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Building costs nearly double

Posted: Tuesday, June 08, 2004

Lumber and plywood prices have nearly doubled since hitting seasonal lows last fall, the increase in the cost of many steel products has reached double digits, and the prices on finished products are rising as well, say Alaska building materials suppliers.

To the residential contractor, that means higher costs increases they pass on to home buyers who have watched the cost of a typical $150,000 to $175,000 home jump $5,000 to $7,000 over the last year.

Basic economic principles are at work here, say suppliers, but exactly why demand is outstripping supply and driving prices through the roof appears to have many causes.

Depending upon with whom one talks, demand is up because potential home builders are taking advantage of low interest rates that experts say are soon to climb; because natural disasters such as wildfires in California, tornados in the Plains states and hurricanes in the Southeast are putting pressure on manufacturers; because droughts are limiting when forests may be harvested; and even because military purchases are channeling building materials to Iraq.

"The building industry over the whole country is seeing a significant boom," said Bruce Turkington, manager of Spenard Builders Supply in Homer.

A typical sheet of 1/2-inch construction grade plywood has risen from a low of $16 to as high as $27, while an equivalent sheet of OSB (Oriented Strand Board), a plywood-like product composed of wood chips glued together into sheets, has jumped from $10 a sheet to $23 a sheet since late last year, Turkington said.

"It is slowly falling again, but it was a huge spike in pricing," he said.

Meanwhile, steel products, which usually show only small annual inflation rates and often may hold steady for a year or more, as well as other products, are seeing double-digit inflation, Turkington added.

"We usually see 1-percent to 2-percent increases on steel, cabinets, carpets, insulation, Sheetrock. Now we're seeing anywhere from 12 percent to 30 percent on those products," he said.

The cost of rebar (steel rods used to strengthen concrete) has doubled. Manufactured roofing has gone up 20 percent to 25 percent, he said.

Rising prices are being felt countrywide. For instance, the Houston Chronicle in May reported near record plywood prices, a doubling of the cost of a box of steel nails and substantial increases in the cost of cement.

Some speculate that the war in Iraq is a contributing factor because of military purchases last year. According to a summary of comments by business leaders appearing in the 2003 Beige Book, a publication produced for the Federal Reserve Bank of New York, "Demand for lumber and particleboard has increased, reflecting a surge in demand for projects in Iraq and continued strength in housing markets."

A Sept. 17, 2003, article in the New York Daily News reported residents in the path of Hurricane Isabel last fall were paying twice the usual cost for plywood sheeting needed to cover and protect windows. At the time, the story said, "the government was shipping some 660,000 sheets of the stuff to Iraq."

The sheeting some 21 million square feet was being used primarily by the military itself for things like tent flooring, bunkers and guard towers and other "force protection," the story reported.

The newspaper went on to say that large retail chains, such as Home Depot, had ample stocks and enjoyed prices protected by long-term contracts. Smaller individual retailers, however, were running out of inventory.

Lumber industry watchers, however, say the $13 million purchase amounted to but a tiny fraction of the 16 billion square feet of plywood produced annually in the United States.

"As far as the Iraq angle goes, I would emphatically say that that is more urban legend than reality," said Sean Church, editor of Random Lengths, an Oregon-based publication that follows the forest-products industry.

"The only reality is that the military stepped in with a small purchase when the market was on the way up to record highs. It helped give the market a bit of a boost at that time. The volume compared to the total North American production was not even a hundredth of 1 percent."

The timing, however, was significant, Church acknowledged.

According to the New York Daily News article, higher prices quickly followed reports the military was buying plywood, leading suppliers, contractors and homeowners to believe those rising costs were directly attributable to rebuilding in Iraq. If the perception has lingered, the actual market demand spike caused by the military purchase was short lived.

The fact is, military purchases (of plywood) for Iraq have been nonexistent in the 2004 market, Church said.

So what is driving the price increases?

"We're hearing from local builders about costs," Church said. "But their demand is the cause of it. There's a demand for homes."

Indeed, across the country homes are being built at one of the highest rates in history, he said, and single-family housing is a huge component of the growth. Church said the current boom is akin to that of the early 1970s.

Disasters like tornados and hurricanes, he said, actually produce no noticeable effects on the plywood market, except perhaps locally when there may be a run on sheeting for window protection.

Demand caused by rebuilding efforts in the wake of a storm often is influenced by the pace of insurance settlements, which don't always result in building demand at one time, but rather spread it out over a broader timeframe, he said.

Forest fire season can and has had effects on the wood products market, Church said.

"Last year it was pronounced," he said, noting closure of woods in western Canada as well as in the U.S. northwest.

Also contributing is a shipping problem caused by the high demand. Railroads have been unable to get commodities to market due to cutbacks in personnel and underestimates by rail officials of the industry's ability to respond to a strengthening economy, Church said.

He also blamed new federal regulations limiting the number of hours truck drivers may sit behind the wheel in a 24-hour period, which, he said, have caused some truckers to get out of the business.

Also affecting market prices for wood products is the rising cost of gasoline and diesel fuel, he said.

The effects of higher prices whatever the real causes are being felt across Alaska, according to suppliers and consumers.

Gary Reger is purchasing manager for Builders Bargains Inc., which has a store in Soldotna.

"Certain products have been affected," he said. "Nationwide, steel market prices have gone up tremendously. Supply is sparse." The same is true of forest products, he said.

Reger attributed some of the cause to overseas demand, as well as the rising costs of freight and fuel.

High world oil prices, too, have had an impact, because "so many things are made out of petrochemical products," he said.

Locally, demand is putting pressure on supply. He noted 1,400 to 1,600 new housing starts in the Matanuska Valley area and defense projects near Fairbanks.

"It's going to be a wild construction year," he said, adding that in such times, market fluctuations "get magnified."

George O'Quinn, owner of Hapco Construction in Soldotna, said the new-home market is strong, driven by low interest rates and low inventory on the real estate market.

"We have experienced across-the-board increases from our subs on average this year of 10 percent to 15 percent," he said.

Will Bolz, branch manager of Alaska Steel Co. in Kenai, said China's economy is the real driving force in the steel market. China has been buying up scrap steel in the United States and paying premium dollar for it. The steel China produces with it is being used domestically, not re-shipped out to the world market, he said.

American mills also depend on scrap metal in producing new steel. The Chinese factor has caused a shortage.

American mills have begun adding a surcharge for new steel that has added $1 to $2 per 100 pounds, Bolz said. In March, he said, the surcharge hit as high as $4.

Bolz also said a drop in steel prices expected following a move in December by the Bush administration removing a trade tariff on steel never materialized.

"The opposite happened," Bolz said.

Higher fuel costs also are keeping steel prices from coming back down, he said. Meanwhile, a weak U.S. dollar isn't buying the tonnage it once did, Bolz noted.



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