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May’s Construction Health Update with Anirban Basu

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As of Monday, May 1 our national Construction Health Indicator score is 80.80.

  • The strongest contributor is Investments 91.
  • The national Labor score is 82.
  • The National Commodities & Materials Indicator is 70.

If running a construction firm is about risk management, the one thing you need to learn today is that your biggest risk is commodities.

Historically, commodities and materials have always been the weakest health indicator for the construction industry, and for good reason. Of the three indicators, input prices are the closest tied to geopolitical events. Because of this, and despite strength in economic conditions that suggest input prices will remain steady for the next few months, prices can rapidly change.

I chatted with Anirban Basu, Procore’s Chief Economist, to hear his interpretation of what the commodities and materials market means for your business, your profit margins, and your future.

First, here are the performances of commodities and materials over the past twelve months

According to the Associated General Contractors of America, among the most widely used materials in construction, there were price increases over the past 12 months.

  • 19% increase for steel mill products.
  • 17% increase for copper and brass mill shapes.
  • 8.8% increase for aluminum mill shapes.
  • 7.6% increase for gypsum products such as wallboard and plaster.
  • 7.3% increase for lumber and plywood.
  • 35% increase in the price index for diesel fuel.

Association officials cited three types of proposals that caused this temporary increase in construction costs: an expansion of "Buy American" construction materials, tariffs on imported Chinese steel, and trade limitations on Canadian lumber.

For now, US steel prices seem to be fluctuation independent from international prices, as imports have been under control. However, unless the government puts a blanket tax on steel imports, there might not be a sustainable respite for US steelmakers; hurting steel consumers.

Similarly, U.S. Department of Commerce determined that Canadian lumber exports to the U.S. market are unfairly subsidized and as a result set an average tariff of 20 percent to offset these subsidies. The National Association of Homebuilders (NAHB), wrote in an open letter last week that this lumber tax could hurt builders, not buyers.

Despite these rises, Anirban Basu, Procore’s Chief Economist predicts that these increases won’t last.

These are the forces at work keeping input prices under control:

  • The producer price index slipped 0.1% last month to mark the first decline since August, the government said.
  • America’s gross domestic product (GDP), a broad measure of economic growth, grew at an annualized rate of just 0.7 percent
  • Household finances are in the best shape in years amid record stock market gains, a strong jobs market, and gradually rising wages.
  • China’s economy has shown more signs of cooling causing Chinese steel and iron ore futures to tumble to multi-month lows.
  • The Federal Reserve is on high alert for signs of quickening inflation, a course that could spur the central bank to lift U.S. interest rates more aggressively; portending a stronger dollar.

Assuming that no major geopolitical events erupt, these factors suggest prices for commodities and materials will remain favorable for sustained margins over the next several months.

How to Mitigate the risk of these uncertainties.

According to Anirban Basu, even through materials should remain stable, you have two challenges.

The first being that in the short term, increases in input prices are outpacing the fees that contractors are charging owners.

“Risk has been thrust upon general contractors since the recession,” says Mr. Basu. “Owners are unwilling to take the risk of materials fluctuations and feel that they shouldn’t have to in the first place. The idea that construction firms are lucky to have their business is a sentiment stuck in a post-recession mindset. But the markets are performing well enough now that larger companies have significant backlog, and a productive, albeit limited workforce. There is some more room for pushback in the owner contractor relationship.”

The second challenge is mitigating the risk of potentially sudden geopolitical decisions. Mr. Basu suggests that you use commodity futures to hedge against uncertain outcomes in materials prices.

Ultimately, market trends remain favorable for sustained contractor profitability.

That’s all we have for now. Keep building and we’ll keep crunching the numbers. Check back here daily as numbers refresh and we’ll continue to translate this into meaningful digests that will help you make informed decisions all week long.

For industry highlights by region, check out the top contractors, the biggest news stories, plus statistics on the labor market that may surprise you on this page. Or click here for recaps from Construction Health Updates from past weeks.

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