As further evidence of downward pricing pressures amid weak global demand for building and construction and a build-up in inventory in Chinese steel mills, the latest data from the United States shows a dramatic fall in prices for iron and steel products in that country.
In June, overall prices for building and construction materials throughout the US fell by 0.6 per cent according to the latest Producer Price Index report from the United States Department of Labour.
Aside from energy, where the notoriously volatile crude energy prices plummeted 5.1 per cent (seasonally adjusted) in June and dropped by a whopping 16 per cent in the June quarter, iron and still products led the decline, plummeting by 3.8 per cent in the month. Prices for iron and steel are now six per cent below their level at the end of June last year.
Aside from this, prices for non-ferrous wire and cable products (down 2.1 per cent for the month and 7.3 per cent year on year) are also falling. So too are steel mill prices, which dropped 1.3 per cent last month and are down 3.2 per cent from their level one year ago.
By contrast, softwood lumber prices as on the rise, having jumped 7.4 per cent in the June quarter and 1.9 per cent in June alone. Concrete prices rose to a lesser extent, seeing a 0.3 per cent increase last month and a 1.5 per cent boost compared to one year ago.
Meanwhile, prices for plumbing fixtures and fittings as well as fabricated structural metal products remain relatively stable.
Along with the slowdown in global demand, downward pressure on iron and steel prices is being driven by continued overproduction in China and a build-up in global inventory stockpiles.
According to the most recent report from the World Steel Association, China, by far the world’s largest steel producer, increased its overall volume of production during the first five months of this year even as the rest of the world pulled back, resulting in Chinese producers continuing to flood world markets with stock they have been unable to sell at home.
Because of this, and also due to falling demand in Europe, the world is awash in steel, consuming less than eight-tenths the amount of steel it has the capacity to produce.
The dark side of lower prices: weak building conditions
While falling input prices have a direct and positive effect for building and construction companies in terms of easing pressure on profit margins, they are also a symptom of a serious problem: weak economic conditions and poor demand for building and construction output.
Associated Builders and Contractors Chief Economist Anirban Basu attributed latest figures to a slowing global economy, a stable US dollar and a decrease in demand for construction materials throughout many parts of the world.
“Today’s producer price index report, which indicates falling construction materials prices, reflects the collective impact of a number of economic forces,” Basu said. “The economic weakness is well documented around the world. For example, China’s economic expansion has slipped beloweight per cent, and the rate of annualized growth in the United States during the first half of 2012 was below two per cent.”
Basu said the weakness in building conditions remains the bigger story and the fall in input prices is merely a silver lining.
“The elevated levels of uncertainty regarding near-term economic recovery are lingering like a dark cloud, he said. “Until some substantial fraction of that uncertainty abates, lower materials prices will fail to spark renewed non-residential construction spending recovery. While this is good news for construction contractors because materials prices are expected to remain well-behaved, the larger view is that overall construction activity is still lagging and may continue to do so in the months ahead.”