Construction materials carry higher price tags

Some key construction materials have seen some wicked price hikes in early 2004. Most notably, oriented-strand board (OSB), the structural wood panels that have been replacing more expensive plywood products, saw prices soar 47% from January to February 2004. The causes for price hikes like that have been due to the long-running hot housing market and increased demand from the U.S. military for building supplies needed in Iraq and Afghanistan, coupled with tight capacity among the five major players in the North American OSB market.

Our existing construction supplies price and cost indices do not include OSB. That will be corrected in the next version of our special index data. Without OSB prices, our aggregate construction supplies price index increased just 1.9% in 2003 while the commensurate cost index grew 2.4%.

Spikes in demand and short supplies can have a large impact on prices. But to understand the long-run trend, underlying cost trends are critical, too. Plus when we look at cost trends relative to price trends, we also get insights into the price changes that will bring margins back to sustainable levels.

For example, look at the brethren to OSB, the softwood plywood industry. Average product prices increased 19.8% in 2003. From January to February 2004, prices soared again by 21.8%. Yet, we are forecasting only a 5% overall price hike in 2004. The fact that domestic materials costs as well as labor costs are under control is part of the reason. The other factor can be found in our unique price target analysis. As of December 2003, in order to restore inflation-adjusted margins to 5-yr average levels, we calculate that plywood prices have room to fall 17.2%. It will be interesting to see the price targets for reconstituted wood products like OSB.