Rapid demand shifts left manufacturers of construction products and materials struggling to keep up, unable to ramp up production capacity quickly enough to meet the soaring new demand. Perceiving the current supply issues to be short-term, manufacturers saw little point in investing capex into expanding capacity. Instead, they have been happy to accept the higher prices and enjoy increased margins.
There are early signs that record-high material prices across the construction industry have started to soften demand and create some hesitancy regarding new contract awards. Despite this, prices are set to remain ‘sticky’ for a period, resistant to change quickly despite shifts in the market suggesting that a different price is optimal. Falling raw material costs take time to filter through the supply chain and become reflected in prices. Suppliers will also need to sell their existing inventory bought at higher prices and increase their inventory at these lower prices. Retailers will naturally try to hold on to higher prices for as long as they can, particularly when there is still demand.
How long will these supply chain pressures last, exactly? The short answer is, no one knows. The longevity of these issues depends, in part, on whether another round of the pandemic shuts down more countries and what fiscal policy decisions those countries make in the short to medium term. These things are inherently unknowable. Although most see these supply issues as a flash in the pan which will work themselves out as time marches on, it’s important to separate the longer-term structural supply issues from the near-term issues.