U.S. contractors association warns about inflation, supply chain delays

The Associated General Contractors of America (AGC), an organization that groups 27,000 member companies, updated in mid-2021 an inflation alert originally issued in the first quarter after most key construction materials such as steel continued to soar while supply chain problems worsened.

Steel coils. Usiminas - Ipatinga, Brazil. Image courtesy of WorldSteel Association.

“Extended and uncertain delivery times for construction items have been an even bigger problem for many contractors than the extreme price increases. Currently, there are delays at every stage of the supply chain,” according to a June report sent by Ken Simonson, AGC’s chief economist.

“Lengthening lead times for both production and deliveries” has been an issue, according to commentaries in the report.

The association published the warning at a time when consumer price data has shown the biggest annual increases since 2008, according to mid-July figures.

A market analyst separately warned after the mid-July release of retail data about inflationary trend concerns that may potentially lead to decisions involving interest rates.

Supply chain problems

“One steel fabricator reported on June 1 that it had been told bar joists would not be available from its supplier until May 2022,” the AGC report said.

“Plant or transportation breakdowns that would normally have caused only tight supplies, inventory draw-downs, or localized shortages have had much wider consequences this year. The most widespread and long-lasting example has been the impact on construction plastics from the freeze in Texas in February,” it said

“The freeze and losses of power and water damaged or completely shut down all of the plants that supply the raw materials for all construction plastics. In addition, the freeze burst thousands of polyvinyl chloride (PVC) water pipes, thereby adding to demand,” the report said.

Other unplanned outages have occurred at “plants producing cement, semiconductors, chlorine (used in making PVC and other plastics), and steel. Meanwhile, little new capacity has been added as producers struggle.”

In addition to increased costs and lead times, contractors are experiencing “delivery times that have stretched or become completely unreliable. These problems have shown up at all points in the delivery chain,” the report said.

Surging steel costs 

The U.S. Midwest Domestic Hot-Rolled Coil Steel Index Futures, as listed on the CME Group's exchange delayed quotes the morning of July 20, showed $1,830 per short ton for a minimum contract unit of 20 short tons.  This compares with under $500 per short ton a year ago.

According to Worldsteel Asociation, production in May 2021 of 64 countries reporting to the organization was 174 million tonnes, or a 17% increase. Asia and Oceania accounted for 128 million tonnes of that global output, a 12% increase from the same month a year earlier.

The association said that U.S.-imposed tariffs on steel started under former President Donald Trump have worsened availability while increasing costs, the report said.

“Although the ostensible purpose of some of the trade actions was to protect and create jobs in the U.S. manufacturing sector, steel in particular, very little capacity has been added so far. Many manufacturers merely raised their prices in tandem,” according to the ACG report.

In May, over 300 U.S. manufacturers sent U.S. President Joe Biden a request to end Section 232, or steel and aluminum tariffs initiated three years ago.

“The vast majority of manufacturers in the U.S., such as ours, use only domestically produced steel and aluminum, but it is industrial users such as ourselves who face major disruptions to our operations due to the lack of availability of these raw materials,” the letter said.

“Many of us are accustomed to four to six-week delivery times for common steel products. Now we receive delivery quotes for 16-20 weeks with some products not promised for delivery until 2022.”

Biggest inflation advance since 2008

The U.S. Bureau of Labor Statistics said on July 13 that the Consumer Price Index for all urban consumers, not seasonally adjusted, increased 5.4%, during the one-year period ended in June and said it was the largest 12-month advance since the year ended August 2008.

Consumer prices increased 4.7% from February 2020 to June 2021. February 2020 was the last month before the COVID-19 pandemic started to spread across the Americas.

Separately, the U.S. Census published on July 16 retail data that showed that the sale of items like clothing or restaurants that had suffered during the pandemic, have shown recovery.

Overall retail trade sales in June 2021 rose nearly 16% above last year based on advance estimates, the U.S. Census Bureau said on July 16.  

Clothing and accessories stores activity increased 47%, while food services rose 40% from last year. Both services create demand for plastics and other materials for packaging.

“The Fed has shown no desire to hike interest rates yet, but that prospect is a cloud on the otherwise bright, big-spending horizon,” said Erez Katz, director of market analysis company Neuravest.

“The slingshot effect on sentiment that usually applies to economies as they emerge from economic downturns could be scuppered by runaway inflation and the rate rises necessary to contain it,” he added.

Mexico has already seen changes in interest rates amid inflationary concerns.

By Renzo Pipoli