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Katrina adds fuel to rising materials costs; pre-storm Beige Book showed rosy outlook
Sept. 6 - Sept. 13

September 16, 2005
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The producer price index (PPI) for finished goods, rose 0.6% in August, seasonally adjusted, the Bureau of Labor Statistics (BLS) reported today, noting that prices were collected before Hurricane Katrina struck. The increase was due to a 3.7% jump in energy costs. The “core” index, which omits food and energy, was unchanged for the month and up 2.4% over the past 12 months. BLS reported, “The index for materials and components for construction was unchanged in August, after falling 0.2% in July. Prices for asphalt felts and coatings jumped 8.5%, following no change in the preceding month. The indexes for building paper and board and for steel mill products declined less in August than they had a month earlier. Prices for gypsum products, nonferrous wire and cable, and paving mixtures and blocks rose more than they had in July. Alternatively, prices for concrete products advanced 0.6%, following a 1.9% increase in July. The plastic construction products index decreased at a faster rate in August compared with the prior month, while prices for millwork moved down after rising in July.” Many of these prices are likely to be higher by now, or soon.

The PPI for diesel fuel, which is not considered a construction material but is used to power offroad equipment and construction trucks and shows up in the fuel surcharge on freight deliveries, rose 3.1% in August and 49% over the past 12 months. Yesterday, the Energy Information Administration (www.eia.doe.gov) reported that the national average retail price for on-highway diesel fuel fell five cents to $2.85, which is still 25 cents higher than two weeks ago and 93 cents higher than a year ago. Highway vehicles, including construction trucks that travel on public roads, must normally use low-sulfur, undyed diesel fuel. However, to ease fuel shortages, the Internal Revenue Service and Environmental Protection Agency in the past two weeks have issued various limited-time waivers to allow use of dyed, high-sulfur fuel (normally allowed only for offroad equipment and heating oil) and jet fuel (from four airports). Several refineries and oil platforms have resumed production. But “the U.S. Coast Guard reports 52 platforms were sunk,” the Wall Street Journal reported Monday, and a couple of refineries may be out of action for months, implying continuing high prices for all petroleum products, including asphalt and feedstocks for construction plastics and roofing materials.

The Journal also reported Monday on the uneven impacts on supply and price of construction materials. “Certain manufacturers are building inventories of steel, plastic resins and cardboard boxes and such stockpiling could eventually lead to even higher prices in the near term. [USG Corp.,] which makes construction wallboard, is boosting output at its 40 U.S. plants, although in part to offset the loss of a flooded factory in New Orleans….'It looks like we're going to have trouble finding craftsmen, labor, because there's going to be such a pull of manpower into the rebuilding,' says [Jim] Crom, whose company [Crom Corp., a maker of tanks used in municipal water and sewage systems] hires locally to complete construction projects in given cities.”

The U.S. Geological Survey reported last week that the New Orleans Customs District, including smaller downstream and Gulf Coast ports in Lousiana and Mississippi, accounted for 12% of U.S. imports of hydraulic cement and clinker in the first half of 2005 (http://minerals.usgs.gov/minerals/pubs/commodity/cement/), the highest of all 38 districts, and up from 9% in 2004. Imports in turn accounted for 26% of shipments of portland and blended cement, up from 23% in 2004. Thus, more than 3% of total shipments appear to have been shut down, at least until the ports and inland transport facilities can reopen or other ports can handle the traffic. The PPI for cement rose 12.7% from August 2004 to August 2005; the PPI for concrete products rose 10.4%.

A steel supplier reported to AGC yesterday, “Mills have increased transaction prices for rebar and merchant steel by $45 per short ton effective September 1, with another increase anticipated on October 1 of between $30 to $40 per ton (possibly higher depending on scrap),” which he says is up $75 per ton since July.

The Federal Reserve on Wednesday issued its latest “Beige Book” compilation of informal soundings of business conditions in the 12 Federal Reserve districts (referred to by the headquarters cities), covering mid-July to August 29, the day Katrina hit. Regarding construction, the summary stated, “Overall commercial markets grew. Most Districts described conditions as improving from weaker levels. Commercial real estate markets were strong in the New York and San Francisco Districts. Commercial construction activity increased in Cleveland, Dallas, Minneapolis, and St. Louis and was mostly flat in Boston, Philadelphia, and Chicago….Atlanta, Boston, Dallas, Kansas City, and Richmond reported that some firms had difficulty finding qualified workers. Occupations mentioned include healthcare, accounting, information technology, trucking, energy, and construction-related trades.…several Districts reported significant increases in certain manufacturing and construction input prices, including steel, chemicals, plastics, and cement. Decreased lumber prices were noted in Dallas, Kansas City, and Minneapolis.”

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