MEMORANDUM
TO:
FROM:
DATE:
RE:
Wyoming Policymakers
March 3, 2006
Construction Industry Briefing Paper
ISSUE:
A global macroeconomic challenge facing the United States and Wyoming’s
heavy highway construction industry in particular is the rising inflation of commodities and
inputs for the construction of public transportation systems at a macroeconomic level. For the
purposes of this assignment we will focus on the impact of inflation in the cement industry.
While inflation has risen, the principal source of Wyoming’s transportation funding has not kept
up with inflation. Wyoming policy makers have questioned the source of the rising prices, and,
implied that Wyoming contractors are inflating prices to increase profits. The construction
industry needs to be aware of the economics of the current and future situation.
CURRENT SITUATION: Global, national, and regional price shocks have hit Wyoming’s
construction industry most significantly over the last three years. According to Ken Simonson,
Chief Economist for the Associated General Contractors of America (www.agc.org), “since early
2004, the highway construction industry has been battered by a series of price shocks and
materials availability problems exceeding any elsewhere in the economy, including other
construction segments.”
The building booms in China and India are commonly viewed as the main drivers of the increase
in worldwide demand for cement. Demand has outstripped supply and has thus resulted in
higher prices for cement. In September, 2004 the impact of the worldwide cement shortage on
Wyoming came to the surface when Wyoming essentially “ran out of” cement for a brief period
and cement suppliers were forced to put customers on “allocations” in order to manage through
the “crisis” until more supplies could be found.
The situation was ultimately alleviated with the shipment of cement from Taiwan which was offloaded in the Pacific Northwest, shipped by rail to Denver, and trucked to Casper, all at a very
high premium. What this situation demonstrated at the Wyoming level was the challenge of
getting supplies and paying for supplies. At a macroeconomic level, the challenge of dealing
with worldwide supply issues clearly demonstrates the need to plan for future construction,
purchasing, and financing.
Natural gas is also a critical input in the manufacture of cement, construction plastics, plastic
membranes, and polyvinyl chloride (PVC) pipe. Natural gas prices more then doubled in the fall
of 2005. As over 100 oil and gas platforms in the Gulf of Mexico were knocked out by
Hurricanes and Katrina, the possible scarcity of natural gas in 2006 may drive prices higher until
those platforms are back on-line.
According to Simonson, “In the first half of 2004, the price of steel for bridge plate, rebar, steel
pipe, guardrails, signs and other highway and bridge purposes shot up as much as 68%. Asphalt
and diesel fuel prices have risen repeatedly as world oil demand has grown faster than supply.
The national average price of highway diesel fuel on February 6, 2006 was $2.50 per gallon, vs.
$1.98 a year ago. Contractors use diesel fuel for earthmoving and other offroad equipment, and
for dump trucks, concrete mixers and pumpers, mobile cranes, and other construction vehicles.”
In general prices according to Simonson are expected to increase by 10% per year in 2006 and
2007. For Wyoming Contractors they must be ready to explain the cause of the increases thus
being global macroeconomic issues and be ready to offer planning solutions to Wyoming
contractors. According to the Wyoming Department of Transportation, prices have more then
doubled since 1998.
The Wyoming Legislature is currently debating the merits of one-time additional transportation
funding or diverting surplus revenues to savings accounts. The Wyoming Contractors
Association has been “getting beat up” for their perceived responsibility for double digit
increases in the cost of constructing public buildings and roads. While three years ago, the cost
to construct a road in Wyoming was a million dollars a mile, it is now estimated to be three
million dollars a mile. A perception exists that Wyoming contractors are taking advantage of
current inflation in construction to line their pockets in the construction of public works, roads,
and highways.
The Wyoming Contractors Association should seek to demonstrate to the Wyoming Legislature
that the “true reason” for the escalation in prices is the result of global demand for construction
supplies, materials, and inputs outstripping global supply.
PROPOSED LEGISLATIVE ACTION: Please support increasing the Wyoming Department
of Transportation’s request to increase the WYDOT Budget Request of $104,964,378 to keep up
with current inflation. While this current request does not “keep up with inflation” it is a
beginning.
SUMMARY: Without new investments, the funding gap that will be required to keep
Wyoming’s highways at current or national standards will continue to grow. Wyoming will have
to shift into a “maintenance” mode of keeping our transportation system together versus a
traditional maintenance, construction and reconstruction mode over time.