Juggling Act

Juggling Act

By David R. Corder

Associate Editor

Beginning in January 2004, Sarasota commercial builder David Sessions witnessed a disturbing trend. Critical construction materials such as concrete and steel became scarce. Price increases ensued.

"Last year we had, perhaps, the biggest spike in terms of raw materials cost that we ever had," says the president of Willis A. Smith Construction Inc.

U.S. steel prices, a critical component in Smith Construction's commercial projects, increased at an average 44% over the 12 months ended Dec. 31, the federal producer-price index (PPI) shows. Gypsum prices, the principal ingredient in wallboard, climbed an average 23% over the 365 days. Ready-mixed concrete prices jumped an average 6.7% over the same time period.

"Price increases were hitting us every month," Sessions recalls.

This year, prices appear much more stable than a year ago. Some construction industry officials, such as Butler Manufacturing Co.'s Larry Klempnauer, think that bodes well for the remainder of the year.

"Steel seems to have stabilized over the past four months," says Klempnauer, the Sarasota-based senior area manager for the maker of pre-engineered steel buildings. "I haven't heard anything about new price increases. Sometimes I'll hear a month or so in advance, but, of course, I said the same thing last January."

Steel prices grew by about 2.1% from December last year to January this year, the PPI shows. Gypsum prices jumped by about 1.5% over the 30-day period. Ready-mixed concrete prices increased by about 3.1% over the same time period.

Several reasons account for the continued increase in construction material costs, says Ed Sullivan, the Portland Cement Association's chief economist. For one, he cites ongoing residential demand. Overseas demand, particularly in China, accounts for another large part of the increase.

For instance, Sullivan says, residential construction accounts for almost 44% of the Florida's concrete use. There's no sign of weakness, he says, with an estimated 350,000 new residents moving to the state each year. "It's absolutely huge."

Unfortunately, Sullivan says, Florida concrete producers rely heavily on imports to meet demand in excess of domestic capacity. Imports account for about 38% of the state's concrete supply. So this reliance on imports became a problem last year when the Chinese building industry willingly paid whatever it took to gain as much construction materials as possible.

"If there is a hitch with imports, then Florida has a tremendous problem," Sullivan says.

Acting on China's demand, Sullivan says, ocean shippers raised freight rates by about 240%. That's largely because the number of dry bulk freighters, which transport products such as concrete, remains about at same level as in 1985.

There is some good news, however, Sullivan says. "Freight rates have declined, and they've turned around a little," he says.

The impact on the local supply-demand curve has turned construction executives such as Pat Cook of Sarasota's Pat Cook Construction into jugglers.

"It makes it harder to perform," Cook says. "Owners don't' want to hear that we can't get materials. So it's a juggling act."

To compensate for the lack of materials, Cook and Sessions each say they spend more time scheduling projects than at any time in the past.

"It's created a whole other layer of scheduling challenges for about every project," Sessions says. "You no longer assume, like we used to be able to, that the materials are available just by picking up the phone and placing an order for what you want in a matter of days."

This is especially true with concrete supplies, the two executives say.

"It used to be you could call a concrete company 48 hours in advance and set something up, and they could accommodate you," Sessions says. "Now we're scheduling two to three weeks in advance."

To offset possible shortages, some construction companies have resorted to advance stockpiling of materials anticipated.

"In some cases, we ordered stockpiles and paid for materials months in advance of when we needed them," Sessions says. "We did more so last year, in particular the first and second quarters. Now our procurement process is to get everything in order when we have an executed contract with an owner."

To an extent, Sessions says, site owners shared the cost of the unanticipated price increases. That's not true in every case, especially for manufacturers such as Butler Manufacturing.

At any given time, Klempnauer says, the company has almost $150 million of backlogged sales of pre-engineered steel buildings. In many instances, contracts forced the manufacturer to absorb cost increases.

"How can Butler pass it on to Dave Sessions who has a customer like the school board?" Klempnauer says. "We try to go back to the customer, within reason, on some of it to pass it on. Some we couldn't."

Despite this juggling act, Sessions says few in the industry can anticipate where the next materials shortage may occur. That's the case with the rigid insulation his firm installs under the roofing membrane.

"That one has just started to become a concern," he says. "Our roofing subcontractors are warning they need three or more months lead time just to get the products. Three months ago, it wasn't even an issue."