Industry braced for a bump as material prices rise.

Construction materials costs are rising faster than today's producer price report suggests, according to Ken Simonson, chief economist for The Associated General Contractors of America (AGC).

Commenting on the March 15 producer price index (PPI) report from the Bureau of Labor Statistics, Simonson noted, "Steel is getting especially hot and diesel is adding fuel to the inflation fire.

"The PPI for construction materials and components edged up only 0.1% in February. But data for this index was collected on February 13 and there have been some notable price increases occurring or announced since then.

Steel mills have announced two big increases for reinforcing and structural steel--types used widely in highways, buildings, parking structures and other construction. On March 1, many mills increased prices by $15 per ton. This week, they announced a $55 increase to take effect on April 1. That would make the total increase since January 1 about $100, or nearly 40%.

"These steel increases are roughly as extreme as in early 2004, the year that kicked off a three-year binge of materials cost escalation," Simonson observed. "This year, as in 2004, price hikes for other materials, such as diesel fuel and asphalt, are going to hit construction especially hard."

The retail price of diesel fuel soared 21 cents a gallon in the month since the PPI data was collected, according to weekly surveys by the Energy Information Administration.

"That hits contractors three ways: directly in the cost of operating offroad machinery and construction trucks, and through surcharges on deliveries of materials and equipment to job sites," noted Simonson. "The PPI for diesel was up 7% in February, and these increases will easily double that. Based on futures prices, more is probably on the way.

Asphalt prices, which jumped 14% at the refinery level last month, will soon rise for paving and roofing contractors, Simonson predicted. Paving asphalt also uses a lot of aggregate, or crushed stone. That PPI jumped 1.9% in February and 3.9% in the past three months.

According to the economosit, road construction, along with other heavy and building construction, will bear the brunt of these increases, because highway and bridge contractors use so much diesel, asphalt, steel for bridges and guardrails, and concrete, which also is rising in price.

In contrast, falling gypsum prices and a multiyear drop in lumber prices are holding down single-family homebuilding costs. "The catch there is that nobody is putting up houses," said Simonson.