No end in sight to rising material costs, experts tell General Contractors panel.

Though the national economy is projected to remain strong throughout next year, material costs could continue to escalate by approximately 6% for the next several years, economists speaking at an Associated General Contractors teleconference agreed.

Panelists suggested contributors to price escalation, including pressure on limited resources such as gasoline, increased global demand for products, fewer local production mills and a sharp drop in residential construction.

The price of natural gas has remained stubbornly high this year, floating at around $8. Demand is expected to rise upwards this year and prices may reach $9 by 2009 and double digits by 2010.

Spiking gas prices, combined with uncertainty about global supply and the shift in public consciousness towards environmental sustainability may infuse new energy products with power.

"Anything energy related should gather steam. There will be more need for both conventional plants and environmental retrofits of conventional plants, and for new ideas like wind farms, biodiesel, animal fat diesel and more experimental energy construction," Ken Simonson, chief economist of the Associated General Contractors of America

New technologies will not be expansive enough to solve all problems caused by outrageous gas prices, Simonson said. "As far as gas goes, there is no pricing panacea. The demand is too strong," he said.

High gas prices will also contribute to declines in the supply of other construction materials, particularly PVC pipes and other plastics.

The outlook for base metals will stay "stronger for longer" due to a dramatic increase in building in Brazil, Russia, India and China (BRIC), said Bob Garino, economist with the Institute of Scrap Recycling Industries. The prices of copper, stainless steel, and materials with stainless steel in them like nickel, have risen sharply this year and will continue to rise, he added.

Unexpected factors that may contribute to base metal prices evening out include the possibility of moving more ore producing smelters to the states, such as those projected for Louisiana or Alabama, and changes in worldwide politics resulting from the general surge of construction activity.

Less national residential construction is causing less demand for products like wood, gypsum, and to a lesser extent, concrete and copper. This trend should continue, the panelists said. "The sharp drop in home construction over the past quarter has put downward pressure on a lot of inventory. It is highly unlikely that home construction will rebound in the immediate future. I do not think homebuilders will pick up their tools again," Simonson said.

"I agree that there is a significant drag on the Gross Domestic Product (GDP) as far as residential construction goes that we have seen this year and will continue to see throughout next year. We have seen so many years of strong growth and now we are seeing the market pulling back some, but it won't last forever. Four to six quarters from now there should be a recovery," said Jason Schenker, economist for Wachovia.

Concrete rebounded unexpectedly this year. The material sustained price increases for the past three years but began to recover when China started to produce concrete themselves and ship it out, and a foreign duty for dumping concrete was lifted in Mexico. Though prices are not as high as they have been, higher ship charter rates have kept them slightly elevated.

Unanticipated factors that could cause wild surges in prices include natural disasters such as Hurricane Katrina that wiped out 16 oil refineries on the Gulf Coast in 2005, and the loss of other natural resources like copper. Schenker said.

Though sticker shock from escalating materials have not caused any projects the panelists know of to be shut down, they have heard of firms scrambling to come up with creative ways of financing projects until they ultimately pay for themselves..

"We hear nearly every day, particularly from public agencies--those who are involved with schools or some form of transportation, who are shocked at how high the bids they have opened the floor up to have turned out to be, when they got approval for the project three years ago, and thought they could rely on the 3% inflation rate that was projected," added Simonson. "There is not any one thing driving those prices, but it is fair to say the total costs of the projects are rising significantly. This trend should continue for the next couple of years."