for shortages this year."

Last year, national construction activity - residential, commercial and public - consumed 120 million tons of cement. About 19 tons of cement are used to build the typical 2,300-square-foot, single-family house, statistics from the home-builders' group show.

For the last couple of years, cement supplies have been tight in 30 states during peak building season, Sullivan said. Right now, 15 states are short of the product. There is no shortage in South Jersey, and Philadelphia has an adequate supply, but Western Pennsylvania does not, he said.

Some economists are suggesting that the anticipated decline in residential-construction activity will ease supply problems, but Sullivan doesn't buy it.
"There is emerging strength in the nonresidential segment, and since 50 percent of our demand is public-sector, that will increase as the public picture improves," he said.

The cement industry is increasing capacity slowly, with 14.5 million new tons, or a 15 percent expansion, due by 2010.

"There will be no immediate relief," he said.

Gulf Coast reconstruction will not be a factor until the second half of 2006, if then, because cleanup of devastated areas is nowhere near complete - nor are estimates of damage or decisions on who will foot the bill to rebuild.

A Mortgage Bankers Association study of New Orleans estimates the cost of repairing the flood damage to single-family structures at between $8 billion and $10 billion.
Pre-Katrina market values of those properties totaled between $17 billion and $18 billion. Flood insurance is expected to cover somewhere between $4 billion and $5 billion, leaving anywhere from $3 billion to $6 billion in uninsured losses, the study shows.

Rising energy prices are contributing to the run-up in the cost of materials.
The Labor Department's Producer Price Index for January showed a 1 percent increase in construction-material prices over December, most of which could be attributed to a 1.9 percent jump in concrete prices.

Price indexes rose for a variety of construction materials and components, including those for softwood lumber used in framing, wiring devices, asphalt felt and coatings used in roofing and road construction, and treated wood and mineral wool used in insulation.

Insulation consumption was up 33 percent in 2005 over 2004 because of efforts by consumers to tighten their houses to reduce energy costs. Builders have reported three price increases since August, although manufacturers declined to confirm that. The last price boost, in late October, was between 8 percent and 10 percent, builders said.

At the end of November, the Philadelphia Federal Reserve reported that the region's builders had experienced shortages of roofing materials and drywall, both of which require significant amounts of energy to manufacture.

"The really serious impacts are with those products where there are materials made with oil and gas," said Michael Carliner, an economist with the home-builders' association.

In U.S. Gypsum's fourth-quarter 2005 report, chief executive officer William Foote listed the pressures affecting the company's wallboard operations. USG's plants ran at close to capacity in 2005, "even as the company added production capacity at some high-speed plants," Foote said.

Wallboard shipments were 11.3 billion square feet in 2005, 3 percent higher than in 2004.

To compensate for higher energy, freight and raw-material costs, U.S. Gypsum raised its prices 18 percent in the fourth quarter over the same period a year ago, to $155.38 per thousand square feet, Foote said.

Clearly, materials shortages and rising prices could mean higher costs for new homes and remodeling projects.

"Drywall is just one thing that is going up," said Jay Cipriani, owner of Cipriani Builders, a Woodbury remodeling firm. "Almost every day, we get faxes from our suppliers about price increases - roofing, siding, PVC. Anything petroleum-based is getting more expensive.

"We just show [the faxes] to the customers and tell them they might as well make a decision now because it isn't going to get any less expensive," Cipriani said. "We try to get them locked into prices as soon as we can, but we've added a clause that if the price of any material increases more than 15 percent, we have the right to increase the job cost."

Developer Carl Dranoff's projects, Symphony House in Center City and Venice Lofts in Manayunk, are consuming huge amounts of concrete and steel.

"It's dog-eat-dog for these things, so we committed to these materials with our suppliers more than a year ago to guarantee timely delivery when we needed them," Dranoff said.

Steel for Symphony House, purchased and paid for well in advance, is being fabricated now and stored until it is needed, he said.

"Any shortfall can hamstring operations, and with labor costs as high as they are already, that could really push costs higher," Dranoff said. "By ordering and paying for materials well in advance, we won't have to keep raising sale prices for our units to compensate for high materials prices."

Although softwood prices increased last month, lumber and panel prices remained below last year's levels, according to Random Lengths, a Eugene, Ore., firm that tracks framing lumber and panel prices.

Many builders apparently are waiting to order lumber, hoping that companies will drop prices or that competition among mills will produce the same result.

Some builders are pushing for a drop in tariffs on Canadian softwood to brake increases in U.S. lumber prices. Florida builder Barry Rutenberg told a Senate committee Feb. 14 that "restrictions on Canadian lumber do little or nothing to increase the use of U.S.-produced lumber in home construction, because the vast majority of the domestic timber supply is unsuitable for framing walls in homes."

"I would not use Southern yellow pine for framing walls in the homes I build, even if it costs half as much as Canadian spruce-pine-fir," Rutenberg said. Reducing duties on Mexican cement to increase imports won't necessarily ease shortages of that commodity, Sullivan said.

"Most of those imports will be used in Arizona, Nevada, California and Texas," he said. "Only 125,000 tons will find its way to the rest of the country."