Surging materials costs to ease

Nonresidential builders are reluctantly absorbing the sharply higher spot prices for engineered wood products and metals caused by the unexpectedly strong and long housing boom and the abrupt surge in U.S. and Chinese demand for raw materials late last year.

Some prices have doubled from the depressed price levels that existed a year earlier, with the biggest increases occurring February through April. At press time, recent market reports suggested that prices could peak in April. But prices will remain above bid assumptions for many months. Steel and nonferrous metals prices will experience a quick price decline (there is a surplus of worldwide capacity). Wood product prices will decline more slowly, especially plywood and OSB panels, because there is very little reserve capacity. Mill operators are reluctant to open closed plywood mills or build new OSB mills in the face of the consensus outlook for declining housing starts.

The construction materials price index reflects the winter price surge through February. Expect further sizable rises through April or May, a few months of decline, and then a 1.5-2% inflation pace through 2005.