DAILY NEWS Dec 22, 2013 8:05 PM - 0 comments

Steel glut kept materials pricing flat for construction

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El Segundo, Calif.2013-12-22

Although overall North American construction costs rose throughout 2013 due to tightness in the labor market, pricing for materials and equipment held steady for most of the year, primarily driven by falling steel prices.

The Current Materials/Equipment Price Index, part of the Engineering and Construction Cost Index (ECCI), has been hovering near the breakeven point of 50 since April, according to IHS Inc. and the Procurement Executives Group (PEG). This indicates that pricing for construction materials in North America has been unchanged throughout the year, even as labor costs have increased.

Four of the 12 segments comprising the Current Materials/Equipment Price Index are currently below the neutral mark, indicating that their prices are declining. These segments are carbon steel pipe, fabricated structural steel and freight rates.

Over the course of 2013, steel-related products have shown the most weakness of any material used in construction, as the global industry continues to suffer from overcapacity and low utilization rates.

The overcapacity is predominantly the result of mills operating in China, which now account for more than half of the global steel supply. Despite the oversupply, Chinese steel capacity continues to grow, with more than 20 million metric tons of capacity added just in the first three quarters of this year, highlighting the tremendous upward pressure there is on China’s steel production. This huge amount of excess capacity is undercutting any attempt by the Chinese mills to increase pricing.

“Downward pressure on steel prices is mostly a supply-side story,” said John Anton, director of the steel service at IHS. “As a result, financials for global steel mills have almost failed to make operating margins, never mind generating a net profit. This creates long-term issues at mills regarding debt service, maintenance and investment.”

The ECCI divides construction costs into two major categories: materials/equipment and subcontractor labor. The ECCI was listed at 53.0 in December, essentially unchanged from 53.2 in November. With the materials/equipment portion of the index remaining at around 50, labor continues to be the segment driving up construction costs. The current subcontractor labor index in December registered 56.8 percent, down slightly from 58.5 percent in November. The ECCI has now indicated rising prices for 23 consecutive months.

The shale gas boom in the United States continues to play a major role in driving increased spending on construction and rising costs for associated labor in North America.

“Respondents to the ECCI survey once again are expressing concern over the availability of skilled laborers, such as welders and pipefitters in the U.S. Gulf Coast,” said Laura Hodges, director of the pricing and purchasing service at IHS. “Availability of these workers in the region is limited and some in the energy industry are expressing concern that labor shortages could arise in 2014.”

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