Sharp Rise in Gypsum Prices Likely in New Year

Gypsum production is heavily dependent on construction industries. Approximately 90% of gypsum is used in the manufacture of wallboard for residential and non-residential building applications. A further 5% is used as an additive in cement production.

The steep decline in the residential and non-residential building sectors over the past five years has greatly affected gypsum demand. Consumption of gypsum fell over 50%, from 41.6 million tons in 2006 to 19.4 million tons in 2010 (United States Geological Service). NAHB forecasts only a modest 1.3% increase in housing starts in 2011, then a 15% rise in 2012. Gypsum demand is expected to closely follow the housing starts forecast, remaining relatively flat in 2011 followed by a moderate increase in 2012.

Gypsum prices generally track demand. As the chart below shows, the gypsum price index, (a component of the producer price index), has by and large moved in line with construction spending over the past 20 years.

 

The chart also shows the long term trend in the gypsum price index. In the period of peak housing production, between mid-2003 and mid-2006, gypsum producers struggled to supply the very high demand for wallboard. Consequently, gypsum prices surged, rising over 75%, to a level well above their long term trend.

With the housing market entering a downturn in 2007, gypsum demand slowed sharply and prices followed, falling 32% over a 20 month period. This returned prices to a level close to their long term trend by early-2008.

With very weak demand from the housing sector, gypsum prices have bounced around within a relatively narrow range since the early-2008 trough. In the past three months, the gypsum price index has trended down, falling 0.6% in July, 1.7% in August and 1.7% in September. Overall the index is down 4.6% relative to September 2010. The current gypsum price level is below the 2008 trough and 15% below the long term price trend level.

Gypsum producers responded to the very weak demand over the past four years by slowing production though reduced shifts, moth-balling production lines and even the closure some of their older production facilities. There is no doubt that they, like home builders and many building materials suppliers, are struggling to remain profitable in the current economic environment.

Recently, several NAHB members have expressed concern about gypsum producers’ stated plans for significant price increases in 2012, some as high as 35%. An increase of this magnitude will raise gypsum prices to a level almost 20% above the long-term trend.

NAHB research indicates that gypsum drywall represent around 4.4% of the construction cost of an average new home, with material input typically represent 30% of the component cost (ie. gypsum drywall material cost around 1.3% of construction cost). If construction costs account for 52.9% of the house price, the current median sales price of a new home is $204,400, and points and interest on a loan, broker’s fees and return on equity add a further 16% to the final sales price of a home, then a 35% increase in gypsum drywall prices would increase the cost of new home by around $600. Based on income distribution and the minimum income needed to support the monthly mortgage payment (plus tax and insurance), analysis by NAHB indicates 246,000 U.S. households are priced out of the market for a median-priced new home when the price of the home is increased by $1,000. Thus, with the proposed increase in gypsum drywall prices, up to 143,000 U.S. households are likely to be priced-out of the market for a median-priced new home.

The proposed 35% price increase is out of proportion given the currently weak housing market. With builders’ margins squeezed to the bare minimum, little scope exists for them to absorb increased input costs. Any increase in cost is likely to be passed on to the home buyer, leading to a considerable decrease in the number of households that can afford a median-priced new home. This will weaken housing demand further at a time when new home sales are bouncing around at record lows.

NAHB will continue to monitor gypsum price movements very closely.

27 Responses to Sharp Rise in Gypsum Prices Likely in New Year

  1. Craig Weisbruch says:

    Mr. Grist,

    I read your comments in an article in which I was also quoted about the upcoming price increase on wallboard. I believe you have made a fairly large error by equating the percent that wallboard contributes to the cost of a home. We’re not raising the installed cost for the product, which would include hanging, finishing, etc. we are raising the wholesale price to the distributor. I would estimate that based on the average size of today’s home that this increase would amount to about $300 to $400 per home.

    While you can agrue the merits of the increase in an industry in which all the competitors are losing money, it would be better if you didn’t inflate the effect of the increase to make it sound astronomical.

    Craig Weisbruch
    National Gypsum Company

  2. NAB says:

    I heard the same thing last year, just about this time, that gypsum prices where going up significantly. They didn’t and they probably won’t again. Someone is trying to put their spin on it for personal gain.

  3. AM says:

    Craig,

    Of course your not raising the installion cost because you have nothing to do with that. We the Drywall contractor have had to suffer with lowering prices just to stay in bussiness .With raising the price of drywall 35% is really going to put building to a stop.

  4. What about the lightweighted wallboard, which is being promoted in North America recently? Isn’t it affecting somehow the unit variable cost of wallboard? Should affect positively the contribution margin and so let avoid such price increase, as you predict.

