Expect the price of construction materials to rise by 6% to 8%, says Ken Simonson, chief economist for the Associated General Contractors of America (AGC), Arlington, Va.
While Simonson's forecast covers several primary construction materials, asphalt and concrete are central to his predicted increase. By late last year, it appeared that cement price increases in 2007 would be less severe than in 2006. (Prices rose 11% in the 12 months ending Sept. 30, 2006.) Diesel fuel and asphalt prices, which spiked in 2006, could move in either direction this year depending on international events.
Two factors continue to edge prices upward. One, worldwide demand is strong when supply—for example, of cement—takes years to expand. For another, rising fuel costs drive up the cost of transporting materials
Asphalt: the wild card. Asphalt prices follow trends in crude oil pricing, which in October 2006 had moderated somewhat. But they also depend on the cost of transportation, which has grown more expensive with the cost of diesel fuel. And asphalt must be kept hot, which adds to its cost.
From 2005 to 2006, asphalt prices more than doubled—from $160 per ton to $360—according to Bill Haverland, manager of asphalt sales and marketing for ConocoPhillips Co. in Houston. In some areas of the country, asphalt soared to more than $400 per ton.
Barring a major geopolitical upset, asphalt may stay within $350 to $400 per ton this year, says Bill Lampton, president of Ergon Asphalt & Emulsions Inc., a Jackson, Miss., refiner. But because crude oil supply and demand are so closely matched, international events could easily move the price of crude. “If Venezuela places an embargo on the supply of crude to the United States, as President Chavez has threatened to do, asphalt may shoot to $450,” says Lampton.
Late last year a number of crude oil refiners announced they'll be adding cokers, which are fueled by asphalt. Lampton says these new cokers are scheduled to come online in 2008 through 2011 and, when they do, they'll put upward pressure on asphalt prices.
Cement price increases should slow. The Portland Cement Association (PCA), Skokie, Ill., expected consumption to reach 124 million metric tons during 2006, a 2.3% gain over the record year in 2005.
Although the association expects the market to ease somewhat in 2007, to 1.3% growth, demand will be uneven. The Great Lakes, Northeast, and Middle Atlantic states “face meager growth conditions and, in some cases, outright contraction,” says the association, while the south, west, and mountain states are expected to achieve somewhat stronger growth rates.
Through September 2006, there were none of the cement shortages that plagued more than 30 states in 2004 and 2005, says the AGC's Simonson, thanks to a huge increase in imports from China. In addition, an agreement the United States and Mexico signed in March 2006 reduced the duty on Mexican cement from $26 per metric ton to $3 per metric ton, which should encourage more imports from Mexico.
The PCA, however, doesn't think the recent gains in import volumes can be sustained.
Import gains throughout 2005 and into 2006 reflected favorable global shipping conditions—and on the heels of resurgent growth in China, tighter shipping conditions have resurfaced. As new domestic capacity comes online in 2008 and beyond, import volumes are expected to fall to 30 million metric tons from an expected 38.5 million metric tons in 2007.
— Daniel C. Brown is a freelance writer in Des Plaines, Ill.