Material Increases

April 5, 2005
From energy to steel, prices of basic commodities continue to rise.

If the recent past is an accurate predictor of basic materials costs, U.S. manufacturers aren't going to like the future.

In March, the most recent month for which data are available, natural gas prices rose for the thirty-second consecutive month, steel prices for the eighteenth month, aluminum prices for the seventeenth month, chemicals for the fourteenth month, corrugated containers for the fourteenth month, paper for the thirteenth month and caustic soda for the eleventh straight month, according to the Tempe, Ariz.-based Institute for Supply Management (ISM).

Indeed, March of 2005 was the thirty-seventh consecutive month that the prices portion of ISM's manufacturing activity index had registered higher prices. The prices index in March was at 73%, some 7.5 percentage points higher than February's 65.5%. In March, 51% of the supply managers responding to ISM's monthly survey of manufacturers reported paying higher prices for commodities, just 5% reported lower prices and 44% said prices were unchanged from February.

"At this point, steel seems to be the construction input with the best chance of retreating in price," says Kenneth D. Simonson, chief economist at the Associated General Contractors of America, Alexandria, Va.

Manufacturing and construction, along with mining, constitute the goods-producing sector of the U.S. economy. "Reportedly, worldwide [steel production] capacity is growing, and perhaps the growth rate of demand is slowing in China, India and elsewhere in Asia," Simonson relates. Nevertheless, shipping and currency costs could keep steel prices high in the U.S. even if Asian and European prices fall soon," he adds.

Simonson does not expect crude oil prices to keep rising on average during 2005, although he does anticipate continued volatility-"price swings of several dollar per barrel each month." That, he says, will mean fuel surcharges will remain a fact of business life. "Nobody is going to refuse delivery of materials because of a fuel surcharge, but they may cut into profits if contractors don't make allowance for them or-less likely-pass them on to owners."

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