    Piotr Dabkowski

  5. mark says:

    Wouldn’t it be nice if there was a group of drywall contractors that could stick together and say we are forced to charge prices from 20 yrs ago we “NEED A RAISE” “We as a non-collusion entity are collectively raising our prices 35% (somebody’s fairy tale world). When the gypsum industries (ALL of them except GP) came out with almost the exact same 35% up with no job quote pricing for 2012 that was a little odd to me. I am not aware of a group of “Individuals” in history that even said they were all raising the price of material the same amount at the same time, except maybe OPEC. Good luck getting an increase at all when you think you are entitled to a congress style blanket coverage price increase of over a 1/3. The gypsum industry caused this pricing inadequacy themselves, matching each other for the scraps off the table, prices are now lower than they were this time last year(with at least 5 false price increase letters). The Gypsum industry drove the prices down and now they are trying to make up for it in one guillotine stroke to the building industry. I assume we will be seeing a letter about the April 2012 35% increase sometime in January? I understand the premise it is simple economics less demand need more price to keep up with the hard cost of doing business I understand that. 15% would have been smarter if you would have done that Jan 2010, Jan 2011, by this January that would have netted you 45% and all at a manageable 15% per increase. I just think that would have been a little more logical.

    • NAB says:

      80% of the drywall workers in my area are from Mexico. Tough to do quality work and make a living at the same time.

      • Ben T. Hair says:

        I would agree. If the manufacturers raise their prices we are forced to try to absorb it. Those sub-contractors with lower standards and regulatory conformance gain market share.

  6. Doug says:

    Really… give me a break! In general everything will increase next year just as many building products have increased this year. What’s the real idea here? If and when the housing market turns around and starts back in the direction that it was going in 2004/05 I would expect everything to increase. Why wouldn’t prices increase… most of us have been starving and going deeper into debt just trying to survive. How many of you guys out there have wives who are blaming you for not keeping up the lifestyle that they’ve been used to and dragging them into deeper debt? My wife thinks I should fold up my business and become a greeter at Walmart so I will at least be able to bring in a regular paycheck!

    Wall board prices may go up… oh my!?

  7. leo says:

    Yes My wife has been on that band wagon of the deeper debt scenario since 2008 and it is driving us appart and crazy. I pray I remain calm enough to see this whole thing through to where it is headed.

  8. GW says:

    From the perspective of a drywall distributor I see the need for an increase.However I believe the manufacturer’s are at fault for not already having the desired increases they need to be profitable. They have attempted several 20% increases when the market could not stand such an increase. As I have told my vendor rep’s over and over they could have achieved these increases if done in 5%-7% increments. If needed, the distributors, drywall sub-contractors and builders could each absorb a little and the final buyer would see a minimal impact. Trying to implement such strong increases not only enrages builders but it also halts construction in certain brackets. We all want and need an increase. Everyone is tired of working to just break even or minimize losses.
    This increase of 35% is outrageous and has thrown the market into chaos. As distributors we are now required to tell some of our customers we can no longer honor quotes for jobs needing drywall after Jan. 1, 2012. This has not gone well for us, our customers or their contractors. We now have GC’s calling wanting to pre-buy millions of square footage and have it stored for projects going well into 2012. Pre-buying board just isn’t possible for several reasons excluding the storage issue.

    First, and which has not yet been mentioned, the manufacturers have implemented a “controlled distribution” (heaven forbid they use the term ‘allocation’). Due to this proposed increase every distributor in the country is trying to fill their warehouses with lower cost drywall. Now the demand surpasses supply. Manufacturers have the ability to meet this demand but why would they? Distributors wouldn’t need to buy board again until February or March. Distributors are already having problems buying board that is needed now much less for stockpiling.

    Second, it just isn’t fair to our regular customers as drywall sub’s to sell direct to the GC. Not only does it cut out some of their profit and possibly control of stocking the job (if they are still the sub’ of choice) it diminishes the availability of board for other projects. I would hate to be the distributor who sold board to a GC on a job for which none of their regular customers were hired. As in previous “controlled distributions” customers will remember who did and did not take care of them. Customer relationships are going to be strengthened, strained or broken over the next few months.

    Is there a need for an increase? Absolutely! Does it make sense to set one price for job quotes that will last all year? That’s wonderful. Does it make sense for a 35% increase? Keep in mind that 35% is the proposed increase to distributors. By time the distributor, subcontractor and builders apply their markups it could become a significant figure. I have a new home order for 225 pcs of drywall which is average for my area. If my suppliers go up 35% and I drop my gross margin to 28% the builder would pay an extra $602 for material. Mr. Weisbruch is correct in his figures for average new homes. The big problem and what is not addressed is the multi-family or commercial project. When 225 pcs becomes 2,250 or 4, 500 pcs the difference is $7000- $14000 dollars. That’s a deal breaker for everyone. I am not looking forward to re-quoting every 2012 project that has been budgeted or awarded over the last 6-8 months. Get ready for a new outbreak of bid wars! No wonder they don’t want to issue any more job quotes.

    Bottom line I agree with Mark. It seems unfair that manufacturers are trying to reverse many months of buying market share and eroding prices in one dramatic increase.
    gw

  9. Johnny Gypsum says:

    We will probably see a 35.00 msf increase which isn’t a 35% jump.
    In my market the only ones cpmplaining are the “large” builders that beat up the local distributors and subs down to nothing, and commercial subs that send old quotes out for requotes and buying materials cheaper taking the job away from the distributor that was low in the first that helped them get it. I love the idea of no job quotes. it puts all at the same level rather than subs buying new jobs with old job quotes. They have my suppot.

