Imbalance of the Supply and Demand of Construction Materials and the Hyper-inflation of Material Costs
Back in 2020, when the lockdown was imposed, everyone knew it would have a major impact on all sectors of the economy, including the housing market, but no one could have guessed what that impact would be. But one year later, the results are coming in and it is not only unexpected, but it is also worse than anticipated.
Going into the lockdown, commercial construction, along with the entire construction industry, was already being plagued by severe shortages. While there have always been shortages of critical construction materials, the worst shortages were for skilled labor. As of 2020, the industry faced a shortfall of around 200,000 workers.
This problem has been more than ten years in the making. However, the inability of the industry to meet the demand for new houses is more recent. It is a direct result of the 2009 recession when the new housing supply was cut by more than half, explains Evolve Nevada. Over ten years later, builders are still struggling to keep up with the huge backlog of demand for residential housing.
At the same time, commercial construction was also experiencing a boom. But similar to residential housing construction, commercial builders were also facing shortages and uncertainties in the pricing of major construction materials. In 2018, 90% of all commercial contractors reported shortages throughout the four quarters of the year.
This was the situation before the lockdown. But the lockdown worsened a situation that was already bad. Its aftermath has been a severe distortion of the supply chain for construction materials, with one commentator stating that “in my 45 years in this business, I’ve never seen such a demand/supply imbalance.”
What we are experiencing are sweeping disruptions of manufacturing capabilities and transportation systems for the most important construction materials. The worst impacts have been on steel and lumber supplies. But even for materials that are still relatively accessible, other factors are having an impact.
Here is a snapshot of where things currently stand in the supply/demand for construction materials and the ongoing hyperinflation of material costs.
Shortages in the supply of lumber
The material, which has shown the most marked price changes, has been lumber. According to the Associated General Contractors (AGC) of America, the price of lumber increased three times within the short period of fall (2020). These price increases were so sharp they have been described as an “N-turn.” Between April and September 2020, lumber prices rose by 88.5%.
However, after September and up to November of 2020, prices for softwood lumber fell by 22.9%, only to rise by 42.6% after November. In 2021, for two months in a row, the price for softwood lumber has risen an unprecedented 5.3%. In all, by end of April 2021, lumber prices were 40%-80-% higher than the previous week’s price, depending on the species and size.
The initial problem with the availability of steel was the closure of many steel mills at the height of the pandemic. Without new steel being brought to the market, prices inevitably rose. However, even with most mills back to operation, supply remains a problem due to huge backlogs and sharp increases in the cost of transportation.
In March 2021, prices increased by 17.6%, exceeding the earlier record high set in 2018. But, despite the sharp increases, prices are not stabilizing; month-on-month percentage increases have set new record highs. Over three months, prices have gone up by 22% and they are set to increase further. These price increases are expected for both rebar and wire mesh.
Higher freight prices
Critical container and trucking shortages are other catalysts behind the spike in prices and persisting demand/supply imbalances. On the domestic front, the lockdown worsened already existing trucker-driver shortages, already at minus 50,000 before the lockdown. A lot of aging truck drivers – who make up the majority – did not return to work after the lockdown.
The result has been major hikes in the cost of transporting construction materials along with serious delays. At least one mill has implemented a 7% increase in freight prices and this was just one more price increase amongst past ones. At the same time, freight costs from Asia and Europe to the US have increased for the seventh consecutive month.
Other important shortages
- Polyethylene sheeting shortage
Shortages in polyethylene were due to the February snowstorms in Texas more than the Coronavirus outbreak. Although mills are back to full capacity, lead times are stretching 8-10 weeks. The prospect for improved supply is better than for other construction materials.
- Copper and aluminum
In late February, the price of copper was at $9,600 per metric ton – the highest in ten years – before falling to $9,000 per metric ton, where it still hovers. Aluminum rose to its highest price since 2011, trading at $2,500 per ton.
- Gypsum and drywall
Gypsum products saw a price gain of 2.1% in March 2021, after experiencing a 1.3% drop in February. Overall, in the last 12 months, gypsum products, including building materials such as drywall, have increased their price by 6.3%-6.6%.To sum up, what is the outlook?This situation is likely to persist until well into the winter of 2021.