Cement, oil, and natural gas drive construction materials inflation

Lumber and steel have given way to cement, oil, and natural gas as the key drivers of construction materials inflation. There is still a small risk of renewed lumber and steel price surges through next year that would be initiated by a stronger than expected housing market for lumber or a stronger than expected world economy for steel.

Rising cement prices are currently the main contributor to materials inflation. Cement prices have increased about 1% a month recently with concrete product prices rising about 0.5% a month. World cement demand parallels world steel demand, but cement suppliers have been much more slow to respond to rising prices than steel suppliers. Another summer of rising prices and supply shortages should be expected throughout most of the country.

Oil prices get most of the headlines but have had a small direct impact on materials cost. Oil prices impact nonresidential construction largely through the diesel fuel needed to deliver materials and operate jobsite equipment. Diesel was $2.24 per gallon in early June, only a few cents below the peak 2005 price and up $0.50 from a year ago. The average price through next year is expected to be $2.20, but cold weather could push the price over $2.30 next winter.

Natural gas prices pose a major risk to materials inflation ahead. Plastic construction products are largely made from natural gas. Natural gas was $6 per 1,000 cubic feet in early June and is expected to increase to more than $7.00 by the end of next year.

Gas prices were steady for many years but have doubled in the last three years as a persistent surplus was absorbed by a shift to natural gas for electricity generation. As a result, petrochemical production has migrated to Asia and the Middle East, adding importing costs to plastic resins. Prices for plastic construction products are now rising at a 10% annual pace. This pace is likely to continue well into 2006.