The construction and manufacturing sectors, the hardest hit by the recession, are gaining ground once again. The prices of many of these sectors’ products and services are rising in turn, as are prices in key freight transportation markets. IBISWorld has identified four product and service categories—wood building materials, building construction and maintenance, power and telecom transmission equipment, and surface freight transport services— that affect a range of buyers and will be areas of significant price growth over the next three years because of heightened construction and manufacturing activity. Buyers can leverage their knowledge of the market dynamics, forecasts and buying strategies discussed below to make more cost-effective purchasing decisions.
Wood Building Materials
Wood building materials—specifically plywood, particleboard and medium-density fiberboard—are expected to show considerable price gains during the next three years. Declining unemployment alongside rising incomes, consumer confidence and access to credit will spur significant growth in the housing market; IBISWorld expects housing starts to rise at the strong annualized rate of 9 percent during the period. Nonresidential construction will increase, too. Improvements in corporate profit and increased on-shoring from many manufacturers will result in more large-scale construction projects than were undertaken during the past three years; the result will be an 8 percent annualized growth in the value of nonresidential construction. Rising domestic demand will be complemented by even stronger increases in wood consumption from developing countries. While suppliers will benefit from demand growth with heightened sales at home and abroad, buyers will face rising prices. Plywood, particleboard and medium-density fiberboard are expected to increase in price at annualized rates of 4.8 percent, 5.3 percent and 5.8 percent, respectively, in the three years to 2017.
To improve their access to high quality materials, buyers can lock in multiyear contracts, which will help avoid service interruptions and price hikes during a period of heightened demand; such contracts generally range in length from one to three years. Bulk purchases of more than a couple thousand square feet also reduce per-unit costs.
Building Construction and Maintenance
Rising construction activity and growth in business openings will contribute to significant price gains for many building construction and maintenance services. Demand increases for industrial building & warehouse construction will stem from a jump in private investors’ spending on manufacturing facilities. Such spending is expected to rise at an annualized rate of 5.8 percent over the next three years as the U.S. economy expands and export opportunities increase. Buyers in the market for a new industrial building or warehouse can expect to see the price for its construction grow at an annualized rate of about 5 percent during the next three years. Therefore, buyers willing to begin construction early can harness significant cost savings compared to those that wait.
The price of Plastering & Drywall Services is expected to rise at the even faster pace of 7.5 percent over the next three years. Growth in both residential and nonresidential construction will heighten demand for building materials, including gypsum wallboard, suppliers’ primary material input. No perfect substitute for this material exists, and the full weight of suppliers’ input cost growth will be borne by buyers. Furthermore, the same market forces that raise demand for wallboard will heighten demand for installation services. As such, buyers in the market for building renovations should add drywall installation to their list of services to procure sooner rather than later. Fortunately for buyers, this market is extremely fragmented, heightening the level of competition in contract bidding. Buyers should therefore cast a wide net in their search for installers, and solicit quotes from as many as possible to bring in some low bids that reduce costs.
Power and Telecom Transmission Equipment
Electrical wire and electrical cable manufacturers have raised their prices in recent years as a result of rising construction demand, and prices are expected to continue to grow as the construction sector heats up further. Over the next three years, IBISWorld expects electrical wire and electrical cable prices to rise at annualized rates of 5.1 percent and 5 percent, respectively. Copper is the primary input in each of these products, and its price has already surpassed pre-recession levels. Copper’s price volatility is a threat to price stability in wire and cable markets, and a spike in its price could drive up these markets’ prices even further. Buyers are encouraged to purchase electrical wire and cable now, or secure long-term contracts that lock in rates. These actions will reduce costs; the construction sector has yet to fully recover and bring these products’ prices upward with it, and copper prices have temporarily slumped, with an uncertain future ahead.
Improve Your Buyer Power
Armed with a basic understanding of the dynamics of these high price-growth markets, buyers can enter the purchasing process with greater negotiating power. Whether buying now to lock down pricing or delaying a purchase until budgets or needs are determined, procurement professionals must grasp the drivers and trends shaping their suppliers’ markets to make the optimal purchasing choice. In the markets discussed above, which have combined annual sales of more than $200 billion, strategic sourcing is becoming increasingly important as a cost reduction method due to the magnitude of forecast price growth.