Researchers concur: 2023 will bring construction cost relief

Construction consultant Linesight released new data showing that stability may be returning to the cost of construction materials in the U.S., even as IHS Markit’s Engineering and Construction Cost Index forecast a slowing rate of construction-input inflation in the coming six months.

Construction inflation has a lot of momentum supported by supply-chain dysfunction, energy and labor cost increases.

The IHS Markit index, a leading indicator measuring wage and material inflation for the engineering, procurement and construction sector, fell to 76.7 in June from 79.1 in May. June’s reading is still well above the breakeven 50 mark, indicating rising prices. The subcontractor labor index rose 3.3 points in to 89.1 from 85.8, while the sub-index for materials and equipment costs fell 4.8 points to 71.4.

Sub-indices for metals prices eased further in June with declines in structural steel (to 58.3), carbon steel pipe (to 62.5), alloy steel pipe (to 62.5) and copper-based wire and cable (to 66.7). Shipping costs rose for the 22nd consecutive month, though respondents indicated price increases were less widespread. The index for routes from Europe to the U.S. dropped from 81.8 to 72.7, while the index for routes from Asia to the United States eased from 72.7 to 68.2.

The sub-index for current subcontractor labor costs came in at 89.1 in June, another monthly increase from May’s 85.8. Survey responses showed labor costs continued to rise in all regions of the U.S. and Canada.

Linesight’s analysis noted that high global energy prices, increasing interest rates, labor shortages, fuel and freight costs will likely delay palpable reduction in commodity prices until the beginning of 2023.

“For the last two years, the global construction industry has been at the mercy of disrupted and broken supply chains that have made critical material scarce and have caused some significant increases in the cost of building,” said Patrick Ryan, executive vice president for the Americas at Linesight. “The good news is that many of these materials are now more readily available, which is causing material prices to stabilize, but we are not out of the woods yet because of high energy costs, labor shortages, and tariffs that are tempering the availability of materials and keeping the cost of construction from coming down.”

Among key findings in Linesight’s report:

• Average lumber prices fell sharply in early summer and are expected to fall 12% by the third quarter as demand from the residential-sector demand eases.
• Higher energy prices, including oil prices, have driven up asphalt production cost over the last year, with a 24.8% leap in the second quarter. Decreasing domestic demand is expected to dampen prices by the first quarter of 2023.
• The cost of copper has fallen 12.8% as an indirect result of increasing interest rates.
• Diesel fuel prices are still high but have fallen 8.5% over the last quarter after a major spike in 2021 as crude oil prices skyrocketed past $100 a barrel on the outbreak of the Russia-Ukraine conflict.

Linesight says a key reason for prices that have fallen is rising U.S. interest rates reducing the number of projects greenlighted. Copper and steel – whose prices soared in recent years – appear to be easing as demand drops. A number of geopolitical factors caused asphalt and brick prices to rise in Q2, although Linesight expects those prices to drop later this year as demand shrinks.

“Certain commodities, such as lumber, reflect changes almost immediately, whereas others take one or two quarters to realize,” says Ryan. “It is reasonable to assume

that by the fourth quarter of this year, we will see a downward trend in many commodity costs.”

IHS Markit’s research measures expectations for that change in momentum, with the headline index for costs over the coming six months falling to 72.9. The six-month expectations index for materials and equipment declined 2.6 points to 70.3. Six-month expectations for sub-contractor labor fell 16.5 index points to 79.1.