The Price is...

Distributors are Keeping a Close Eye on Fuel and Steel Pricing, and They Continue to Watch the Housing Market for Signs of a Slowdown

By Joe Nowlan, Associate Editor -- Industrial Distribution, 8/1/2005

When those who work in construction and related industries talk about where pricing for materials will go in the months ahead and into 2006, the phrase heard most often can be 'yeah, but.'

Someone mentions that steel may have stabilized...as another responds with 'yeah, but' for how long? Lumber prices offer no bargains, says one... 'yeah, but' they aren't as high as they used to be, says another. Now as for fuel and oil prices? Don't ask. 'But did you hear what I heard about the housing bubble?'

The Construction Specialist talked to construction industry officials about what could be called the 'usual suspects' that must be rounded up when discussing prices, and where they might go in the future.

We may as well get the worst out of the way first. The price of fuel is high, and few think that it will not get higher. If it costs more to fill up your family car, it's certainly no fun filling up a truck with diesel fuel. And the number of products essential to construction work that are oil-based are impacted as well.

'It's a problem,' says Ken Currence, CEO of A.H. Harris, a Newington, Conn.—based distributor of construction materials. 'Oil companies keep increasing the cost of the base product, and it's nuts.'

Recently, A.H. Harris placed a maximum-per-visit on the amounts their drivers can spend with their fuel credit cards, Currence states. And based on what that limit is, 'they literally can not fill up their truck in one visit. The fuel has gone up that high. So we're considering 'upping' the allowable charge on that card. We don't want the driver making two stops a day. That's inefficient, obviously.'

At some point, passing such an expense on to its customers becomes unavoidable. The company came close to implementing a fuel surcharge last year, Currence admits, and is seriously contemplating one again in the near future.

'As much as we don't want to, I'm afraid we'll have to institute a fuel delivery surcharge,' he adds.

Fabrics, plastics and other oil-based products, Currence adds, have also gone up, and continue to do so.

Research done by Jim Haughey, director of economics for the Reed Research Group, reflects this as well. Construction plastics, or any products made from oil or natural gas, continue to rise in price, Haughey found.

Dave Duewel, vice president of sales for W.R. Meadows, points out that the increase in crude oil, gas and diesel actually hurts at both ends.

'It hurts in terms of bringing in raw materials from which we manufacture products. But also at the back end, for the trucks we use to get the materials to our distributors,' he explains. Meadows, a manufacturer that specializes in concrete and sealant products, is based in Hampshire, Ill.

While a number of the oil-based products (sealants, especially) that Meadows manufactures are 'water systems as opposed to solvent systems,' Duewel explains, many of the raw materials used to make them are derived from crude oil.

'That has really increased our costs for those products,' Duewel says. 'As a result, a number of these materials have been placed on allocation. There just aren't enough of them out there, from the plastics side or the rubber side of the business.'

A further source of pricing concern is that, as of late-June, oil cost $58–$60 barrel, while products derived from oil were priced as if oil was still closer to $50 a barrel. From Duewel's perspective, products whose prices could be impacted include various synthetic rubbers Meadows uses in its sealant materials, and peel and stick membranes used in waterproofing.

'That would be very critical as far as those items are concerned,' Duewel admits.

On top of fuel costs, Duewel brings up a related factor impacting his company as well as others: having enough trucks (and drivers) on hand.

'It's been very difficult even getting [enough] trucks,' he says. 'I'd say freight rates have increased faster than than most raw materials. A lot of trucking companies have gone out of business or consolidated. And the number of the drivers has decreased....It's so much more than just the increased diesel costs.'

An offshoot of increased fuel prices is found in another essential construction material: cement.

'Remember, cement plants are fired by natural gas,' Haughey says.

The price and availability of cement or concrete has been worrying construction people for a while now, Haughey explains (see news story, p. 9). Overseas demand remains high, especially in China, where massive construction is underway in preparation for the 2008 Olympics.

The price in the United States had been stable for a long time, Haughey says, but has recently started to increase, much like steel did a few years ago.

'Cement is a worldwide commodity like steel or oil, but the distribution is different,' he explains. 'The cement plants are tightly controlled by a small number of companies. Their distribution goes out to a tightly controlled set of distributors, many of whom have their own ready-mix plants.'

The industry also is starting to see huge price increases in concrete products—roof tiles and pipe, for example. Haughey expects that trend to continue for a few months, at least.

'After no change for a year, in May, they went up a couple of percentage points,' he says.

He adds that the cement pricing problem, as of mid-2005, does vary from region to region with, for example, the Northeast markets not as hard hit as the Southeast may be.

'Concrete is very much a regional market/problem, much more so than steel or lumber...In the Southeast, say, where cement has to be imported, there is supply problems,' he says.

Currence, based in the Northeast, agrees. He has seen no radical increases in price so far.

'I think it's a smoke screen,' he says. 'We've been hearing about cement shortages for a while now, but we haven't seen any price increase or difficulty in getting it.'

Harris' purchasing people stay on top of such things, he adds, and would be sending out a heads up, if necessary, but none have been forthcoming.

