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Materials Outlook for 2007
Two noted industry economists see
more availability and less volatility for most construction
materials in 2007, but asphalt still is a question
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Simonson
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| Murray |
Two of the industry's most respected economists offered their
predictions about materials prices in 2007. Ken Simonson,
chief economist for AGC of America, and Robert Murray, vice
president of economic affairs at McGraw-Hill Construction,
say contractors can expect a better year for most materials,
despite uncertainties about fuel prices.
Asphalt
Simonson: The biggest concern in materials for 2007
is probably asphalt. It was in short supply last year, and
we saw price spikes as high as 30% in some areas. Colorado,
Hawaii and Wyoming had some of the worst shortages.
This same scenario could play out again in 2007 because many
refineries are planning to install new cokers and eliminate
the residual that has been sold as asphalt. Contractors need
to work closely with their asphalt suppliers about upcoming
changes in the source of the supply and be prepared to look
further afield.
This will be an evolving situation even beyond 2007. Other
refineries might decide to supply markets they had not been
serving before as they adjust their product lines for the
highest profit levels the refineries can produce.
Murray: Asphalt prices did increase as much as 28% in 2006,
but I expect the upward pricing pressure on asphalt to ease
a bit in 2007. However, we will not see any price declines
for asphalt in 2007.
Copper
Simonson: Prices will remain elevated. The futures prices
for copper nearly doubled from January to May of 2006 then
settled down a bit. We won't see anything as dramatic in 2007,
but we're not going back to the 2005 levels. Contractors buying
pipe or wire can expect some fluctuations in the higher prices
and must also be mindful of widespread thefts and vandalism
for copper products. There has been some talk about using
aluminum wiring instead, but I don't know how widespread that
is. Stainless steel pipe is not a cheap or perfect substitute.
Murray: Copper prices went up about 60% in '06 and will rise
about 5 to 10% in '07. There is some potential for a drop
because of lower demand in the housing market, but overall,
copper will continue to be higher this year.
Steel
Simonson: In the first half of 2004, steel prices went up
50% or more, and in the last two-and-a-half years, prices
have fluctuated but only by 10 to 20%. In 2007, we may see
that 10% fluctuation range, possibly on the down side.
Steel should be widely available this year, but the big question
mark has always been demand from China, and I have no idea
about that. There have been some impressive increases in China's
own industrial capacity. Contractors will have to keep a close
eye on the steel market this year.
Murray: There has been some softening, but given the ongoing
demand in Asia, prices won't go down. The 10% increase in
2006 may become more like a 7% increase for steel prices in
2007.
Cement
Simonson: This has been a troublesome area in the past, but
probably less so in 2007. We've seen an expansion of the domestic
supply, which will continue in 2007, and more supply from
Mexico, so we shouldn't see anything like the shortages in
2006. Price increases should be moderate, somewhere around
3 to 5% this year.
Murray: The 13% price increase in 2006 will moderate to 2
or 3% in 2007.
Gypsum
Simonson: I'm relatively upbeat about this market. The sharp
decline in housing and remodeling construction will make for
significantly lower demand for gypsum in 2007. The further
good news is prices for gypsum should actually come down this
year, maybe even as much as 10 to 20%.
Murray: Yes, the slowing housing market will make a big difference
here. Gypsum was up something around 20% in 2006, but at most,
only 3 to 4% in 2007.
Fuel
Simonson: I never have been able to predict a day ahead in
this market, let alone a year. There's plenty of volatility
and so many factors that affect where it's going-strikes,
weather, violence, political instability. I'm not even going
to guess on this one.
Murray: The price pressures won't be as extreme as what's
taken place lately. The likelihood of any sharp decline in
prices is not that high. A slowing U.S. economy and less demand
could impact prices this year, but this is a difficult market
to track.
Construction Plastics
Simonson: We saw a very tight supply of PVC pipe after the
hurricanes in late 2005 and 5% price increase in 2006. But
I see flat or even slightly falling prices for construction
plastics in 2007 and an ample supply, mostly because the fall
off in home building is freeing up plenty of supply.
Murray: This is also related to the petroleum situation,
of course, but the nearly 18% increase in 2006 should flatten
out to around a 5% increase in 2007.
Unknowns
Simonson: Mostly, a lot of speculation: Just how rapid will
be the growth in the Asian economies and its impact on the
world economy, especially materials? Will there be a chill
in the U.S. economy and a resulting decline in demand for
construction services? I don't predict this, but it's possible.
What will the impact be of the 2007 political party clashes
on things like water and highway projects?
We're getting mostly good news from the state level, with
more money in most state coffers than expected and some big
bond issues passed last November. The overall climate of the
construction industry is positive and we should have another
good year in 2007, with labor concerns as the only real headache
for most firms.
Murray: Unknowns include how much pressure on materials and
prices will be eased by the housing slowdown, how the tighter
immigration policies in some states will affect the labor
market and what will happen in Congress.
We predict a 5% decline in housing starts for 2007, and a
decline of that magnitude will obviously impact what we're
seeing in the overall level of construction activity. Still,
the construction market will remain relatively stable, thanks
to other strong building sectors. If single-family housing
were taken out of the equation, the U.S. construction market
would see an overall 3% gain this year. As it is, it will
be largely flat, with construction starts forecast to drop
1% to $668 billion.
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