Steel Glut Keeps Materials Pricing Flat for North American Construction Industry in 2013

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Friday, December 20, 2013 2:31 pm EST

"Downward pressure on steel prices is mostly a supply-side story"

Steel Glut Keeps Materials Pricing Flat for North American Construction Industry in 2013


El Segundo, Calif. (Dec. 20, 2013)—Although overall North American construction costs rose throughout 2013 due to tightness in the labor market, pricing for materials and equipment held steady for most of the year, primarily driven by falling steel prices.


The Current Materials/Equipment Price Index, part of the Engineering and Construction Cost Index (ECCI), has been hovering near the breakeven point of 50 since April, according to IHS Inc. (NYSE: IHS) and the Procurement Executives Group (PEG). This indicates that pricing for construction materials in North America has been unchanged throughout the year, even as labor costs have increased.


Four of the 12 segments comprising the Current Materials/Equipment Price Index are currently below the neutral mark, indicating that their prices are declining. These segments are carbon steel pipe, fabricated structural steel and freight rates.


Over the course of 2013, steel-related products have shown the most weakness of any material used in construction, as the global industry continues to suffer from overcapacity and low utilization rates.


The China syndrome

The overcapacity is predominantly the result of mills operating in China, which now account for more than half of the global steel supply. Despite the oversupply, Chinese steel capacity continues to grow, with more than 20 million metric tons of capacity added just in the first three quarters of this year, highlighting the tremendous upward pressure there is on China’s steel production. This huge amount of excess capacity is undercutting any attempt by the Chinese mills to increase pricing.


“Downward pressure on steel prices is mostly a supply-side story,” said John Anton, director of the steel service at IHS. “As a result, financials for global steel mills have almost failed to make operating margins, never mind generating a net profit. This creates long-term issues at mills regarding debt service, maintenance and investment.”


Labor pains

The ECCI divides construction costs into two major categories: materials/equipment and subcontractor labor. The attached figure presents the monthly results of the ECCI. A number higher than 50 indicates a monthly increase in prices paid, while a reading lower than 50 shows a decline.


The ECCI was listed at 53.0 in December, essentially unchanged from 53.2 in November. With the materials/equipment portion of the index remaining at around 50, labor continues to be the segment driving up construction costs. The current subcontractor labor index in December registered 56.8 percent, down slightly from 58.5 percent in November. The ECCI has now indicated rising prices for 23 consecutive months.


The rising tide of gas

The shale gas boom in the United States continues to play a major role in driving increased spending on construction and rising costs for associated labor in North America.


“Respondents to the ECCI survey once again are expressing concern over the availability of skilled laborers, such as welders and pipefitters in the U.S. Gulf Coast,” said Laura Hodges, director of the pricing and purchasing service at IHS. “Availability of these workers in the region is limited and some in the energy industry are expressing concern that labor shortages could arise in 2014.”


About the ECCI

The IHS/PEG Engineering and Construction Cost Index (ECCI) is based on data independently obtained and compiled by IHS from the procurement executives of leading engineering, procurement, and construction firms. The headline index tracks industry-specific trends and variations, identifying market turning points for key projects, and is intended to act as a leading indicator for wage and material inflation specific to this industry.


Each survey response is weighted equally for every $2 billion in spending in North America. Respondents are asked whether prices—either actual paid transactions or company-informed transactions—during the current month for individual materials, equipment, and regional subcontractor rates, were higher, lower or the same as the prior month.


Respondents are then asked for their six-month pricing expectations among these same subcategories. The results are compiled into diffusion indexes, in which a reading greater than 50 represents upward pricing strength and a reading below 50 represents downward pricing strength.


About IHS (

IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today's business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs approximately 8,000 people in 31 countries around the world.


IHS is a registered trademark of IHS Inc. All other company and product names may be trademarks of their respective owners. Copyright © 2013 IHS Inc. All rights reserved.


About The Procurement Executives Group (PEG) (

The Procurement Executives Group provides a forum to identify and address procurement related issues which will improve the effectiveness of the engineering and construction industry.  Established in 1994 the Procurement Executive Group has been recognized as an Industry authority on Procurement, Materials Management, and Subcontracting topics. PEG is actively involved in supporting research efforts related to these topics. PEG Member Companies include AMEC, Bechtel Corporation, Black & Veatch, Burns & McDonnell, CB&I, CH2M HILL, Fluor Corporation, Foster Wheeler USA Corp., Jacobs, KBR, McDermott International, Peter Kiewit Sons, S&B Engineers and Constructors, SNC-Lavalin, Technip USA, URS Corporation, Wood Group Mustang, WorleyParsons, and Zachry.

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