Chinese Takeout

Thanks to high demand for raw and finished construction materials in the Middle Kingdom, Hawaii contractors are dealing with eye-popping price hikes

September, 2004

At the beginning of June, the cost of a three-quarter-inch steel conduit commonly used for wiring ducts was 75 cents per foot in Honolulu. By the middle of June, the price had risen to $1.40. By July, the price was $1.80 per foot, a whopping 140 percent increase in one month.

That’s hitting electrical and systems contractors, such as Island Signal & Sound, in the pocketbook. “What happens is you go in and you give a proposal. By the time they give you the work the prices have gone way up so you end up eating some of that material cost. I don’t think anyone anticipated costs rising that quickly,” says Grant Maeshiro, the project engineer for the 20-person company, which has done work at Tripler Army Medical Center and Ko Olina Resort.

Island Signal & Sound and its fellow electrical contractors aren’t the only ones feeling the pain. Construction material costs have been rising quickly in many product categories, including steel and metal, plywood and others. “I’m hearing that building materials are anywhere from 30 percent to 70 percent more expensive than a year ago and in major product categories,” says Paul Brewbaker, chief economist at Bank of Hawaii.

A confluence of events outside Hawaii has fueled these uncomfortable increases, squeezing contractors who signed on the dotted line a year earlier. The raging housing market on the U.S. mainland has tightened the supply of many items. A hot construction market in Southern California has raised regional prices and some of those increases have been passed through to the Islands. Rising oil and gas prices have also nudged up material costs as the cost of transportation has soared. But the real driver is the rapid growth of China. The Middle Kingdom has sucked up huge volumes of raw and finished materials as it continues to grow its economy at about a 10-percent annual clip.

Hawaii is just starting to feel the effects of the rising costs. Smaller contractors will take the disproportionate hit, because they are less able to absorb these costs and have less bargaining power to insist that escalator clauses be inserted into deal language. Such clauses would require the owner of a project to pay added material costs above a certain percentage increase if prices of materials go up dramatically. The most savvy construction players hedge their costs through use of forward contracts and other financial instruments. However, hedging all material costs is difficult and expensive. And even the big boys may have trouble extracting escalator clauses from property owners, particularly in the private sector. “You try to ask for these guarantees, but normally there is some resistance to that,” says Hawaiian Dredging and Construction Co. President Bill Wilson.

Ultimately, these price increases will force overall project bids to go up. That could exert a small but noticeable drag on the growth of the sector, says Brewbaker.

Wilson says, “Anyone building something today is facing the fact that the costs of doing it now are higher than they were some time ago when the project was in planning. That could mean some things don’t get built.”

Combine these material increases with the apparent resolve of the Federal Reserve Bank to raise interest rates and the Hawaii construction industry could feel a considerable downward tug. Some relief may be on the way. The Chinese government has started to tighten up lending policies at its state-owned banks in order to reign in speculative investments and poorly planned construction projects. But the effects of this move could take more than a year to reach Hawaii. In the meantime, the folks in the hard-hat sector watch the effects of this Chinese takeout, and try to make sure that nobody else eats Hawaii’s lunch.

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Hawaii Business magazine