Spend Matters welcomes another guest post from John Bauman, Principal Economist at IHS.
The market for most building materials has shifted in favor of sellers as annual price increases take effect and construction activity resumes after a challenging winter. Wallboard and cement prices both posted significant gains in the first half of 2014, when previously announced price increases took effect. In contrast, lumber prices have softened modestly to date. In our view, 2014 will in fact be a very good year for housing, and therefore we are expecting lumber prices to snap back over the summer.
Spot lumber prices, as measured by Random Lengths' spruce-pine-fir (S-P-F) #2&Btr mill price, peaked last November at $382 per thousand board feet (mbf). They have since softened, averaging $367/mbf in first-quarter 2014 and are expected to slip to $344/mbf in the second quarter. Given that severe winter weather affected large swaths of the US housing market this year, it is somewhat surprising that prices have remained as resilient as they have. Record log costs have certainly played a role in supporting higher lumber prices; so have expectations surrounding lumber demand heading into the peak building season. In the current forecast, single-family housing starts are expected to increase 9.7 percent in 2014, which will help lift S-P-F #2&Btr mill prices. Lumber prices are expected to climb steadily throughout the second half of the year, reaching $379/mbf in the fourth quarter.
Cement manufacturers managed to raise prices 3.1 percent month on month in April. On a level basis, prices are now only 1.7 percent below their January 2009 peak. Saddled with higher input costs and facing healthier end markets, cement manufacturers will continue to press for higher prices. However, below-average capacity utilization rates for the industry will limit the scope of additional gains this year. In the current forecast, cement prices are expected to advance 3.2 percent quarter on quarter in the second quarter as manufacturers capitalize on stronger cement demand. Regionally, we expect prices to show the most strength in the West and South, with pricing particularly strong in California and Texas. In contrast, prices in the Northeast will likely lag the national average. As we move through the remainder of 2014, cement prices will begin to level off. Starting early next year, another round of price increases will likely take effect. By the second quarter of 2015, national cement prices should be 4.1 percent higher than they are today.
For the third year in a row, gypsum product manufacturers implemented annual price hikes, effective January 1 of this year. To date this year, it appears the increases have stuck. According to the Bureau of Labor Statistics, gypsum product prices, which include wallboard and plaster, were up 10.1 percent in the first quarter versus year-earlier levels. Similar to previous years, prices will likely continue inching up through the summer as construction activity reaches its seasonal peak. By the third quarter, though, prices should soften marginally as gypsum product manufacturers try to maintain sales volumes.
This cycle is expected to repeat itself in 2015, so long as activity within the housing market continues to expand at double-digit rates. After advancing 14.8 percent in 2013, gypsum product prices are expected to rise 8.1 percent in 2014 and 7.5 percent in 2015. An important downside risk to the price outlook is the pending wallboard antitrust litigation that was recently consolidated in the Eastern District of Pennsylvania for coordinated pre-trial proceedings. The defendants include American Gypsum, USG Corp., CertainTeed Corp. and Georgia-Pacific LLC, among others. If the courts rule that these manufacturers have in fact conspired to fix prices and limit output, there could be a sharp downward correction in prices, since the threat of future prosecution would put an end to any uncompetitive behaviors.