The U.S. Bureau of Labor Statistics recorded a 4.8% rise in material cost over the past year. In an uncertain market, contractors and suppliers alike are concerned about the rising cost of building materials. Fluctuating supply and demand, market uncertainties and rising energy prices all compound the concerns of those in the construction industry. The rising cost of materials and supplies is a multi-faceted problem.
Supply and Demand
The 4.8% rise in costs between 2016 and 2017 comes on the tail end of a pricing decline. Between 2014 and 2015, prices fell by 3.5% and further decreased by 2.7% between 2015 and 2016. This dip in cost led to an increase in building activity, which increased the demand for materials. Any time demand rises, the supply falls, which prompts suppliers to drive prices up.
Supply and demand isn’t always a textbook concept. When applied to the real world, you also have to factor in sales tactics and human psychology. When talk of rising prices or uncertainty occurs, sales representatives may use that to their advantage to persuade contractors and companies to take advantage of lower prices. When it works, the demand increases, the supply decreases and prices rise, turning idle talk and uncertainty into a self-fulfilling prophecy.
Energy Price Increases
Supply and demand and the sales tactics that use it aren’t the only factors leading to increased material prices. The cost of energy also plays a part in raising the cost of doing business. When energy prices increase, the cost of manufacturing the materials increases, as does the cost of transporting them to suppliers and buyers.
According to the U.S. Energy Information Association, electricity generation from utility-scale plants is expected to fall by 0.7% in 2017, with natural gas generation costs to fall an estimated 2%. Shares in non-hydro power, nuclear power and coal are also in flux. The price of coal is expected by the EIA to increase in 2017 and 2018.
The Global Economy
Rising material costs can also be attributed to a more stable global market. As other countries find their footing in the materials and commodities industry, their pricing levels out. But a more stable global market isn’t the only foreign factor in play when looking at the rising cost of doing business.
The U.S. Steel Manufacturers successfully protested in 2015 and 2016 to impose higher tariffs on foreign steel. While the new tariffs are a boon for U.S. steel manufacturers, it means potentially higher costs for contractors who utilize the domestic supply market or the now more-costly foreign sector.
Lumber prices are also in flux due to bilateral trade uncertainty with Canada, the country’s largest softwood supplier. Because of the dispute, the National Association of Home Builders noted the biggest price increase in raw materials since 2003.
Domestic politics also play a part, with election years bringing further uncertainty to foreign relations and trade agreements. With the 2016 election over and the focus shifted toward limiting imports and increasing domestic materials production, contractors can expect to see a materials price increase commensurate with paying U.S. workers higher wages to produce steel and lumber.
The cost of building materials is expected to rise for at least 2017 and 2018. Supply and demand, market uncertainties and a changing global market all contribute to the problem, as does an increase in energy prices. The high cost of doing business for contractors is a multi-faceted issue with many factors and no easy solution.