Just as the Inland Northwest economy has shown signs of getting off the ground again, soaring building-materials prices threaten to clip its wings.


Steel prices have risen sharply in recent months, and Spokane-area companies that do business in that market say those prices could go higher still, increasing the cost of construction projects that businesses are planning as they expand. Also, steel supplies are limited, making some products difficult to find, industry sources say.


Meanwhile, lumber and plywood prices have shot up, and while some believe they have peaked, they remain far higher than they were a year agoand far higher than industry executives expected them to be now.


The steel and lumber industries were caught with low production levels and drawn-down inventories when nonresidential construction activity picked up sharply late last year, after two slow years. Managers and executives here now fear that sustained high prices could prompt some project owners to hold off on building plans, though theres been little sign of that happening so far.


Weve just started to see a recovery, but its my fear that the recovery is so fragile that this (rising material prices) will knock it down, says C. William Savitz, president of Garco Building Systems, of Spokane. That would be a problem.


The Coeur dAlenes Co., a Spokane-based steel distributor, is paying 34 cents a pound for hot-rolled plate steel, up 78 percent over the 19 cents a pound it paid for the same product six months ago, says company CEO Jim Coulson. In addition, steel makers have started charging scrap surcharges, which they tell customers are meant to offset the rising cost of scrap steel, which is a large source of raw material for U.S. steel mills.


Those increased costs are passed on to the steel distributors customers, he says.


Like all other steel distributors nationwideand probably worldwide, he saysCoeur dAlenes Co. currently can buy only as much steel as steel mills will ration to them. He says steel makers are allocating their products to established customers in volumes proportionate to their previous years purchases.


So far, were getting enough steel to fill orders, he says. As long as the mills hold up their end of the bargain, well be all right. This hasnt hurt sales yet.


At Garco Building Systems, which fabricates metal buildings, costs of the various steel products the company uses have increased anywhere from 10 percent to 65 percent over the past six-plus months, Savitz says.


The company, like many others in its industry, was caught off guard by quickly rising steel prices, Savitz says. It signs contracts to fabricate buildings four to six months in advance and must honor those contracts, he explains. Consequently, for current projects, the company is getting paid based on steel prices of four to six months ago, but its buying its supplies of the metal at todays higher prices.


The West Plains company has raised its prices twice this year and expects to implement a third price hike at the end of the second quarter. Combined, Savitz says, the three increases will equate roughly to a 20 percent price increase for the companys customers. All of those price increases go into effect on buildings fabricated after April 30, because of the lag time between signing contracts and starting production, so Garco is having to absorb most of its excess material costs between now and then.


Still, Savitz says hes encouraged by the volume of business the company is bringing in so far this year. After taking in just $15 million in revenues last yeara steep decrease from its $26 million in sales three years earlierthe company is on pace to bring in up to $19 million in business this year.


We had good orders in the fourth quarter and January and February, he says. Im just hoping that whats happening with the steel prices doesnt kill off business.


Obscene panel prices


In the wood products industry, structural panels, such as plywood and waferboard, or oriented-strand board, averaged $545 per thousand square feet as of late February, up from $263 a year earlier, according to Random Lengths, a Eugene, Ore.-based industry that publishes composite prices for wood products. The publications composite price for dimensional lumber was $389 per thousand board feet, up from $288 a year ago.


John Case, president of South Regal Lumber Yard Inc. here, says lumber prices are rising from unusual lows, and that if you look at 10-year averages, current lumber prices would be close to the norm.


Its not nearly as obscene as the plywood and waferboard prices, he says. Its gotten to the point where people are yelling uncle and looking at alternative building products or putting projects on hold.


The lumber yard has to change prices frequently, but that hasnt shortened the amount of time for which it will honor price quotesquotes typically are good for 10 days, he says.


The price changes most profoundly affect South Regals contractor customers, who like Garco Building Systems, often bid project months in advance.


Mike Sullivan, spokesman for big Spokane-based forest-products company Potlatch Corp., says prices this year arent as high as peaks reached late last year, but still are substantially higher than the company expected to see at this time.


Its a pleasant surprise for Potlatch, which finished last year in a profitable position after two years of net losses.


Wood products has been a very strong and supportive business sector, Sullivan says of Potlatch, which also makes paper products such as tissue paper. It accounted for most of our profits last year and likely will account for much of our profits this year.


In both the steel and wood-products markets, industry professionals expect prices to level out soon and perhaps start to decline around mid-year, though most admit they wouldnt have predicted that prices would be this high right now.


A mix of causes


Several factors contributed to price swings in both markets, but the main reason is that activity rose when steel and lumber production lulled due to lower demand the two previous years.


In the steel market, Coulson says, the Chinese have been buying up much of the scrap steel on the market. Also, coke, which is used in making new steel, is in short supply, making it difficult for steelmakers to shift to that option.


Also, Savitz says, when it first became apparent that steel would be in short supply, many companies bought up as much as they could to bolster inventoryand still are buying as much as they can secure.


Its like when theres a gas shortage, he says. Everybody runs to the pump and gets in line and buys up all the gas. Thats whats happening here.


In the wood-products market, Sullivan says much of the shortage has been attributed to several events that fueled demandthe U.S. Department of Defense bought a large block of plywood for rebuilding efforts in Iraq; the Southern California fires caused a huge home rebuilding effort; and large forest fires in Western Canada ate into timber supply, raising Canadian producers costs after the value of the U.S. dollar had fallen, making Canadian products less competitive in the U.S.All of those events worsened the shortage, but werent direct causes, Sullivan says.


They happened to occur when the supply chain was tremendously drawn down, he says. They made it worse, or from our perspective, better.