2012 Building Material Prices to Increase Sharply
Originally published by the following source: NAHB — December 15, 2011
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Producer prices bounced back in November after easing the previous month. The Bureau of Labor Statistics reported the producer price index for finished goods (PPI) advanced 0.3%, seasonally adjusted, in November on the back of a jump in food prices. Modest changes were observed for the energy and core indexes as both recorded a 0.1% increase. The finished goods index has risen in nine of the eleven months this year and is up 5.7% relative to November 2010.
The index for consumer foods registered a gain of 1.0% (SA), driven by a marked increase in fresh and dry vegetables (+11.5% SA) and fresh fruits (+4.7%), as well as chicken (+8.0%), pork (+3.2%) and turkey (+1.6%). This is the sixth consecutive monthly increase in the consumer foods index, with the index up 7.8% for the 12 months ended November 2011.
Energy prices, particularly the gasoline index, have been driving the trend of the PPI for more than a year. However, in November, with minimal changes in the gasoline pump prices (-0.1%), the energy index remained relatively flat. While there was a rise in home heating oil and distillates (+9.4%), this was offset by decreasing prices for residential gas (-2.0%) and residential electric power (-0.5%).
The only modest increase in gasoline prices is surprising given that oil prices (the spot price for West Texas Intermediate) have been on the rise for the past three months. From its low of $79.43 per barrel in late-September, the oil price rose to almost $100 per barrel in the first week of December, an increase of over 25%. In comparison, gasoline pump prices drifted up modestly in October, then eased through November, but overall are down 4.2% over the same period. This indicates that upward pressure on gasoline prices is building, such that we can expect to return to very strong growth in the energy price index begin next month (December) and extending into the New Year. Given that rising gasoline prices have been the main driver of the growth in the PPI for finished goods over the past year, we can expect that increase in gasoline prices will be reflected in an increase in the finished goods index. Similarly, gasoline prices also have a heavy influence on the building materials composite index, and the price of individual building materials, due to increasing processing and transport costs. Therefore, a strong increase in prices of building materials can also be expected in 2012.
Core PPI, finished goods less food and energy prices, remained relatively flat for the past four months. In November, higher prices were observed for pharmaceuticals (+0.9% SA), passenger cars (+0.6%) and, men’s (+0.6%) and women’s (+0.5%) clothing, but there was little change in most other items.
With energy prices remaining relatively flat, the composite index of inputs into residential construction was unchanged in November. Notable declines were observed for asphalt roofing and siding (-5.4%), copper (-2.7%), steel (-1.1%) and lumber (-1.1%). These were balanced out by increases in cement (+1.2), ready-mix concrete (+0.8%), plywood (+0.7%), oriented strand board (+0.5%), and bricks (+0.5%). The building materials composite index has remained relatively flat since June, but gains earlier in the year have left the index up 5.5% relative to November 2010. While still high, this is the smallest percentage year-over-year increase since February 2011.
We continue to monitor gypsum prices following the announcement by several of the major gypsum producers in late September-early October that they would be ceasing job quotes immediately and increasing prices by 35% in January 2012; see Sharp Rise in Gypsum Prices Likely in New Year. For the time being, prices settled back in November, down a 0.4%, following a 3.0% rise in October — the month of the announcement. A 35% spike would raise price gypsum prices well above their long term trend, to levels last seen near the peak of the housing cycle in 2006. However, prices may not rise the full amount. While four of the manufacturers have indicated that they will raise their prices by 35%, the other four are yet to announce their intentions. Thus, there may be some horse trading, with these four proposing more modest price increases of 15-20% in an effort to gain market share. Nevertheless, gypsum prices will rise sharply in the new year, which will increase the cost of housing construction in what is already a very difficult market for home builders.