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Construction Materials Prices Squeeze Strapped Contractors

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The amount that contractors pay for a range of key construction materials edged down 0.1% in November but climbed 6.2% from a year earlier, outstripping the increase in contractors’ bid prices for finished buildings, according to an analysis of producer price index figures released recently by the Associated General Contractors of America.

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Officials with the construction association warned that the cost squeeze on contractors, combined with declining public sector investments in construction, may drive many contractors out of business.

“Price increases have moderated or even reversed direction at the moment for essential construction materials, but prices are likely to increase in the next few weeks,” said Ken Simonson, the association’s chief economist. “Meanwhile, federal construction funding has slowed sharply, and some may be cut off completely by next week, leaving contractors in desperate shape.”

Simonson noted that prices have diverged greatly for key construction materials in the past month. The price index for diesel fuel leaped 8.9% in November and 32% over the past 12 months. The index for copper and brass mill shapes, which reached record levels earlier in the year, sank 2.3% in November and 7.7% year-over-year. Steel mill products also dropped in price for the month, by 1.1%, but rose 13% from a year earlier. Similarly, the index for asphalt paving mixtures and blocks declined 0.5% in November but posted an 8.1% year-over-year gain.

“Prices are likely to be as volatile in 2012 as they were this year,” Simonson predicted. “Wallboard makers have announced they intend to raise prices 35% on Jan. 1, and a variety of steel products appear to be headed higher again. In contrast, diesel fuel and copper prices are poised for further slippage in the near term but could shoot back up without warning, as they did in 2008 and 2011.”

Simonson observed that price indexes for finished nonresidential buildings, which measure what contractors estimate they would charge to put up new structures, have slowly strengthened in recent months but do not match the rise in materials costs. From November 2010 to November 2011, these indexes rose 3.4% for new industrial buildings, 3.7% for offices, 3.9% for warehouses and 4.5% for schools. Despite the increased bid prices, Simonson cautioned that materials prices have increased at a faster rate.

“Contractors won’t have the same ability to increase bid levels if Congress allows billions in construction investments to lapse later this week,” said Stephen E. Sandherr, the association’s chief executive officer. “If Congress can’t work through its differences and fails to enact short and long term investment bills, many contractors are likely to shed even more jobs and may even be forced out of business because of declining demand and increasing materials costs.”

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