Skip to content

The Mountains, Hills, and Valleys of Material Prices

A new report from Anirban Basu, chairman & CEO of Sage Policy Group and Chief Economist of the Modular Building Institute

anirban-basu-300x300
Anirban Basu is chairman & CEO of Sage Policy Group and Chief Economist of the Modular Building Institute

What Goes Up Must Come Down, Eventually

It all started with a global pandemic. With governments urging people to stay at home and the global economy entering a sharp downturn, many economic activities were interrupted. This was particularly true in the context of supply chains as workers generally could not supply effort remotely in manufacturing and distribution contexts and were told to physically isolate as their factories idled.

The pandemic followed decades of moving to just-in-time inventory practices. With factories temporarily shuttered and inventories quickly depleted, the supply of various items was constrained. Then the economy reopened, albeit in fits and starts. Demand for various items surged as consumers looked to spend massive accumulation of savings as vaccinations become more commonplace.

Anirban Basu, CEO of Sage Policy Group and Chief Economist of the Modular Building Institute

Anirban Basu speaks at MBI's annual World of Modular conference and tradeshow.

The result was inevitable. With demand ratcheting higher and supply chains and inventories atrophied, prices took off. This was especially problematic for those working in goods-producing segments, like modular construction. Investors sought to deploy capital in large amounts thanks to absurdly low costs of capital as central banks around the world injected liquidity into financial systems. While it helped certain forms of economic activity that the cost to borrow funds was low, the same factor rendered it difficult to generate income. Interest rates were too low from the perspective of portfolio returns. Investors responded by investing in a variety of assets, including real estate. The consequence was an uptick in demand for construction materials as properties were repositioned in the marketplace or built from scratch.

Alas, the supply of materials was simply inadequate, producing massive increases in the prices of softwood lumber, steel, and other inputs to construction. Many of these commodity prices slumped early during the pandemic, only to ramp up immediately thereafter. For instance, according to data from the Bureau of Labor Statistics (BLS), steel prices fell slightly in 2020. With most of the world shut down, demand for steel was predictably low.

That did not last. Inflation burst forth during spring 2021, with construction materials prices at the heart of dramatic price increases. By April 2021, steel prices were 125 percent higher than they were the month prior to the pandemic. By August, prices were nearly twice the pre-pandemic levels. Steel prices finally peaked in November 2021, settling at 235.7 percent above the pre-pandemic level.

The story of softwood lumber was roughly as dramatic. If the price of steel was equivalent in dramatic intensity to the hit TV series Game of Thrones, softwood lumber was metaphorically aligned with at least the show Succession. Softwood lumber, another key input in modular building, experienced a price in exceeding 150 percent between February 2020 and May 2021.

While it is simple to handwave and attribute virtually all causal effects to pandemic induced phenomena, there has been more at work. For example, prior to global contagion there were budding trade wars around the world, including many between friends.

Early during the Trump Administration, America imposed significant tariffs on Canadian softwood lumber. By mid-2018, Random Lengths, a publication focused on the lumber market, pointed out that the “cost of 1,000 board feet of western Canadian lumber is up nearly 80 percent over the past 12 months...” There was also a burgeoning trade war with China, Brexit, and other forms of deglobalization that pushed prices higher. Many trade disputes have continued into the Biden Administration.

Even the price of concrete has ballooned. Its price has increased more than 31 percent over the past three years. As indicated by the National Association of Home Builders, the rise in prices in recent months was attributable at least in part to the closure of a large limestone quarry in Mexico. Moreover, the report states that the shortages in concrete are not limited to the U.S. since many nations are wrestling with a lack of key inputs, including cement. A recent Washington Post article pointed out that concrete “is the most ubiquitous human-made substance on earth...” That same article pointed out that, “Cement prices are surging on both sides of the Atlantic as producers passed on higher energy and pollution-compliance costs to customers and then kept hiking prices even as their gas and electricity bills receded.” In America, cement prices have been increasing at a 15 percent annual rate.

That said, even a deadly pandemic and trade wars fail to fully explain the massive inflation that modular builders and others have experienced in recent years. Transportation costs have also risen massively on occasion. The Baltic Dry Index, an economic indicator that tracks shipping costs of raw materials, rose from around $400 per container in February 2020 to $2,178 a bit more than a year later. Prices continued to rise, passing $5,500 by October 2021.

The Cass Freight Index, an indicator supplying crucial insight into North American’s shipping industry, was 17 percent higher in May 2021 compared to the month before the shutdown. The rise in shipping costs was attributable to numerous factors, including a shortage of truck drivers. Data from the BLS indicate that the number of job openings in the Transportation, Warehousing, and Utilities subcategory, which encompasses truck drivers, was up 51.2 over the same period.

