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.
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.
|Major Components of Manufacturing Costs Annual % Change in 2003||Average Product Prices Annual % Change|
|Industry||SIC||Domestic materials||Imported materials||Production labor||Energy||2003||Forecast 2004|
|1 Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
2 Analyses of each industry’s direct manufacturing cost changes are from Thinking Cap Solutions, Inc.’s proprietary Industry Cost Escalation (ICE) model. The “grade” indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3 Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry’s products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: firstname.lastname@example.org).
|General Sawmills and Planing Mills||2421||0.43||3.94||1.86||9.49||7.7||2.0|
|Hardwood Veneer and Plywood||2435||4.09||14.06||4.89||9.17||-2.1||0.1|
|Softwood Veneer and Plywood||2436||3.62||13.81||1.89||9.89||19.8||5.0|
|Metal Partitions and Fixtures||2542||3.02||5.65||1.22||11.56||1.1||0.8|
|Paints and Allied Products||2851||4.87||3.26||1.20||11.85||2.9||1.1|
|Other Structural Clay Products||3259||3.07||2.94||2.98||17.41||2.4||1.6|
|Steel Pipe and Tubes||3317||3.62||5.09||3.22||11.35||4.8||-1.2|
|Plumbing Fittings and Brass Goods||3432||1.64||4.13||4.00||11.89||0.6||0.8|
|Metal Doors, Sash and Trim||3442||1.45||3.11||3.32||10.89||1.0||1.3|
|Sheet Metal Work||3444||2.11||4.26||2.05||11.88||0.7||0.6|
|Refrigeration and Heating Equipment||3585||0.98||1.50||3.70||9.12||0.3||0.9|
|Current-Carrying Wiring Devices||3643||2.82||2.19||2.68||7.04||-1.2||0.3|
|Noncurrent-Carrying Wiring Devices||3644||2.69||2.19||2.75||8.84||0.3||1.4|
|Commercial Lighting Fixtures||3646||1.49||0.73||1.78||13.17||2.1||1.2|