Those who theorize that paralyzed demand for new homes will translate soon into lower prices for building materials had better think twice before they budget in cost savings.
That was the consensus among a panel of economists who recently gathered to discuss materials prices at a summit sponsored by The Associated General Contractors of America (AGC).
"I do expect materials prices to continue to rise," roughly to the tune of 6 [percent] to 8 percent a year," says Ken Simonson, chief economist for the AGC. Wages, he predicts, will climb about 5 percent a year, all despite the residential slowdown.
Part of the reason is that the commercial construction industry has been picking up pace at the same time residential building has slowed, nearly making up the difference in demand. Also, many of the raw materials involved in home building aren't expected to get cheaper. Supply scarcity, as well as growing demand in other countries that continue to enjoy building booms, including the "BRIC" countries of Brazil, Russia, India, and China, should keep prices of many metals as well as cement high, they say.
In addition to Simonson, Bob Garino, economist for the Institute of Scrap Recycling Industries and Jason Schenker, a Wachovia economist who follows energy, including the oil industry and metals, participated in the teleconference.
There were two materials bright spots for residential builders in the teleconference. Prices for wood should remain somewhat down because it's not used as often in commercial construction and the residential market is down. Gypsum wallboard, too, should remain at moderate price levels, especially since new manufacturing plants are coming on line.
But, most other materials can be expected to keep escalating in cost, if not in the immediate short-run, certainly over the long haul.
Natural gas prices, for instance, are expected to start spiking because the clean-burning fuel is becoming more popular in the wake of stiffer environmental standards. That will impact the prices of materials that are created with the aid of natural gas-powered energy, including glass, metal, and plastics.
Metals, in general, are expected to continue to increase in price, particularly those, such as nickel and copper, which come from only a few spots in the world. Although copper, in the short term, might see some falling prices because there appears to be a bit of a glut on the market, nickel, which is used to make stainless steel, is in short supply. Copper, too, is likely to continue rising over time.
"The one thing about copper that amazes me," says Garino, "is we always underestimate the demand and always overestimate the supply. ? We don't know whether Mexico will go on strike. There's a potential strike in Peru, but there is trending toward a surplus in copper now."
One thing all three economists made clear is that the United States, although still a powerhouse user of raw materials, is getting some sizeable competition from countries that are having building booms. Nicknamed BRIC–Brazil, Russia, India, and China–are all on steep construction upswings whereas the United States will probably settle into a steady 3 percent to 4 percent yearly growth curve.
"Those economies may have been growing before, but they hadn't reached that point where they could really influence world markets," says Schenker. "Construction materials are on a long upward trend."