Post-Katrina Construction Prices Ease Temporarily

The price of building materials rose immediately following the devastating 2005 hurricane season but has since slowly declined.

Construction companies and contractors are now bracing for more uncertainties once reconstruction along the Gulf Coast hits full swing in the coming months.

Construction companies in Arkansas say building material prices have generally eased back down from their immediate dramatic jumps early last fall, but prices are still slightly above the norm and could soar once again.

"Right now we're seeing a general increase from the norm of about 5 percent across the board on building materials," said Bob Shell, president of Baldwin & Shell Construction Co. of Little Rock. "That was, obviously, much higher immediately following the hurricanes, but right now we're really not seeing much effect both in the labor market and in materials. But I think as they start to rebuild that's probably where we're going to get some labor repercussions in all probability."

With more than $250 billion of insurance, private and federal monies expected to pour into the Gulf Coast once rebuilding hits full throttle this spring, contractors and construction companies are again concerned about uncertain prices and shortages of some building materials — not only along the Gulf Coast, but across the country.

Builders and contractors in Arkansas, though, aren't expecting changes dramatic enough to hamper routine business practices.

"What we've seen in the New Orleans area is that there is not much construction going on there," said Lewis May, CEO of May Construction Co. of Little Rock. "They haven't decided on how the insurance companies are going to insure the new construction, they haven't decided on how they're going to zone it, they haven't decided on what the new building codes will be and certainly they haven't decided on what they're going to do on the levees."

And until the levee situation is under control, May said, the insurance companies won't be willing to move forward.

"You're not going to see a big building boom [in New Orleans] until those things are decided," he said. "We are seeing a boom in the Fort Lauderdale area where Hurricane Wilma moved through southern Florida, but they're rebuilding because they already have codes in place."

Petro Products

Since most of the more than 600,000 structures damaged during Hurricane Katrina won't actually be rebuilt until at least 2007, according to the National Association of Home Builders, the price of building materials has dipped after the initial anticipatory rise.

A factor currently wreaking havoc within the industry is fuel prices, which are reflected in higher prices in goods that are delivered by truck or that are manufactured using heat, natural gas or petroleum.

Because nearly 60 percent of the country's natural gas refining capacity was damaged by hurricanes Katrina and Rita, products such as insulation, cement, drywall and PVC pipe have become the most volatile.

"Products that are petroleum-based, we've seen big increases in pricing," said Bill Hannah, CEO of Nabholz Con-struction of Conway. "PVC pipe, glass, asphalt, shingles — anything that is rubber or petroleum-based or the manufacturing requires heat has seen a huge jump in pricing, mainly due to gas prices."

The price of asphalt alone increased 23 percent last year, according to Clay Gordon, a business development officer for Nabholz.

"And there's potential there for as much as about 20 percent more of an increase this year," he said.

Diesel fuel, which powers bulldozers, cranes and dump trucks along with numerous vital delivery vehicles to construction sites, was selling for $1.99 a gallon a year ago. After the hurricanes, it spiked to $3.16 a gallon but has since dropped back down to about $2.49.

River City Materials, one of central Arkansas' largest suppliers of wall board, has been operating on a limited supply from a USG Corp. plant in New Orleans that was temporarily shut down after Hurricane Katrina.

"Sheetrock has been tight in our market and across the country. Prior to the hurricane we had record shipments, and then when the hurricane hit it took a hard strain on everyone," said Jamie McLarty, center manager at River City Materials. "Since then, we had a price increase in December and we're still on tight allocation with our manufacturer. The amount of board they're producing they're allocating to suppliers.

"Some of the box outlets like Home Depot are seeing the crunch because they don't get a whole lot more than a place like us gets. We've been able to take care of all of our customers' needs, but we could definitely use more."

The strain hits more than the bottom line, as most manufacturers are so uncertain that they're hesitant to release long-term plans for shipping to customers like River City.

"We used to be able to get extended quotes, but they're hesitant to do that now," McLarty said. "We're quoting jobs in Little Rock that won't start until December of 2006, and the manufacturers are hesitant to put in writing what that'll cost then. It's made it harder on everyone to estimate."

