The short answer: To me, nobody knows.
If we compare the normal demand for commercial projects in the United States to our current climate, the market is down 30-50 percent. The laws of supply and demand tell us commodities prices should decrease in order to level things out. The opposite is happening. On average, we are paying more for materials then we were last year. But why? Some may blame globalization, but I’m not so sure I agree.
I think it has more to do with manipulation of the futures market and the operation of hedge funds. These interfere with “normal” or what used to be a matter of supply and demand. In 2004 and 2005, steel prices rose 50-60 percent after being flat for many years. It got to the point that it was embarrassing. On long-term projects, I would have to go back to the owner and tell them of increased cost for no change in scope.
Then there was the asphalt. I remember being on vacation and meeting with someone from Wall Street. He was blaming rising prices on increased oil use in India and China, but I think this was faulty logic. Hedge funds and various other investment vehicles were driving the price of oil up.
The increases we have seen in the last two or three quarters are far less dramatic, but they do spike. It makes it really tough on our customers. During the last 12 months, average reduction in commercial construction has been in the 35 percent range. However, construction material prices rose almost 3 percent in February. Lumber went up nearly 8 percent in January and was almost 18 percent over the year before. All commodities including steel, copper and brass have increased while demand is decreasing substantially.
Now people are blaming China again. There are many myths about China and I am not sure what to believe. Their gross domestic product has increased while their energy consumption decreased. I’m just not sure how that can happen.
I will say over the last several weeks of bids, the prices have remained relatively benign, which is a good thing. Maybe we are getting back to core factors of supply and demand. I hope so, at least for a while—for our business, but more so for our customers.