Low bid prices squeeze contractors but spur Indiana work; highway paint woes loom

The producer price index (PPI) for finished goods rose 0.2% in April, not seasonally adjusted (but fell 0.1%, seasonally adjusted) and 5.5% over the past 12 months, the Bureau of Labor Statistics announced on Tuesday. Contractors were again squeezed by rising input costs and falling bid prices. The PPI for inputs to construction industries, a weighted average of the cost of materials used in every type of construction plus items consumed by contractors, such as diesel fuel, jumped 1.1% for the month and 5.7% over 12 months. Highway and street construction experienced increases of 1.1% and 8.3%; other heavy construction, 1.1% and 6.7%; nonresidential buildings, 1.0% and 5.1%; multi-unit residential, 0.9% and 4.1%; and single-unit, 0.9% and 3.9%. The PPI for new building construction, which reflects contractors' labor, overhead and profit as well as materials, fell 0.1% and 4.3% for offices; new industrial buildings, 0 and -4.0%; new warehouses, +0.2% and -4.6%; and new schools, +0.7% and -1.5%. Notable materials cost increases included diesel fuel, 6.5% and 43%; steel mill products, 5.2% and 25%; lumber and plywood, 4.7% and 20%; copper and brass mill shapes, 4.3% and 30%; aluminum mill shapes, 3.6% and 18%; and asphalt paving mixtures and blocks, 1.2% and 7.9%. Gypsum products rose 4.7% for the month but were down 7.5% from a year ago. The PPI for concrete products slipped 0.5% and 2.2%. Because of falling bid prices, Indiana Governor Mitch Daniels "dramatically ramped up the timetable for the I-69 extension from Indianapolis to Evansville on Wednesday," the Indianapolis Star reported on Thursday. "The driving factor: Construction bids on I-69 have been far below estimates. [Daniels said,] 'we want to get as much under contract as we can with these terrific below-estimate prices. You never thought you'd hear the term government underrun, but that's what we're getting.' So far, the five I-69 contracts INDOT has awarded have come in between 25% and 35% below original estimates, primarily because of the struggling economy and prevalence of cash-strapped governments that have limited road projects." One construction product that is in tight supply, with price increases announced, is pavement marking materials. Plant breakdowns led Dow Chemical to declare "force majeure" in April for acrylic resin and on May 6 for methyl methacrylate polymers. Titanium dioxide, widely used as a whitener for paint and other products, and rosin esters, the primary resin system used in alkyd-based thermoplastic, have been in short supply. This month, highway striping suppliers Ennis and Swarco announced price increases and allocations for their products, which could cause delays in completion of some highway projects. Other materials prices have leveled off or dropped, however. Nucor-Yamato Steel wrote to customers on May 12 that its raw material surcharge for structural steel products would drop $40 per ton on June 1 but that it would raise its base price, leaving the transaction price unchanged for the second month. The price of crude oil for June delivery on the New York Mercantile Exchange closed Thursday at $64.53 per barrel, a 10-month low. Copper futures closed at $2.96 per pound, down nearly 20% from a month ago. The consumer price index (CPI) for all urban consumers rose 0.2%, not seasonally adjusted (but fell 0.1%, seasonally adjusted) in April and 2.2% over 12 months, BLS reported on Wednesday. The CPI for urban wage earners and clerical workers (CPI-W), used to adjust many construction and other wage contracts, rose 2.9% over 12 months. New construction starts in April dropped 9% in value at a seasonally adjusted annual rate, McGraw-Hill Construction (MHC) reported on Thursday, based on data it compiled. "Much of the decline was due to a pullback for nonresidential building, which in recent months had appeared to be stabilizing after the steep downturn experienced in 2009," MHC said. "The housing sector also lost momentum in April, slipping back after recent gains. Running counter in April was nonbuilding construction, which registered moderate growth as the result of heightened activity for environmental public works and electric utilities. During the first four months of 2010, total construction on an unadjusted basis came in at...essentially the same amount as reported a year ago." Nonresidential building plunged 23% in April and 18% year-to-date (YTD). Residential building decreased 7% in April but jumped 34% YTD. Single-family housing dropped 8% in April and multifamily housing, 1%. Nonbuilding construction advanced 6% in April but fell 2% YTD. An analysis of more than 50 major metropolitan areas released on Thursday by Glenn Mueller of Dividend Capital Research (www.dividendcapital.com) showed continuing declines in rents and occupancy rates for five property types in the first quarter. The national office market occupancy level declined 0.2%. "New construction is running at a rate of 0.5%, which is the lowest level in 14 years." Industrial occupancies declined 0.2%. "Our models show 1Q10 [the first quarter of 2010] as the bottom of the occupancy cycle and we expect to see improvement begin next quarter." The apartment occupancy national average was flat. "The first-time home buyer credit did not create as many occupant losses as expected. New apartment completions stayed at their 30-year low, keeping supply in check." Retail occupancies declined 0.3%. "Our models show retail occupancy bottoming in 1Q10 and we expect to see minor improvement in 2Q10...Some retailers have started to expand, already creating some new demand while new supply is at very low levels." Hotel occupancies improved a moderate 0.4%. "Our model shows that the hotel recovery has started, but should only have moderate increases over the rest of 2010." Hotel revenue per available room, or "revpar," declined 7.6%.