Spend Matters welcomes this guest article from IHS.
The dramatic slide in oil prices over the last several months has helped pry pricing leverage away from building material suppliers. However, this is likely to be temporary. As oil prices gradually recover, buyers will have less leverage in pushing for price cuts. Moreover, price risk varies by material depending on exposure to the energy sector. In markets where oil accounts for a sizable portion of input costs, such as asphalt, price risk is on the downside, where it will remain until 2016. In contrast, for markets where oil and other energy inputs play a proportionally smaller role, price risk remains on the upside. This is largely a function of the improving outlook for both residential and nonresidential construction in 2015.
To date, however, asphalt prices have yet to respond. According to the US Bureau of Labor Statistics, the Producer Price Index for paving asphalt declined 0.3% in January, but prices were up 1.2% over the last 6 months. However, this should not be taken as a sign that asphalt suppliers are immune to developments in energy markets. Rather, it confirms a decades-old relationship: changes in the price of oil take between 1 and 2 quarters to begin appearing in asphalt prices. This relationship is likely to hold in the current energy rout, despite improvements in paving investment. After falling a mere 0.2% q/q in the fourth quarter of 2014, asphalt prices are expected to weaken further over most of 2015 before bottoming out at the end of the year. Annually, prices are forecast to fall 4.1% year-on-year in 2015. This would be their first annual decline since 1998.
After pausing in the winter, cement demand will resume its climb higher beginning in the spring of 2015, fueled by gains in residential and commercial construction. However, receding input cost pressures should help temper cement price escalation over the remainder of 2015. With natural gas prices and other key energy inputs expected to fall sharply this year relative to last, cement manufacturers will struggle to push through additional price increases. After rising 4.9% y/y in 2014, cement prices are forecast to rise only 3.5% y/y in 2015.
Lumber prices have been on a rollercoaster ride since 2012, with strong surges followed by equally large corrections. This narrative of sharp price gains followed by heavy losses will continue until new home construction consistently meets or exceeds expectations. This was supposed to happen last year. However, there are reasons to believe 2015 will be different. Mortgage rates have fallen to their lowest level in more than a year and household finances are improving. Additionally, rising rents are changing the calculus in the choice to rent or own. Together, these factors should help resuscitate the moribund housing recovery. This in turn will drive lumber prices higher. After averaging $315/mbf in the first quarter of 2015, S-P-F mill prices are forecast to reach $346/mbf by the third quarter.
Wallboard demand from both the residential and nonresidential structures markets should continue to improve throughout 2015. This will encourage wallboard manufacturers to push for another round of annual hikes, effective in early 2015. However, buyers are expected to push back, citing falling input costs, particularly for fuels and other raw materials. This should help temper wallboard price increases throughout the year. In IHS’ current forecast, prices are expected to rise 2.1% in the first quarter of 2015 before flattening out over the remainder of the year.