Impact on the Construction Industry
In the weeks leading up to the tariffs’ imposition, many construction industry observers predicted significant cost increases for critical inputs. Everything from rebar to steel beam, steel pipe and tube, and aluminum mill products, were predicted to go up in price, potentially causing an industry slowdown. Further speculation was that the cost of new and used construction equipment would rise, pushing purchase and rental prices for contractors higher.
Indeed, most predictions turned out right. Without getting into the finer points of domestic production versus imports and production capacity versus output, we can consider the facts. The Associated General Contractors Association (AGC) tracks and compiles a monthly listing of the Bureau of Labor Statistics Producer Price indices, covering various industry sectors and materials. According to its reports, from November 2017 to November 2018, fabricated structural metal costs grew 12 percent. Metal bar joists and rebar rose 12.6 percent. Structural metal for nonindustrial buildings climbed 13.1 percent. Fabricated structural metal for bridges increased by 5.5 percent. Aluminum mill shapes climbed 5.9 percent.
It is no surprise then that iron and steel scrap prices rose 19.8 percent year-over-year.
Excluding capital investment, labor and imports, total input costs for overall construction increased 4.9 percent in the November 2017 to November 2018 period. No construction industry sector was excluded from input cost increases. Nonresidential construction costs rose 4.9 percent. Industrial structures climbed 4.2 percent. Residential construction costs increased by 4.8 percent, and highway and street construction input costs grew the most at 6.2 percent.
Important to note are cost increases in other important components, including a significant escalation in diesel fuel (+19.5 percent) and asphalt (+57.6 percent), perhaps explaining why highway and streets construction input costs outpaced other sectors.
What About Construction Equipment?
The Producer Price Index (PPI) for U.S.-made construction machinery and equipment rose only 0.3 percent through November. This is minuscule given the steel and aluminum cost increases.
Why such a small increase? It’s important to note that steel is one part of the finished product cost. Steel accounts for roughly 10 percent of the manufacturing cost in large construction equipment.
There are other factors to take into account when considering the relatively low PPI increase, such as how and when price increases are passed to the manufacturer’s dealer network. If a manufacturer agreed to fixed prices prior to the higher tariffs, it might have been forced to absorb any increases in steel- or aluminum-related costs. On the other side, long-term supply contracts with steel producers may have delayed cost increases to large-scale purchasers. Finally, elimination of discounting, rebates, marketing funds, free financing, and other incentives may give certain manufacturers the ability to retain more profit without raising the reported machinery cost to their dealers or end users.
A version of this article originally appeared in EFA.
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