Inventories Depleted as Boom Follows Bust

Across the board, prices of building materials have been skyrocketing for the past few months. Distributors are reporting that increases of five to ten percent on building materials are typical for nearly every manufacturer. An increase of less than five percent is an exception while many product lines have seen a whopping 15 percent increase or even more!

However, these price increases are out of line with the inflation rate. Figure 1 shows the inflation rate was less than one percent in the United States in 2020. So, if inflation is not driving up the prices of building materials, what is causing it then?

Figure 1 — Fed Chair Powell has been reiterating the inflation could temporarily exceed 2% although upward price pressures are likely to be temporary. Source: U.S. Bureau of Labor Statistics.

The US economy experienced a dreadful 30 percent drop in its gross domestic product in the second quarter of 2020, attributed primarily to the COVID-19 pandemic, and the consequent shutdown in several retail and commercial businesses and many operations. Nevertheless, the GDP rebounded in the third quarter of 2020 followed by a modest rise in the fourth quarter (Fig. 2). The overall GDP for 2020 was down only 3.5 percent compared to 2019.

Figure 2 — The US economy expanded an annualized 4.3% on quarter in 2020 Q4. Still, the expansion was slower compared to a record 33.4% growth in 2020 Q3 as the continued rise in COVID-19 cases and restrictions on activity moderated consumer spending. Considering full 2020, the GDP shrank 3.5%, the most since 1946 and following a 2.2% growth in 2019. Source: U.S. Bureau of Economic Analysis.

The slowdown in production activities in the second quarter of 2020 had serious repercussions but only now are we experiencing its aftermath. The driving factors are low inventories and unprecedented disruptions in the supply chain.

Notwithstanding the global pandemic, business in 2020 was good in the U.S. and many manufacturers are still struggling to keep up with demand. Following are the primary factors driving price increases.

  • COVID-19 related disruptions and/or shutdowns at manufacturing facilities;
  • Global raw material supply issues;
  • Global freight and supply chain challenges; and
  • Production complications.

These primary factors are compounded by several secondary factors:

  • Weather events;
  • Material allocations; and
  • Demand outpacing supply.

The COVID-19 Shutdowns

Building material inventories are typically low or close to depletion in the third quarter of every year as the building season draws to a close. Roofing manufacturers in particular replenish their inventories during the winter months when demand is low.

When COVID-19 first hit in 2020 manufacturers shuttered capacity and distributors stopped purchasing building products out of fear of the unknown! Then, in the summer of 2020, demand was unexpectedly high and continued to be so through the fourth quarter. Since there was simply no inventory in the various supply channels, manufacturers shipped out products as they were being produced. As a result, finished goods inventories remained low during the fourth quarter of 2020. Instead of replenishing their inventories in the winter months, manufacturers were still meeting backlogged demand from the 2020 building season.

Considering the huge uncertainty at the peak of the pandemic, manufacturers were blindsided by the high demand in the second half of 2020. Inventories never reached comfortable levels as manufacturers were simply playing catch up with high demand while coping with global supply chain disruptions induced by the COVID-19 lockdown.

Manufacturers normally have plenty of inventory ready for delivery throughout the building season. But that didn’t happen in 2020 because of the COVID-19 lockdowns, which shut down supply and demand in numerous markets. Unused inventory from the spring 2020 lockdowns supported the construction boom in the summer of 2020.

This situation is reflected clearly in the bar charts of GDP by quarter (Fig. 2). The precipitous drop in the second quarter is followed by a rebound in the third quarter. However, what the graph does not show is the low inventory levels and the shortages of raw materials that occurred during the 2020 building season.

Where are the Raw Materials?

Manufacturing is an interconnected world. Scarcity of raw materials hampers production. Last year’s building season was exceptional as COVID-19 disrupted the usual production cycles and supply lines.

Manufacturers met the demand for building materials in 2020 by simply drawing down their inventory levels. That includes inventories not only of finished products but also raw materials.

Raw material suppliers initially reacted to the COVID-19 lockdowns by halting production, anticipating low-to-no demand as the economy initially came to a screeching halt. The disconnect between supply and demand is reflected in the price indices for basic materials such as polymers (Fig, 3).

Figure 3 — United States Export Price Index (Harmonized System): Polymers of ethylene, in primary forms. Last updated from the United States Federal Reserve in April 2021.

Building materials manufacturers subsequently were frustrated by shortfalls of raw materials just as their own inventories were getting depleted. That’s what accounts for the “raw material supply issues” as a primary factor contributing to price increases.

