The impact of hurricanes Katrina and Rita on the construction industry is expected to be significant. Last year the U.S. construction market experienced huge price increases for virtually all common construction materials. This year, prior to the storms, construction prices have continued to be high. Shortages of some materials have also continued. The recent devastation caused by these storms is expected to drive prices even higher, increase shortages, and raise wages.
Cement was already in short supply prior to the hurricanes and calls for lowering the 55% tariff on imported Mexican cement have gone unheeded. On top of the already high demand for cement, several major cement ports located in New Orleans were disrupted. The U.S. construction market is relying increasingly on foreign cement, as cement imports grew from 20 to 26 percent of the market in the first half of the year.
According to the Associated General Contractors of America (AGC), cement prices increased by 12.7% from August 2004 to August 2005, and Engineering News Record (ENR) reports that cement prices have risen by over 5% this year alone. Additionally, prices for ready mix concrete, copper and brass mill shapes, asphalt, and gypsum are all up by double-digit percentages over the last 12 months. Ken Simonson of the AGC predicts that construction material prices will rise by more than 10% next year. Prior to the storm, Simonson predicted an increase between 6% and 8%.
Continuing the trend from last year, fewer suppliers are willing to lock in prices of building materials for more than 30 days. This puts contractors at risk regarding fixed bid contracts, and it creates challenges with negotiable contracts.
Fuel prices, already high before Katrina and Rita, have been driven higher by the loss of production in the Gulf of Mexico. Part of that loss is temporary, as the undamaged platforms that were shut down for the storms are being brought back online relatively quickly. But many platforms have been seriously damaged and some have been removed from service entirely. In addition, and perhaps more seriously, refinery production has been adversely affected. The U.S. was operating at close to maximum refining capacity before the storms. Damage from the storms has reduced refining capacity, at least temporarily, further constraining output and thus putting upward pressure on fuel prices.
High fuel prices affect the construction industry in several ways, directly and indirectly. Contractors must pay more to run their own equipment. The costs for asphalt paving increase and are already up 14% this year. Transportation and shipping costs also increase. Most significantly, prices for other construction materials increase, in part because of fuel surcharges tacked on by vendors trying to recoup some of their higher transportation costs.
Construction wages, an important element of construction costs, will also increase, particularly in the southern states. High demand for construction workers will draw employment to the Gulf Coast, creating shortages of workers in other areas, thus driving up wages.
The impact from the twin storms on the construction industry will be felt most dramatically toward the end of this year and early next year. Companies performing demolition and clearing activities in New Orleans and the other cities affected by the storms will have completed that work and can then begin the full reconstruction efforts. Contractors directly involved in the reconstruction effort in the Gulf Coast area will benefit from the huge amount of work. However, those contractors who are not involved will experience greater overall construction costs due to greater material price increases, higher wages, and even more shortages than experienced previously.