While many of these prices have fallen recently, including several construction materials prices, there are still indications of supply chain disruption. Mechanical contractors, for instance, often point to lengthy lead times for switchgear and generators. According to a CNBC survey from December 2022, only 32 percent of logistics managers indicated that supply chains had returned to what they deem normal compared to more than 60 percent who find that abnormalities persist. Nearly one in three respondents indicate that supply chains will not return to pre-pandemic normalcy until 2025 or perhaps never.

A report from Nashville, a hotbed of construction activity, highlights these lingering challenges. Shortages of key materials and equipment have forced contractors to come with novel ways to conduct work. For instance, Nashville Electric Service has dug up old unused power transformers to use in current projects while they wait for new equipment to arrive.

Looking Ahead

While there remain a handful of construction input categories that continue to be associated with significant supply shortages and rapidly rising prices, such instances have become increasingly rare. During a recent 12-month period, materials prices in the aggregate declined, though much of that decline was driven by dips in energy prices. With the global economy poised for further weakness and recession highly likely in America at some point over the next 12 months, there could be additional downward pressure on input prices during the year ahead even as more infrastructure projects break ground.

More from Modular Advantage

Repetition, Communication, and Coordination: A QSR Case Study

This modular QSR project seemed like any another modular building on the surface. Inside, it was anything but. The rhythm, the desire to iterate and repeat, and the constant communication between all parties made it stand out.

Modular Architecture: Thinking Outside of the Box with Sara.Ann Logan

At a time when modular buildings were still seen as less than by many in the architecture and construction world, Sara.Ann Logan took the plunge and partnered to launch a design-build firm that designed, built, and constructed modular high-end single-family homes. But even though she could see the value of this kind of construction, it wasn’t universally accepted.

Colorado Developer ‘Attacks’ Attainable Housing Crisis

City, county, and state government bodies are reaching out to Fading West Development, a modular manufacturer and developer in Buena Vista, CO, to learn more about how they are using modular construction to solve the affordable housing crisis in Colorado. Governments are eager to learn how they’ve made modular development successful and profitable while meeting the growing need for affordable housing.

CES Group’s Stuart Cameron Will Convince You the Moon Is Achievable with Modularized MEP

While most people think of construction as a gradually layered process, MEP assemblies—such as the modular ones—tend to provide all-in-one installs, like a car factory. A modular MEP product helps developers, architects, and fellow modular manufacturers reach their goals through early integration and planning. MEP assemblies address all the unseen things like electrical, heating, and plumbing when looking at a finalized building. The very nature of MEP assemblies are crucial to any initial prospectus.

Automation: The Future for Offsite Modular Construction

Offsite modular construction lags far behind other industries in embracing and adopting automation. Some people believe it will decrease jobs. Others feel they’ve done okay without it, so why change? In reality, conventional construction methods simply cannot keep up. Cooper Lane of Brave Control Solutions points to the labor shortage and the housing crisis that’s rampant in Canada, the U.S., and globally.

Seizing the Modular Construction Opportunity

The CSA Public Policy Centre’s new report, Seizing the Modular Construction Opportunity, highlights how innovative modular methods can help to bring various building forms—from single unit housing to complex high-rises—online more quickly. Owing to efficient manufacturing practices and controlled factory environments, modular can achieve completion rates that are 25% to 50% faster than conventional construction approaches.

Structural versus Cyclical: What Matters More?

A new set of considerations have induced leaders of major global manufacturing enterprises to reconsider their site selection decisions. Among these are: 1) a desire for simpler logistics emphasizing shorter transit distances and times; 2) a need to better protect intellectual property; 3) more reliable court systems; 4) incentives offered by the USMCA, America’s trade deal with Canada and Mexico; and 5) a recent set of subsidies offered under packages like the Chips and Science Act and the Inflation Reduction Act.

How Air Caster Technology Has Helped Improve Modular Building Manufacturing

Air casters mean flexibility, not just in terms of movement but also in terms of change. For example, one structure might be 56-feet-long and another 76-feet-long. Air casters allow manufacturers to easily accommodate a variety of shapes and sizes of boxes and then make changes on the fly.

The Building Industry Needs a Moonshot Speech

In his “Moonshot” speech in 1962, President Kennedy challenged his fellow citizens to land a man on the moon and bring him safely back to earth before 1970. He showed leadership, reimagining human potential and progress, and this famous speech has been an inspiration for many to get things done. Likewise, a “Home-shot” speech that challenges citizens to remove lengthy procedures and “carefully” remove some of the mountain of red tape required for permitting before 2030 would certainly make a huge difference.

How Issa Nesheiwat Conquered the Great Manufacturer/Design Divide

Born in Jordan forty years ago, Nesheiwat is something of an outsider to the modular housing world. His entrepreneurial spirit led him from a childhood growing up in Yonkers, New York, to the more provincial location of Poughkeepsie where he delved into many unique business ventures. Not one to shy away from a challenge, he took on projects that seemed impossible, often in the housing sector. His innate sense of the fundamentals in finance, corporate branding, and business expansion have led him to where he is today.