Escalating Costs In Materials Challenge Manufacturers In Gulf Coast Rebuilding Efforts

Sept. 30, 2005
As the Gulf Coast digs out from the wreckage left from Hurricane Katrina and Hurricane Rita, many electrical industry executives were trying to make sense of the pricing increases for some materials now needed in the rebuilding efforts.

As the Gulf Coast digs out from the wreckage left from Hurricane Katrina and Hurricane Rita, many electrical industry executives were trying to make sense of the pricing increases for some materials now needed in the rebuilding efforts.

The PVC pipe market appears to be the hardest hit by price increases directly attributed to the storms. But many manufacturers of products with a high content of steel or copper were already factoring in price increases because of escalating materials costs before the storms. Prices are also climbing for key construction materials that will be needed in the rebuilding efforts, such as lumber, cement, gypsum and petroleum-based products such as roofing materials.

“It’s wild. You’ve never seen anything like it,” said one PVC pipe manufacturer. Because so many of the facilities producing key ingredients for PVC pipe such as ethylene and resin were completely shut down by the storms or had their production or deliveries temporarily disrupted, PVC pipe shortages are sparking double-digit pricing increases and some panic buying.

Two of the largest PVC manufacturers, Cantex, Mineral Wells, Texas, and Carlon, Cleveland, announced substantial price increases for mid-September and October that have been triggered by price increases from their raw material suppliers. Prices are already up more than 20 percent.

“There’s just a lot of concern from our wholesale distributor channel partners on what’s going to happen with the resin situation,” said Don Gutierrez, senior vice president, Carlon. “Therefore, I think they’re buying in anticipation of shortages. There’s a little bit of panic by doing that.”

“Pipe prices have had to go up due to unprecedented resin cost increases, especially in October. There were two increases — September and October. That has driven the increase in the selling price of PVC pipe,” said Don Wirtanen, president and CEO, Cantex Inc.

Carlon’s Gutierrez said the PVC price increases are due to several factors. “It’s material availability issues, raw-material cost increases, additive shortages, transportation costs, natural gas and crude oil price escalation.”

He said the price of natural gas has gone up tremendously over the last 30 days, and that transportation costs have been impacted.

“We’re paying a lot of fuel surcharges and in some cases paying premiums for drivers to haul our loads,” said Gutierrez.

In the steel market, Don Finn, vice president of sales, Western Tube and Conduit, Long Beach, Calif., said although steel prices have crept up in recent weeks, the increase can be attributed to the spike in prices for hot rolled steel sheets, cold rolled steel sheets and scrap steel, not Hurricane Katrina or Hurricane Rita.

“We have had to increase prices of electrical conduit, but have kept them in line with our increased steel costs,” said Finn. “American Metal Market” has been charting prices for hot rolled and cold rolled steel sheets, which are used in the production of our products. In the past 60 days, hot rolled prices have increased 27 percent and cold rolled by 23 percent. These increases are primarily due to the increase in scrap prices, which have risen $150/ton. Scrap prices have been rising prior to the hurricane. How long scrap remains at this level, no one knows. Our steel suppliers say scrap will continue to rise in upcoming quarters.

“Hurricane Katrina’s effect has been modest. There was a hydrogen scare immediately after the hurricane hit, but this turns out to be a minor problem as other sources have been available to offset the consequence of the main U.S. hydrogen plant damaged in Louisiana. Hurricane Katrina has not affected our business.

“Prior to Sept. 12, when we raised our conduit prices, most of our distributors bought a reasonable amount of conduit; there was some hedge buying, but it wasn’t tremendous. I believe it was a wise decision on their part because I see conduit prices rising over the next several quarters.”

In other building materials markets, prices were already high before the storms, in part because of a healthy construction market this year. The storms will push prices even higher for materials such as cement, steel, copper, gypsum, and petroleum-based products, says Ken Simonson, chief economist for the Associated General Contractors, Alexandria, Va. He believes construction materials prices will rise at least 10 percent next year, instead of the six-to-eight percent rise he had expected before the storm.

“Unfortunately, Katrina will push many of these costs much higher,” said Simonson. “Contractors use a lot of diesel fuel for off-road equipment, their own trucks, and the multitude of deliveries of materials and equipment. Petroleum or natural gas is a key ingredient in asphalt, roofing materials, plastic pipe and insulation. And energy costs are built into the price of mining, milling, molding, and transporting metals, concrete and most other construction materials.

“Cement was already in short supply in 32 states and the District of Columbia last month. The disruption to ocean, barge and rail transport from Katrina, and the loss of power to cement plants in the storm’s path, will cut further into cement supplies. At the same time, the urgent need to stabilize and rebuild roads, other infrastructure and buildings will increase demand for cement and other materials.”

Carlon’s Gutierrez and Wirtanen of Cantex say the PVC pipe situation is unprecedented. “It’s difficult to really focus on the incoming orders and to make sure people aren’t panic buying and tying up production,” says Gutierrez. “So we’re trying to manage our income, making sure our Carlon Central distributors are getting the material they need, as opposed to providing material that everybody wants.”

Wirtanen said the situation on the Gulf Coast is unprecedented, and that he has never seen a storm have a greater impact.

“We were affected somewhat by Hurricanes Charley, Ivan and Jean last year, but that was mostly just power shutdowns and a little bit of damage, but nothing to the extent of this, especially with our raw material suppliers.”