The Impact of COVID
The outbreak of Coronavirus has had devastating effects on the supply chain for construction materials. Out of 11 categories in the Producer Price Index, 6 experienced monthly increases after the pandemic began. The hardest hit sectors were those that rely on energy, driven largely by the increase in costs of crude oil.
Crude oil not only affects those products that are made from it, but the supply chains that are driven by vehicles powered by fossil fuels. The result is a knock-on effect that increases prices in a large number of areas. Costs of anything that aren't produced locally have risen in response to these problems, which are only made worse by a sharp increase in demand for delivery services as more people shop from home during the pandemic.
The Rising Costs of Lumber
Also high on the list of materials hit with rising costs is lumber. Prices increased over 50% just a few months after the lockdowns for the pandemic started. There are a number of factors that are suspected to have contributed to these increases
● Lockdown orders caused many mills to close down or restrict operations, limiting the supply that was available.
● Those that remained open reduced capacity further as demand dropped substantially during the period.
● Those producers were then hit by a surprise uptick for demand, not from the construction sector, but from do-it-yourself homeowners looking to be productive while the lockdown raged on.
● The housing market survived the impact of COVID better than was expected, resulting in less of a sustained decrease in demand than the producers were counting on.
Not a New Problem
While it's easy to blame the impact of the Coronavirus on the increase in prices, these problems have existed for a long time. Producers first began feeling the impacts of tariffs and rising fuel costs back in 2018. The Producer Price Index, which is a weighted average of the cost of all materials used in the construction industry, rose 7.4 percent between September 2017 to that same time in 2018.
Tariffs and fuel costs themselves don't tell the whole story. While we've seen significant increases from those factors in 2018, and more increases in the cost of materials since COVID hit, the Producer Price Index has actually been steadily rising since at least 2014. Part of the long-term problem is a labor shortage in the industry, that has only been exacerbated by recent events.
How the Future Looks
The rising cost of materials serves as a double whammy to contractors, who are already seeing a decrease in demand due to tightening budgets as COVID restrictions continue to cut into household incomes, and more homeowners attempt repairs on their own. With demand down, the solution isn't as simple as passing the cost of materials on to the client. The good news is that the sharp increases appear to have peaked in 2018, so there's reason to be hopeful that material prices will come down as lockdowns end and demand begins to rise again.
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