Numerous raw materials are used in the manufacture of building materials. Among them are asphalt and polymers. Polymers such as styrene-butadiene-styrene are essential to the manufacture of SBS-modified bitumen membranes and roofing underlayments. Polymers such as polyethylene, polypropylene, polyester, vinyl and rubber are widely used in the manufacture of building materials. Fiberglass is used in insulation and reinforcing substrates or mats. Polystyrene is used in insulation boards.

When the supply of these raw materials is disrupted, the manufacture of building products is immediately affected. Unfortunately, these shortages are still working their ways through the supply chain. The outcome is a reduction in the supply of raw materials resulting in higher prices.

These shortages trace back to the early days of the COVID-19 lockdown. Production was curtailed in response to the initial drop in demand and/or the anticipated slowdown in the economy. Soon afterwards, the construction industry rebounded and demand outstripped supply. Raw materials such as polymers, asphalt and even cardboard boxes became difficult to source and prices steadily rose.

When the pandemic related shutdown severely curtailed travel in 2020, demand for oil dropped steeply. Consequently, crude oil prices dropped off a cliff to $20 per barrel. Crude oil prices have now tripled since their low point in the spring of 2020 (Fig. 4).

Figure 4 — Historically, crude oil reached an all-time high of 147.27 dollars per barrel in July 2008. Crude oil data updated in April 2021.

What about Freight Costs?

When inventory levels are healthy and predictable throughout the building season, freight and transportation benefit from proper planning and logistics. Unfortunately, the “need-it-now” paradigm simply adds to costs. Figure 5 shows how the “General Freight Trucking” index increased steadily from less than 145 in June 2020 to nearly 165 in early 2021. That increase of 12 percent ultimately affects the prices of building materials.

All of the factors enumerated above have contributed to the escalating prices. Although these factors affect some building materials more than others, they are common to most building materials manufacturers.

Figure 5 — United States Producer Price Index by Industry: General Freight Trucking. Last updated from the United States Federal Reserve in April 2021.

What Is Happening with Global Transport?

Companies also are experiencing severe disruptions in global trade and commerce. For example, empty shipping containers were quite scarce in India in the third quarter of 2020. Offshore manufacturers competing for shipping containers drove up shipping costs. Some exporters of goods made in India reported paying double the usual rate for shipping a container from India to the US.

Yet another problem is the steep rise in imports coming through the West Coast, particularly the ports of Los Angeles and Long Beach, and the subsequent congestion at the rail yards. Many importers of materials from Asia have complained about their raw material containers being stuck at the port or in rail yards for several weeks. In the past, it took only a few days to deliver these containers to the manufacturers.

Recently, one of the largest container ships in the world, the Ever Given, was stuck crosswise against the banks of the Suez Canal from March 23rd through March 29th. This disaster resulted in an extraordinary backup of ship traffic in the Red Sea. As a result, hundreds of ships were delayed and thousands of containers destined for the US will arrive past their initial expected times of arrival.

What about the Weather?

The business cycles for building materials, especially roofing products, are driven historically by weather events. The Iowa Derecho of August 2020 was the costliest thunderstorm event in modern U.S. history, only to be followed by three major hurricanes—Isaias, Laura and Sally.

The Last Straw

Just when it seemed that things could not get any worse, an unprecedented Arctic outbreak in February 2021 threw Texas and the neighboring states into chaos (Fig. 6). That was the proverbial “straw that broke the camel’s back.”

Manufacturing was disrupted throughout the country as cold weather persisted for nearly a week. Adverse effects on production were felt for weeks. Many manufacturers are still reeling from this event.

There is no doubt the cold weather and its aftermath are contributing to the higher prices of building materials. For example, many polymer producers in the Gulf region have not yet fully recovered from the 2021 Winter Storm. Even the production of fiberglass was hampered. The resulting disruptions set off a business cycle perfect storm—low inventories, spot shortages, high prices for scarce resources—all contributing to high input costs for manufacturers.

These weather events interrupted the supply chain just as companies were attempting to meet the pent-up demand from 2020 and replenish inventories in preparation for the 2021 building season.

Looking Ahead

The above outlines the reasons for higher prices in the construction industry. If there are two root causes contributing to price increases, they would be the COVID-19 shutdown and the resulting disruptions in the supply chain.

While most manufacturers cope with these events in different ways, some manufacturers simply could not survive. 2020 and early 2021 have been among the best of times and the worst of times. It is now time to look ahead to a robust supply chain and predictable manufacturing environment.


Steve Ratcliff
Chief Executive Officer

-Steve Ratcliff, CEO TARCO