    • Steven says:

      I was just told on Friday the increase is 52/1000 or the equivalent of over 5.6 cents including tax in my area. A 300 board house is now $801.00 higher!!!! My builders are pissed off but I tell them it is what it is and once they check around and verify the pricing they will pay! Lets be honest, the labor pricing is at rock bottom now and subcontractors are trying to push their prices up so anyone coming along promising lower prices will not last for long in this business! Good Luck!

  10. [...] insult to housing’s ongoing injury, gypsum prices could climb by as much as 35% in [...]

  11. [...] An easing in energy prices aided a decrease in the producer price index for finished goods (PPI) in October. The Bureau of Labor Statistics reported a seasonally adjusted 0.3% decline in the PPI in October, driven by a 1.4% (SA) decrease in the prices for finished energy goods. The index for finished goods has fluctuated in recent months, but has shown little change since May following the peak in oil prices. Overall, the PPI is up 5.9% relative to October 2010, which is largely a reflection of the strong growth during the first four months of this year. Nearly two thirds of the October decline in the energy price index can be attributed to the decrease in the gasoline index, which fell 2.4% (SA). Lower prices for residential natural gas (-3.3%) and home heating oil (-6.0%) also contributed to the decline. Unfortunately, the easing in energy prices is likely to be short-lived. The spot price of oil (West Texas Intermediate) began October at a 12-month low ($79.43 per barrel), but rose strongly through the month (to $92.32 per barrel). This suggests that a strong increase in the energy index can be expected in November, with a consequent rise in the PPI. The index for consumer foods inched up slightly (+0.1% SA), its fifth consecutive monthly increase. Higher fresh egg (+18%) and poultry (+4.8%) prices were offset by lower red meat (-4.3%), vegetable (-4.2%), fruit (-2.9%), fish (-2.8%) and dairy (-2.7%) prices. Core PPI, finished goods less food and energy prices, remained unchanged (SA) in October, ending a string of 10-monthly advances. Higher prices for pharmaceuticals (+0.9% SA) and aircraft (+0.8%) offset lower prices for light trucks (-1.6%) and passenger cars (-0.8%). The composite index of inputs into residential construction declined 0.4% (NSA) in October, after being unchanged (NSA) in September, but it is up 5.9% year-over-year. This month-over-month decline was driven mainly by falling energy prices, with gasoline (-5.0% NSA) and #2 diesel fuel (-2.2%) included in the index. The price index for copper also fell sharply (-8.0% NSA), but the index for most other building materials increased. While many materials experienced only a modest rise (between +0.1% and +0.6%), stronger price increases were observed in the indexes for gypsum (+3.0%), plywood (+3.0%) and asphalt roofing and siding (2.5%). The rise in gypsum prices in October marks the beginning of a change in pricing strategy by gypsum producers. In late-September and early-October, most large gypsum producers announced that they were shifting to fixed pricing and would cease all job quotes immediately. Several producers also announced a price increase of 35%, effective January 1, 2012. For more details on the increase in gypsum prices and its impact on the housing industry, see the earlier Eye-on-Housing blog, Sharp Rise in Gypsum Prices Likely in New Year. [...]

  12. [...] The rise in gypsum prices in October marks the beginning of a change in pricing strategy by gypsum producers. In late-September and early-October, most large gypsum producers announced that they were shifting to fixed pricing and would cease all job quotes immediately. Several producers also announced a price increase of 35%, effective January 1, 2012. For more details on the increase in gypsum prices and its impact on the housing industry, see the earlier Eye-on-Housing blog, Sharp Rise in Gypsum Prices Likely in New Year. [...]

  13. [...] Gypsum – According to Eye On Housing  (11/3/2011) Gypsum producers responded to the very weak demand over the past four years by slowing production though reduced shifts, moth-balling production lines and even the closure some of their older production facilities. [...]

  14. [...] that they would be ceasing job quotes immediately and increasing prices by 35% in January 2012; see Sharp Rise in Gypsum Prices Likely in New Year. For the time being, prices settled back in November, down a 0.4%, following a 3.0% rise in October [...]

  15. [...] they would be ceasing job quotes immediately and increasing prices by 35% in January 2012; see Sharp Rise in Gypsum Prices Likely in New Year. For the time being, prices settled back in November, down a 0.4%, following a 3.0% rise in October [...]

  16. [...] November, we examined a possible 2012 price increase for gypsum. Several NAHB members have expressed concern about gypsum producers’ stated plans for significant [...]

  17. [...] Sharp Rise in Gypsum Prices Likely in New Year (eyeonhousing.wordpress.com) [...]

  18. [...] ( http://eyeonhousing.wordpress.com/2011/11/03/sharp-rise-in-gypsum-prices-likely-in-new-year/ ), [...]

  19. [...] Sharp Rise in Gypsum Prices Likely in New Year « Eye on HousingNov 3, 2011 … NAHB forecasts only a modest 1.3% increase in housing starts in 2011, then a 15 % rise in 2012. Gypsum demand is expected to closely follow … [...]

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