Southern Nevada Economy: Through the Roof

Along with interest rates and land prices, a sharp rise in building material costs could slow construction activity in Southern Nevada over the next few months, industry experts said.

Some commercial projects are already being placed on hold and others are being pushed over budget by steel and lumber costs that have nearly doubled from last year.

Concrete is also in short supply and the price has gone from the mid-$60s a ton to the mid-$80s just this year, said Steve Hill, president of Silver State Materials.

"The problem we really have is we can't get as much as we want no matter how much we're willing to pay," he said. "We're at an allocation of 85 percent of what we need, which means construction is going to slow somewhat because of that."

Hill said one of his competitors in Las Vegas had to shut down its business for nearly a week because of the supply problem.

The price for a ton of hot-rolled coil steel was close to $500 at the beginning of the year, up 66 percent from last year's low in June, MEPS International, an England-based steel consulting firm, reports. Rebar was at $355 a ton in January, a 35 percent increase from $263 a ton one year earlier.

In the past two to three months, rebar has gone to $560 and $600 a ton, said Todd Leany, president of Century Steel, a Las Vegas company that has supplied reinforcement steel for most of the hotel towers on the Strip since 1972. He said several factors have come into play.

"In our industry, they're calling it the perfect storm," Leany said Friday. "The market was depressed in the first quarter of 2003, prices were very low, so the market was already due for a correction. But at the same time the correction hit, the demand hit. It's kind of like a rubber band that was stretched and now it's snapped.

"The scary part is this could continue to happen for the next few years. China's demand is expected to continue through 2010."

One of the major factors driving up steel prices is a 38 percent increase in demand from China. Also, higher energy costs make manufacturing steel more expensive.

MEPS said the market is becoming "ever more panicky" as steel-producing companies are talking with increasing openness about shortages. Steel buyers are placing orders for future delivery without knowing the price they will eventually pay, simply to secure material.

"Availability has replaced price as the main driver in steel markets," MEPS reported in April, even as world production is projected to top 1 billion tons this year.

"We're getting quotes from our steel subcontractors qualifying their bid to where they have the ability to increase their contract amount regardless of the initial bid, which is ludicrous," said Greg Korte, division manager of The Korte Co. in Las Vegas.

"You've got vendors out there who expect you to adjust your contract after you're locked in. It's like getting quoted a car price and you go to buy it and it's something else."

Phil Hardy of Hardy Painting & Drywall has seen drywall prices fluctuate during his 25 years in business here, but it hasn't presented much of a problem because many of the suppliers are in the geographic region.

"The real problem is steel prices," he said. "Rebar, steel framing, grid ceilings ... it's probably gone up $3 a (square) foot on tenant improvements since the beginning of the year. You're hard-pressed to be under $43 a foot (for construction cost estimates)."

In the past, Hardy said he was quoted a price for his material when he ordered it and that's the price he paid when it was delivered.

"Now, it's delivery price," he said.

Hardy said the scrap steel market is huge right now, with prices up to $350 a ton, and most of it is being shipped overseas.

"Everything is around steel, as far as the cost of construction goes, so it's a real problem," he said. "They're quoting 3 1/2 to four times what it was in the beginning of the year."

General contractors such as Korte said clients are holding off on some projects until the steel market stabilizes, though he wouldn't specify the projects.

"It's affecting several jobs we've got," Korte said.

China has become an entrepreneurial nation and is "sucking up" steel supply, said Mary Kaye Cashman, chief executive officer and vice chairman of Cashman Equipment.

She said she's seen substantial price increases for both new and used heavy equipment because so much steel is used in manufacturing the machines, which further drives up construction costs.

This could serve as the "death knell" for companies that barely survived the recession, the Washington, D.C., law firm McManus, Schor, Asmar & Darden stated in a March 16 letter to the Mechanical Contractors Association of America.

With respect to rising steel prices, it is believed that the causes are primarily twofold, the letter said.

"One, the president's dropping of tariffs on imported steel at a time when the dollar is weak, making foreign products relatively more expensive and keeping them outside of the U.S.; and two, China's ravenous appetite for steel, steel scrap and coke to feed its hyperactive economic growth."

Nadia Zakher, project estimator for Steel Engineers in Las Vegas, said prices can vary, depending on where the steel is produced.

"Every fabricator gets their steel from a different supplier," Zakher said. "It might come from Mexico or Asia or Florida. It's not like gasoline where everybody pays basically the same price."

Mitsubishi Cement Corp. notified customers in an April 14 letter that the price of cement will be increased $5 a ton effective July 1, a result of unprecedented demand and higher import, energy and maintenance costs.

"As much as we regret their impact upon your business plans, these cost increases and the uncertainties of cost components such as ocean shipping make this cement-price increase unavoidable," the letter stated.

Hill said he buys about 175,000 tons of cement a year and the Las Vegas market uses about 1.2 million tons a year.

"There's actually a worldwide shortage in cement," Hill said. "Apparently, China is using an inordinate amount of the world's cement supply. Part of the problem we have now is China has stopped exporting."