Looking for relief from the high cost of building materials?
Except for cement, which will continue to increase in price as Florida rebuilds after four devastating hurricanes, prices of most building materials will ease somewhat in 2005.
That's the consensus of analysts attending the semiannual National Association of Homebuilders construction forecast conference in Washington in October.
Led by an 80 percent increase in the price of scrap steel, key building materials have risen by double-digits in the last year. Among them were steel-mill products at 43 percent, lumber at 27 percent, gypsum at 20 percent and cement at 6 percent.
"This is a normal commodity price cycle and we are currently at the peak," said John Mothersole, senior member of Global Insight's Industry Practice. "We believe that commodity prices are topping out and moving on a downward slope. However, the bad news is that the ride down won't be too steep in 2005."
International demands determine the prices of commodities. Although we use 13 percent of the world's steel products, what China produces and consumes is almost triple what that of the United States.
China's building boom has been responsible for much of this price increase.
It is getting more expensive to ship building products. In the last year, a tanker has gone from costing $35,000 a day to $135,000, according to Mothersole.
Steel prices will begin their decline in the fourth quarter and continue on that track through the next year. Steel products are profitable, so more plants will begin producing them. Shipping capacity will be added. Finally, because U.S. prices are set above the global rate, there is an incentive to sell more steel to the American market.
"We expect more significant price declines in 2006 and 2007 as ore and coke become more plentiful," he said.
Inventories of cement have been low this year while demand has increased substantially. High shipping rates and rail bottlenecks have led to spot shortages and a price increase of 8 percent over the last year.
The building industry wants tariffs on Mexican cement imports lifted to help reduce the shortages. Availability and transportation issues likely will remain problems from now to the beginning of fourth quarter 2005. Prices won't peak until spring as Florida's rebuilding efforts get into full swing.
Cement prices may drop after that.
Gypsum prices likely will increase in 2005 but at 6 percent, not this year's 20 percent, as sales slow and imports rise.
"Volatile" is the word that best describes lumber and panel prices, according to Al Schuler, research economist for the Forest Service of the U.S. Department of Agriculture. "Volatility is the nature of the beast, but we expect prices to moderate next year in response to a pullback in housing and increased supply."
Problems with oriented strand board have continued, mostly because producers don't seem to be able to correctly read the market. In the mid-1990s, the industry overbuilt capacity, and the result was weak pricing and minuscule profits. To boost prices, the industry took mills out of production, even though demand was rising enough to keep those plants working.
"Nobody wants to hold inventory because it costs money, but no inventory in the pipeline breeds volatility," said Schuler, who said that the top five structural panel producers account for 75 percent of the overall market share.
OSB capacity will remain relatively fixed in the short-term because it takes up to two years to build a plant and 18 months more to get it to full production. Several mills are being planned and when they begin producing, OSB prices are expected to decline.
The softwood lumber trade dispute between the United States and Canada has contributed to price volatility since 2001. In late August, a NAFTA panel found that the 27 percent duties on Canadian softwood lumber should be rescinded because domestic lumber producers failed to prove that imports posed a threat to their financial health.
The United States plans to challenge the ruling. Schuler believes that a negotiated settlement with duties of 15 percent or less will be reached in 2005.
Settlement of the issue would ease upward pressure on lumber prices.
During the next couple of years, OSB prices should decline 30 to 35 percent, Schuler said. Increased South American imports should lead to a 15 percent drop in plywood and softwood lumber prices.