A recent spike in construction materials costs — up 6.8% in the last year — is due to the 7-8% rise in truck freight rates over the past year through March, says Jim Haughey, Reed Construction Data’s chief economist
According to Haughy, higher diesel prices are behind most of the rise in freight rates. The economic recovery has contributed only a little to higher freight rates because carriers still have surplus capacity and can not yet get price increases based on a shortage of capacity for shippers. A further 7% rise in truck freight rates should be expected by the end of summer.
March truck rates were based on approximately mid-February diesel prices. Current diesel prices are $0.58/gal higher in the US.
“Diesel prices have not fully caught up with $110 crude oil. And crude oil prices are headed higher,” said Haughy. “OPEC is now cutting oil production because world crude and products inventory is very high following the damage to the Japanese economy and the economic slowdown in the US early in 2011. A depreciating dollar and the risk premium for the possible shutdown of some oil production in the Middle East will also keep contributing to rising diesel prices for at least a few more months.”
“The impact of higher diesel prices on various construction materials depends on how much the material weights, how far it comes from the commodity site to the job site and how much labor accounts for the total cost of the delivered product to the job site. Prices of heavy items, like cement and aggregates will see the biggest freight based increases.
“The price increase will be less for items like metal and gypsum products since processing and manufacturing labor account for a larger share of total product cost which makes the freight portion a smaller share of total cost. Mechanical and chemical products will see an even smaller freight impact because labor is the dominant portion of total product cost.
He continued: “The ongoing spike in freight costs will be temporary, ending as soon as early fall if there is no loss or serious threat of loss of oil production beyond North Africa. If the current freight cost rises follow the historical pattern, look for up to six months of slipping freight rates in the fall of 2011 and the winter of 2012. The price rollback should be at least half of the price gain in the previous year.”
