A building boom in China and India is exacerbating the crisis, and further squeezing the profits of contractors and developers, including those in Indianapolis. The situation could become worse when rebuilding efforts begin.
“I’ve talked to big commercial developers and we’ve all seen our margins shrinking,” said Greg Small, chairman and CEO of Indianapolis-based developer Equicor Cos. LLC. “As a businessperson, you’re going to have to be sharper at dotting your i’s and crossing your t’s.”
Because the majority of Gulf crude oil and natural gas production remains idled, construction materials using the commodities as a feedstock will remain high through the winter, said Ken Simpson, chief economist of the Associated General Contractors of America, in his forecast.
In fact, common building supplies ranging from lumber and drywall to cement and polyvinyl chloride pipe, are in short supply. The result is that contractors who made no provision for price increases will absorb huge, unexpected costs, Simpson said.
A 1,000-foot spool of wiring has jumped threefold, from $1,800 to $5,400, spurred on by copper mine strikes in Arizona and Zambia, and high demand in China. PVC pipe used for bringing water to and flushing waste away from residences has jumped from $7 to $30 for a 10-foot length of 4-inch pipe.
A combination of factors, including higher oil prices and fewer operating refineries, has led to the steep prices. When oil prices spike, there is a corresponding rise in the resins used to make PVC and other plastic products. Resin makers idled by the hurricanes have further tightened the market.
Watchful eye on costs
Johnny Giannuzzi, vendor relations manager at the locally based electrical contractor Gaylor Group Inc., said the company is trying to stockpile products in an attempt to cut costs and stay competitive. He expects prices to level off but doubts a dramatic drop is in the offing.
“PVC has soared through the roof, and it’s hard to get,” Giannuzzi said. “We have to be aware of theft, and we have to be very careful, because it’s like gold now.”
Giannuzzi was among a handful of industry leaders who participated in a Nov. 4 panel discussion led by the Indiana Construction Roundtable, an organization made up of some of the biggest users and providers of construction services. The symposium provided insight into the causes of the upheaval and what owners can do to lessen the impact.
Morton Marcus, an economist and former director of Indiana University’s Business Research Center, was part of the panel. He concurred with Giannuzzi that prices indeed will remain steady. Rising interest rates will cool construction in many parts of the country, offsetting the building boom expected in the Gulf region, he said.
His outlook is no consolation for business owners struggling to cope with the higher costs.
Frank Eppink, senior vice president of construction operations at Indianapolisbased Lauth Property Group, a commercial contractor and developer, sees a domino effect in play. The rise in material costs will be followed by a shortage of labor, as workers temporarily move to the South to capitalize on the redevelopment. Labor wages will then rise, in an attempt to keep workers here, which will drive up the cost of construction and development, he said.
“How do you hedge that when you’re trying to develop a project that might take a year?” Eppink asked. “What we’re doing is monitoring every division of the industry and trying to project what will happen to those prices, and adjust our prices accordingly.”
Bid bonds submitted on construction projects that guarantee subcontractors will do the work at the bid price might offer some protection against inflating prices, Eppink said.
While bid bonds can provide a safeguard, they also can further inflate the cost of a project because they add an expense to subcontractors’ costs.
“Now you’re limiting the selection of your subcontractors to those who can bond it,” Eppink said. “These are the things we contemplate all day long.”
Higher prices are likely to dissuade some business owners from pursuing new building projects, said Doug Reddington, a vice president of Indianapolis-based architecture firm BSA Lifestructures.
“There are some owners that have the ability to put more cash into a project, but not many,” he said.
Severe cement shortage
Analysts predict cement, the primary ingredient in concrete, will especially be in short supply. Rebuilding New Orleans will require at least 4 million tons of cement during the next five years, according to the Skokie, Ill.-based Portland Cement Association, which represents cement compa- nies in the United States and Canada.
The expected shortage comes at a critical time for cement manufacturers. Consumption in the United States last year grew to a record 114.6 million metric tons, an increase of 6.8 percent over 2003, according to the PCA. Because mortgage rates have remained low, consumption is projected to grow another 5 percent this year.
Shortages in Indiana might be less severe, however, because the state is home to four cement mills. Plants in Greencastle, Logansport, Mitchell and Speed help offset the amount of imported product, said Pat Kiel, executive director of the Indiana Ready Mixed Concrete Association.
“My gut feeling is that we will be OK,” he said, “but it’s a spotty market out there right now.”
Although lumber prices also are expected to rise, costs of vinyl siding, vinyl windows and carpet-materials manufactured with natural gas-are escalating more, said Scott Bowers, spokesman for C.P. Morgan Co. Inc., the area’s largest home builder. Asphalt and roofing materials can be added to the list, because petroleum or natural gas is a key ingredient.
C.P. Morgan must do everything it can to keep costs down to deliver on its tradition of affordably priced homes, Bowers said. The company is aided by the fact that it won’t build speculative homes or begin construction until a loan is approved.
“We can’t turn around to the customer and say, ‘By the way, the house is $5,000 more,'” Bowers said. “But it’s a challenge that a lot of businesses, especially in the home-building industry, are facing right now.”