Duewel and his salespeople at Meadows have heard comments about possible availability problems as far as cement and concrete are concerned, he says, primarily in the Northwest and the Southeast as well as in parts of Texas.

'We don't think it has impacted business at this point. That doesn't mean it won't though,' he says. 'That will continue to be something we have to deal with.'

Many observers feel the steel crisis (both in terms of pricing and availability) has stabilized in recent months. This is not to say happy days are here again and steel companies will soon be offering their version of '2 for 1' sales, but the anxiety that surrounded steel for the past year or so seems to have tapered off.

Currence estimates that wire mesh is dropping in price by 10 percent-12 percent. But he also laughs warily as he looks back to May, when A.H. Harris saw a slight increase in steel prices and, later that same week, a slight decline—taking it back to where it had been.

'Up and down—literally in the same week,' Currence recalls.

A problem companies have to be careful of with these fluctuating prices, Currence points out, is 'when they have that higher-priced inventory and then the price drops. Then, you're standing there with product you paid that higher price for and you still have to get it out into the market.'

Other companies will react to this by dropping their sale price, and risk a loss on that product. It's a dilemma, Currence explains.

'We explain to customers, up front, that when we get rid of that higher-priced inventory, that's when our prices [for them] will go down,' he says. 'When you've got inventory that you paid a higher price for, it's hard to lower it at that time.'

'Contractors got really hurt in the steel market because they're not big buyers,' Haughey recalls. 'They don't order two truckloads every Monday morning like General Motors might. So when they need it, they call someone, ask the price and tell them to send it. So they'll pay a lot more.'

'The bubble.' No need to ask 'what bubble' when construction people talk shop, although some will skirt around the issue, maybe afraid of jinxing the hot streak housing continues to be experiencing in some regions.

Haughey chuckles at a recent quote by Federal Reserve chairman Alan Greenspan, who said, 'There's some froth' on top of the real housing growth.

'It's like he can't say the word 'bubble.' It'll destroy the stock market!' he says.

Haughey thinks that a housing slowdown is due, but only in a few select areas, those regions where many of the housing profits have been driven by speculative buyers who'll invest for only as long as it takes them to re-sell.

'What we have is a limited number of places where people are buying with the expectation that someone will come into town the next day with a bigger bag of money and buy them out for more,' he says.

Historically, 'housing prices have never fallen on a national basis. They've fallen in individual metro areas,' he adds, referring to 'the places with the most growth in price the last year or two—the hot cities. Las Vegas, say. There's a reason house prices have shot up [there]. People want to live there but there's not enough land. It's the same way with coastal California, where you can still go out to the desert [area] and buy stuff fairly cheaply.... That's the 'froth.''

If there's any bubble that will pop, it will be in these areas, Haughey believes, admitting that 'I don't know when. But the rest of the regions will just slow down. I don't anticipate much backing off in terms of home construction.'

Housing means lumber, of course, and from Haughey's research, lumber prices are still high, but not climbing to the comparatively peak prices of a few years ago, he says, calling it 'an annoyance but not a real cost problem.'

One housing material he does worry about—and one that, to date, has not been discussed widely—is gypsum, or wallboard, as it's more commonly categorized.

'It's on the high side but not a problem at the moment. But we're near capacity there. If we get a few more houses or small commercial buildings that use a lot of wallboard, there's some [price rise] risk there,' Haughey explains.

Getting a few more manufacturers to produce more gypsum/wallboard might help matters as well.

'I don't know who sets the prices, but they can vary by 100 percent over the course of months,' Haughey says. 'It's just wild... The two or three companies who make it don't seem to build another factory until they triple the price!'

The Northeast was a bit soft through June, Currence points out. He estimates that business and construction activity is off by about 8 percent behind what some forecasts had predicted. A.H. Harris does only a modest amount of construction related to housing, so Currence watches highway work, among other areas. The T21 highway legislation has remained in Congressional limbo for far too long, he says, and passing that would provide a needed boost.

'It will be a challenge for us to meet our 2005 forecast,' he concedes, 'even though it was admittedly an aggressive one. The market is not as robust as I thought it would be in a variety of segments. We confirm that, too, in talking with our suppliers. So it will be a battle.'

So far in '05, 'we've put three price increases through,' Duewel says of W.R. Meadows. 'We've been more reactive to what's going on in that regard. We've been aggressive when it comes to trying to get back to the type of margins we'd see four or five years ago.'

Consolidation in the distributor end of his business concerns him. As an example, Duewel mentions how a large distributor, White Cap Construction Supply, based on the West Coast, was purchased by The Home Depot earlier last year.

But Duewel remains 'an optimist. I feel good about the balance of the year and that we'll be holding our own. I also think that things look real strong heading into 2006.'

Haughey also brings up the highway funding bill and the negative impact its delay has had. Overall, the amount of paving work and bridge work has gone down, too, as contractors have been stung by prices, he adds.

'It looks like the [pricing] situation will have cost increases but not the explosive ones we had the last year or so. Remember, before last year's price increases, we'd had a few years of no price increases at all and people got used to that. That's gone now.... So we've had a couple of years of price increases—but at least they're not double digit anymore.'