By Tad Stoner
tad@caymannetnews.com 

The recent surge in prices for construction materials is unlikely to slow, feeding general inflation and labour costs, and potentially threatening dozens of smaller companies as part of a contracting economy, say industry leaders.

Because the factors pushing the increases are beyond local control, however, Cayman Islands contractors - responsible for approximately one-quarter of economic activity - say little can be done to mitigate the rises, leaving a vulnerable economy poised for a prolonged struggle with “stagflation”, combining slow growth and inflation.

A recent report in the Atlanta-based Reed Construction Data, among North America’s largest sources of construction-industry news, pegged overall first-quarter rises for building materials at 16.5 percent more than one year ago, driven largely by shortages of oil and metal ores.

“The term ‘stagflation’ has recently reappeared in the news after an absence of about two decades. Expect to see it more often in the next few years as we make the hard choice between growth and inflation,” the report said.

“More ore and oil supply now requires additional and more expensive mines and oilfields. The implications of this are frightening … Realistically, some of the potential price increases will be bled off in the form of a slower-growth economy as materials buyers react to higher prices. That food prices are also rising quickly now for the same reasons is an additional complication that will also likely be absorbed, in part, by slower economic growth.”

Steve Hawley, president of the Cayman Islands Contractors Association, said problems in the local industry largely mirrored those in the US.

“There are not so many local percentages we can come up with here, but US rises are pretty much the same [as the Cayman Islands] and pretty much directly apply here,” Mr Hawley said. “It may actually mean that suppliers gouge us a little more.”

Sam Small, head of Small Construction and President of the Cayman Society of Architects, Surveyors & Engineers (CASE), said that steel alone had risen from US$750 per ton to US$1,200 per ton since October, and that because cement “was up, concrete is up”.

Mr Small added: “The other thing driving costs is internal freight for shipping down to Miami from manufacturers in the heartland. It’s now as expensive as shipping from Miami to the Cayman Islands.”

At Christmastime, he said, moving a container from Tampa to south Florida cost US$95; last week, he said, the same shipment cost US$212. “It’s more expensive to ship a container from Georgia to Miami than from Miami to Cayman,” he said, citing US$1,600 costs for the former leg, and US$1,500 for the second.

Denny Warren, owner and General Manager of Warren Construction, said the increases were higher than any he had previously witnessed.

“I haven’t seen these prices before and, yes, this is going to cause pain and, yes, some people will go out of business because of the price challenges.

“Part of the problem, though, is also the quantity of work available and number of contractors,” Mr Warren said. “There will always be a place, though, for smaller and lower-priced companies because the big guys, companies like McAlpine, for example, can’t do the kind of lower-level, residential work for the same cost as lower-level companies.”

Mr Hawley said contractors would react to rising materials costs by boosting their own prices, but acknowledged the widespread effect of the instability.

“Everybody is affected by this; it’s not good for anybody. When prices are rising wildly, we can’t even quote on a job because no one can predict prices,” he said, suggesting that the only way to cope was either to “beef up” a bid - often compromising clients - or to negotiate “escalation clauses” - in which invoices depended on fluctuating materials prices.

“The problem is that this often sounds like a scam of some sort, but the normal profit in the industry is 10 percent, otherwise you go out of business,” he said.

Mr Small saw no end to rising materials costs, and predicted a spillover into the price of labour, anticipating another 5 percent rise in rates already 5 percent higher than previously.

Generally, workers earn between $8 and $10 per hour, while tradesmen charge hourly rates between $11 and $15

“Labour hasn’t really gone up in about 10 years, but I would have thought that [those] prices will go up as well as materials,” he said.

“This affects everybody and, yes, it will put people out of business. The smaller guys are always the first to go.”

Mr Warren suggested that inflation could be managed with a programme of privatising Government functions.

“The question of halting the increases is not totally dependent on the increase in commodities,” he said. “How the Government responds often determines these things. I would ask if Government is, for example, unnecessarily regulating in particular areas, then scrap it.”

He also foresaw problems in providing affordable housing for the disadvantaged, saying rising costs would “obviously throw a chill” over such social programmes.

“The best we could do for those not in the workforce is to provide training so they are ready and able to deal with these challenges,” Mr Warren said. “We must undertake the burden to help persons that need help.”