Steel Is a Steal

Not unlike the underdog Super Bowl champion Pittsburgh Steelers, the team's namesake shocked much of the construction industry. Forecasts predicted it was going to be a tough year for the resource.

"The one thing that has been a surprise to us all has been steel," said Nabholz's Hannah. "We haven't seen as big of a significant change in steel that we thought we'd see, and part of that is driven by an increase in demand from China and India. We haven't seen any strain there. In fact, if anything we've seen movement on steel go back down."

Gordon said a big part of steel's resurgence is that the Chinese and Indian economies have allowed for more domestic production and a resulting cutback in the amount of steel imported.

Shell of Baldwin & Shell added that those foreign interests are also beginning to buy more scrap steel, which has eased its distribution in America.

Steel product prices caught the construction industry off guard in 2004 but got back on track shortly after Katrina hit last year. The Gulf of Mexico, of course, is a major port of entry for steel imports, and the capacity of the port had an immediate negative impact on steel prices early last fall. Steel-related imports in the Gulf totaled 15 million metric tons last year.

"We suffered a dip in the amount of steel come through here right after the hurricane late September and the first few weeks of October," said Paul Latture, executive director of the Little Rock Port Authority. "But since then the steel has been coming through at the same quantities as it had been. There's been very little disruption."

Cement Prices

Even before last year's devastating hurricane season, construction analysts and trade organizations were forecasting a shortage in cement, the main ingredient in concrete.

Some parts of the country — as many as 32 states, according to the Portland Cement Association of Skokie, Ill. — were experiencing a spike in costs and a decrease in business because of the shortage, though Arkansas escaped the brunt.

Many pointed fingers at high tariffs on cement imported from Mexico and called for officials to ease the hefty tax in order to meet America's cement demand.

With more than 9 percent of cement imports coming through New Orleans and other Gulf ports each year, along with the inevitable demand for cement that will come with rebuilding, a deal was made.

Last month, an agreement was finalized between the Commerce Department and the Southern Tier Cement Association that will allow Mexican cement into the Gulf states without the 55 percent duty now in place. That will reduce the tariff on cement imports originating from Mexico from $26 per ton to just $3 per ton.

"That should ease everyone's mind as far as cement goes," Clay said.

The agreement is definitely good for Hannah, who says Nabholz had seen a 15 percent increase in cement prices over the past year.

The Portland Cement Association says that after record-breaking cement consumption in 2004 and 2005, the industry is expected to be on the rise through 2009. Cement consumption in 2006 is expected to reach more than 130 million metric tons, a 3.7 percent increase from 2005. An average annual increase of 2.5 percent is projected through 2009.

"Public works projects such as highway construction and government buildings will also increase in 2006, contributing greatly to the increase cement consumption," said Edward Sullivan, chief economist for PCA.

Labor Exports

One early fear among local construction companies was that once rebuilding on the Gulf Coast hit full throttle, many workers in Arkansas would abandon their jobs for plentiful overtime and higher hourly wages farther south.

Ken Simonson, chief economist for the Associated General Contractors of America in Washington, D.C., said he still expects a heavy migration of workers toward the Gulf Coast.

Though that may be true in the coming years, no companies that were interviewed are experiencing a work force shortage.

"It's not very likely that if you're anchored with a job in Arkansas, where there is no shortage in construction as it is, that you'd pack up and leave for a little extra money," Shell said. "I'm sure there will be some who see it as a real opportunity to make some extra money when the time comes, but right now there's plenty going on in Arkansas for job security."

It's not as if construction workers are having a hard time finding jobs, either.

"Construction added 46,000 jobs in January, accounting for nearly one-fourth of the nation's employment gains," said Simonson, citing new Bureau of Labor Statistics numbers released last week that showed seasonally adjusted construction employment set a record for the 12th straight month, reaching 7.46 million.

Besides higher prices, May said the biggest effect Arkansas will probably see once reconstruction along the Gulf Coast hits full stride is a longer wait on materials.

"I'm sure the reconstruction boom, when it happens, will result in longer delivery times for some materials in Arkansas," he said. "Other than that, I don't see our industry being adversely affected."