STAYING AHEAD OFTHE CURVE

Hurricane Aftermath CausesMaterials Inflation

By Diane M. Calabrese

In the silver-lining department, the upwardtrend in construction costs may benefitlandlords. That’s what reporter Jennifer F.Forsyth suggests in the November 9, 2005,issue of The Wall Street Journal.

Instead of building and absorbing the higher costs of construction materials, many developers are putting projects on hold. Meanwhile, they reap more money thanks to competition for rental space.

For most companies linked by the development and construction chain, however, price increases are not a positive thing. Gradually escalating costs of materials, labor, diesel fuel, and land are often incorporated into planning over the long term, but abrupt spikes in prices cause difficulties.

So a double blow during hurricane season is particularly harsh. The now infamous Hurricane Katrina made landfall near New Orleans on August 29, 2005, as a Category 4 storm, and less than a month later, Hurricane Rita came ashore and affected much of the same region.

Refineries along the Gulf Coast not only shut down, but many of them lost their transportation links. Supply-chain disruption was just one of the factors contributing to hurricane-related increases in construction costs that spread across the country.

According to Gary Brusacoram of AJB Sales in Minneapolis, Minnesota, the supply of resin from refineries that was needed to make polyvinyl chloride (PVC) conduit was hindered. That quickly translated into a reduced supply of PVC. If PVC was available, materials were often slowed in transit. Not only were roads and ports taken out of service, but the Federal Emergency Management Agency (FEMA) mandated that national trucking firms commit a certain number of vehicles to assist recovery, explains Brusacoram.

AJB Sales is a professional manufacturers’ representative company serving the electrical and voice and data markets in the upper Midwest. Brusacoram watches the prices of all materials related to construction closely, and he cautions that hurricanes explain only a small part of the rising construction costs.

Beyond Katrina and Rita

“Everything related to running a business is going out of sight,” says Brusacoram. He counts health care and workers’ compensation premiums as regulatory drains on the bottom line, as well as the cost of materials.

Yet, unexpected events like hurricanes have a way of making things worse. Even so, says Brusacoram, it is time for a reality check. “If you take everything involved in running a business into consideration, we won’t see the prices of 2001 and 2002 again,” he explains.

One needs only to look at the September 2005 commodity data from the U.S. Department of Labor’s Bureau of Labor Statistics to fill in the picture. The price of gasoline was up 12.7 percent during August 2005. Softwood lumber jumped 2.8 percent for the same period. Industrial commodities rose in price by 3.2 percent from August to September 2005. Crude goods were up 10.2 percent for the interval.

Some prices have already fallen with hurricane season at an end, but the cost of building is not going to return to past lows because of multiple factors in the global marketplace.

“Steel has stabilized,” says Brusacoram. “It has hit that point of supply and demand where the price is relatively predictable from day to day.” That’s a change from the steep climb it was making just a year ago, but it is still a costly commodity.

Because standard steel conduit, building wire, and aluminum wire are essential to his customers, Brusacoram follows the prices of metals on the world market every day, and worldwide forces are still buffeting certain metals. “Copper has gone up approximately 45 percent this year,” he says. He characterizes the price pressure on copper as a “long-term” one.

“There isn’t enough copper in warehouses around the world. Anybody that’s bidding (on copper-based materials) has to count on good common sense and good suppliers,” explains Brusacoram. “There is no shortage of copper in the world. It just costs more to get it out of the ground.”

Attitude Adjustment

Copper is perhaps the most notorious price shifter among today’s building materials. For firms requiring a steady supply of wire, it is especially troublesome.

“Copper wire is one that fluctuates day in and day out,” says Jamie Allen, Purchasing Manager with Parsons Electric LLC. “Strikes in Arizona, strikes in Chile... plus China is buying more and more,” he explains.

As availability and pricing are inextricably linked, dealing with both requires perspective. “Don’t panic,” says Brusacoram. Talking, listening, and, most of all, planning will enable a company to maneuver in the black in a marketplace where commodity prices are increasing.

By talking to distributors and suppliers, says Brusacoram, a firm can garner enough information to look ahead and plan. A high-quality distributor or supplier is closely in tune with market trends. Buying at the last minute is not a good option for getting the best price. “Don’t sit on a quote for a long time,” says Brusacoram. Most quotes on specialty items such as power cable are valid for a limited time.

Allen echoes that sentiment from the side of the purchaser. In fact, he believes that “panic buying” created or at least contributed to a shortterm PVC shortage. “Parsons does a lot of bulk buying,” says Allen. “But the company only bulk buys according to anticipated needs.”

That’s important, says Brusacoram. The key to planning and proper management of materials is to inventory, he explains. By tracking how materials are used over time for what types of jobs and so on, a company can do a much more accurate job of predicting what it will need several months in advance.

Some materials are easier to buy and store, says Allen. PVC conduit can be shelved until needed. Colored wire is more difficult to get and store in the precise quantities that is often required.

To follow commodities prices, Allen consults the newspaper each day and talks regularly to distributors and suppliers. Purchasing at the best price is not an exact science, though. “Basically, you roll the dice,” says Allen. It’s possible to buy at what seems a good price and see a better one the next day.

A Complex Matter

As for bidding on jobs in a marketplace where prices for raw materials keep climbing, that is a complex matter. “If I were a project manager, I would put in timeframes and give an interval in my bid,” says Allen. But in the real world, he explains, such a tactic could take a firm out of the bidding because hard bids are the norm on many projects. “Sometimes you just have to deal with it,” says Allen. “I give the information to project managers at weekly meetings.” But a costly increase in materials can occur after a job is bid.

For his part, Brusacoram suggests that contractors forecast to the end of their projects when considering material escalation. “Everything is temporary with me,” he says. According to Brusacoram, construction has slowed to a seasonal level in the upper Midwest, which reduces demand for PVC conduit. That will give manufacturers a chance to catch up with production. Still, the competition for resin around the world will persist.

Diligence makes a difference when staying ahead of commodity prices. But it cannot cover all eventualities. “You have a number-one contractor in Parsons Electric,” says Brusacoram. “But as sharp as they are, it’s difficult for them to look ahead to every contingency.”

It’s all about planning. It’s the cost of doing business in a world where clouds and their silver linings fluctuate.