US Construction Market Report 2Q 2023
Materials and labor
Materials
Significant materials and products price escalation was seen in 2022, following that which occurred in 2021 as economies reopened after the COVID-19 pandemic.
Figure 7 shows the increases in producer price indices for different commodities since February 2020 (pre-pandemic). Softwood lumber had the smallest rise of items shown, at a not-insignificant 17.9%. In contrast, steel mill products increased by over 75.8%.
Russia’s invasion of Ukraine reignited cost escalation due to supply chain disruption and soaring energy prices pushing up production costs. More recently, some products and materials have seen reductions in pricing in response to a weakening global economy affecting demand and reducing input costs. However, some materials prices increased in the three months to April 2023 and even where commodities decreased, pricing remains higher than pre-pandemic.
Wells Fargo’s 2023 Construction Industry Forecast found that inflation has impacted more than 82% of businesses surveyed, whilst increased material costs have impacted profitability for more than 59% of companies who participated in the survey.
The role of metals in the transition to net zero carbon
Many metals saw significant cost increases in the aftermath of Russia’s invasion of Ukraine. However, concerns of global economic weakening reducing demand, as well as lower resource use from China during lockdowns in response to its zero-COVID-19 policy, caused significant price reductions in the middle part of 2022.
Copper will play a vital role in the transition to net zero carbon as renewable power generation requires large quantities to distribute electricity from wind and solar farms to its place of use. It is also needed to produce electric vehicles (EVs) and battery storage.
Towards the end of last year, there was an uptick in copper pricing, with the beginning of 2023 seeing a marked rise. Expectations are that copper pricing will remain elevated during this year and reach a new high as demand increases and supply constraints bite.
Whilst other metals such as aluminium, zinc and nickel did not see the same level of increase as copper at the beginning of 2023 due to broader financial weakness affecting demand, several commentators and traders have said that the prices of commodities are failing to sufficiently reflect market expectations of supply deficits.
With significant investments planned worldwide for clean energy transition, the demand for metals will likely grow significantly over the course of the decade.
Materials/products status
- Products related to infrastructure and clean energy initiatives will keep demand high, leading to continued long lead times and higher prices for transformers, generators, switchgear and the like
- Risks remain for glass procurement due to sand shortages, demand from other industries and manufacturing constraints
- Engineering News-Record Midwest reported concrete shortages in 48 states last year. Concrete is energy intensive and it is difficult to increase production rapidly. With the net zero carbon agenda, there is also pressure for decarbonizing concrete via the use of cement replacement, etc. adding further pressure.
- Strengthening Buy America requirements could add further burdens on the supply chain where domestic limitations exist.
Producer price indices for different construction sectors show increases in the year to April 2023, indicating the pressures faced.
Whilst cost escalation is not expected to be as great in 2023 as in 2022, price increases are forecast for some materials. It is hoped that reducing inflation will help costs to moderate in the latter part of the year.
The Associated General Contractors of America and Sage survey found that only 9% of firms said that they did not have any significant supply chain problems in 2022. To try and mitigate the issues, companies have:
- Accelerated purchases after winning contracts
- Turned to alternative suppliers
- Substituted materials or products
- Stockpiled items before winning contracts.
Encouragingly, there are signs that the construction supply chain is improving following the extensive delays, shortages and cost increases seen. However, it will look different to pre-COVID and time is needed for the issues to be fully alleviated. The use of mitigation measures should continue to minimize risks to project delivery in the meantime.
Labor
As mentioned earlier, the labor market remains relatively tight. There were 341,000 construction job openings in March 2023, according to the US Bureau of Labor Statistics. Due to the significant pipeline of infrastructure and energy work alongside demand from other sectors, one of the greatest issues facing the US construction industry is an overwhelming skills shortage.
Wells Fargo’s 2023 Construction Industry Forecast found that just under half of those surveyed said that the availability of skilled workers continues to be one of their top concerns for the industry, followed closely by inflation. Over half of contractor respondents also listed it as one of their top two cost concerns for their business in 2023.
Four in five of industry executives who responded to the survey continue to be impacted by their ability to hire skilled employees and the majority are turning to wage increases and training to combat the issue.
ABC estimated that the construction industry will need to attract an estimated 546,000 additional workers, in addition to the normal pace of hiring in 2023 to meet labor demand. ABC’s model approximates that 3,620 new jobs are created by every billion dollars of additional construction spending.
Ultimately, skills shortages will likely impact construction costs and project completion.
Confidential research and consulting business’ commercial program, various North American locations — Gleeds provided Program Management, Project Management and Cost Management services.
