A surge in raw materials prices is hitting the construction and manufacturing industries in Southern California and elsewhere, propelled by hurricanes Katrina and Rita. In some cases, these costs are filtering down to consumers, although it’s unclear how long they will stick.
Prices for fuel, steel and other commodities were already elevated due to worldwide demand when the two storms hit the Gulf Coast. Now energy prices have lurched upward again, sending another wave of price hikes through the system. Supply shortages are adding an additional layer of costs to products such as wood and concrete.
Last week, Jim Davis, general manager at Far West Plywood Co. in Northridge, was charging $23.15 for a 4-by-8 foot sheet of plywood, half an inch thick. Before the hurricanes, the sheet cost about $15.
“People coming in here doing some roof repair were shocked,” he said. “It was like this in the ’94 earthquake. It took about six months for the prices to come back down.”
Sudden price hikes are a standard byproduct of unexpected calamities. But they can also act to accelerate longer-term trends that already are under way, such as the stock market declines and the housing boom that followed 9/11.
When the storms hit, the price of cement had already risen by 12.7 percent in August from a year earlier, according to the Bureau of Labor Statistics producer price index. With 12 percent of the nation’s cement supply coming in through the Port of New Orleans, data from September and October are expected to show further increases.
Steel prices had been moderating most of the year from peaks set in late 2004. That trend has now reversed. Prices that steel processors and distributors are paying to mills for cold rolled and galvanized steel are up 10 percent. Shortages also loom, according to Steve Alperson, president of Rolled Steel Products Inc. in City of Commerce.
Damage to the Port of New Orleans disrupted supplies of scrap and hydrogen that are used to process steel, and higher prices for natural gas and diesel have led to energy and shipping surcharges.
Passing along costs
Depending on volume and supplies, distributors such as Rolled Steel pay about $720 per ton for cold-rolled steel, about $60 more than before the hurricanes, and even more for galvanized steel. On top of that, mills across the country have added energy surcharges of $25 per ton, Alperson said.
“There’s a bit of restricted availability because mills are already allocating material for the reconstruction, even though it’s months away,” he said. “When they rebuild the cities down there, they won’t be using wood, they’ll be using steel, so (the mills) are saying there will be further increases down the road.”
Where they can, businesses are passing along the costs. Last week, Southern California Edison, which sells electricity to most consumers and businesses in Los Angeles, Orange and San Bernardino counties, raised its request for a rate hike to 8 percent from the 3 percent request it made a month earlier with the state Public Utilities Commission. (The city of Los Angeles is supplied by the Department of Water and Power.)
The Edison International unit cited natural gas prices that have risen by 25 percent since Hurricane Katrina hit, after doubling in the previous two years. Natural gas generates 40 percent of SCE’s power.
In some cases, businesses can’t pass on the costs. Contractors, in particular, are seeing materials costs eat into profits on fixed-price jobs they’ve already bid.
“This will hurt contractors badly right away,” said Ken Simonson, chief economist for trade group Associated General Contractors of America. “The materials I’m worried about are diesel fuel, petroleum products and concrete. Contractors often have to eat those price increases because they have to give firm bids to homeowners and highway departments before construction starts.”
For the moment, the spikes in lumber prices appear to be temporary, said Greg Gieber, an analyst with St. Louis-based AG Edwards Inc. He believes that large homebuilders, which tend to order materials far in advance, won’t be hurt as bad as small builders who rely on the spot market.
“Cement is going to be an immediate and near-term problem, but homebuilders don’t rely heavily on concrete. Wood prices are up, but the lumber industry can raise capacity and ship quickly,” Gieber said.
Weathering price increases
This summer, the Portland Cement Association already reported shortages of cement in 32 states.
With wood, though, there was a nationwide glut before Katrina, because suppliers from around the world were feeding the booming U.S. homebuilding industry, said Shawn Church, editor of Random Lengths Publications, a Eugene Ore.-based wood industry trade magazine.
He said lumber prices were settling down already last week, so prices are likely only to hurt contractors or other purchasers that have ongoing projects with immediate needs.
“Everybody across the country was thinking the same thing. So buyers said, ‘We need to get in and buy right away,'” Church said. “So they all jumped into the market at once. That cleaned up all the immediate supply.”
Large building-supply chains appear to have a better ability to weather the price increases. Lowe’s Companies Inc. stores in Los Angeles were charging just $2.50 more for a sheet of overlay strand board (plywood-like sheets typically called “OSB”) last week than they were before the storms.
But other manufacturers are quickly adjusting their expectations.
At Carson-based Rotonics Manufacturing Inc., Chief Executive Sherman McKinnis said the cost for polyethylene used to manufacture plastics has risen by 40 percent since Aug. 1, due to the need for natural gas to produce it.
Rotonics plans to raise prices, and McKinnis expects demand for kayaks to be more sensitive to these increases than industrial liquid storage tanks that Rotonics also manufactures.
“Kayaks are discretionary products, and storage tanks are necessary products, so sales of our discretionary products will be more vulnerable to higher prices,” said McKinnis, who employs 80 people at the company he founded in 1973. “I’ve never seen prices go up like this before.”
