As countries reopen their economies and reinvigorate manufacturing, the demand-led price surge in raw materials like, copper and lumber has been detrimental to construction stocks. The U.S. government announced its plans to kick-start the nation’s growth engine with a $2.3 trillion investment in new infrastructure. This includes the construction of bridges, waterways and ESG initiatives.
However, the spending on public infrastructure needs to be met with the production of raw materials. As a result, when demand for lumber (a core component in construction) spiked, so did prices. This surge comes after raw material prices tanked last year following a weak housing market.
Now with an infrastructure boom on our hands, raw material producers are struggling to keep up with the unprecedented demand.
Although resources like timber and copper are available in plentiful, processing and distributing these materials is a whole other story. Cutting down trees for resources or mining can only be done at a certain pace. Pushing this process into overdrive is nearly impossible. The supply and demand dynamics need to work cohesively to fill that gap.
As material price spikes take a toll on the construction stocks, here’s a look at three companies feeling the heat.
Construction Stocks: Caterpillar (CAT)
Although the global economic recovery is good news for Caterpillar, the rising cost of raw materials will have short-term implications. The main culprits behind the surge are supply-chain hurdles and issues concerning the logistics and production of raw materials. This forced the company to rethink pricing and decide if these costs should be passed on to the consumer.
One of the bigger challenges for Caterpillar is the supply of semiconductor chips. The shortage in core components for manufacturing the chips has forced the company it to extend delivery timelines. According to Caterpillar’s CFO, Andrew Bonfield, the chip shortage means that they “may not be able to satisfy all the end-user demand out there.”
Given the uncertainty that lays ahead, Caterpillar did not provide any guidance for this year. A second headwind is an increase in steel prices that are expected to impact earnings for the quarter ending in June.
Heidelberger Druckmaschinen AG (HBGRF)
Another company that’s feeling the pinch of the rising material prices is Heidelberger. The German-based mechanical engineering company recently announced that it will increase the cost of all its raw materials to cushion the blow of the recent price hikes. The price surge will enable Heidelberger to maintain the quality of its service and invest in new technologies.
Management at the company was forced to make this decision after exhausting other alternatives to make up for the price surge. However, Heidelberger is just one in a slew of businesses that have taken pricing actions in response to inflationary pressures.
The unprecedented increase in demand for goods and services as the economy recovers has pushed up prices of raw materials like timber, copper and steel. This issue has been exacerbated by supply chain bottlenecks, making it nearly impossible for companies like Heidelberger to keep up with the demand.
Home Depot (HD)
As the pandemic comes to a close, many homeowners are looking to start DIY home improvement projects. One of the biggest players in the DIY home projects space is Home Depot.
Although the company reported better than expected earnings in its previous quarter, the increase in raw material prices will likely burden future earnings. Revenue in the first quarter was up 32.7%, which was higher than analysts’ estimate of 24.1%. This earnings boost comes from the stimulus checks distributed in March.
However, the ongoing economic recovery has also pushed raw material supply chains to the brink as manufacturers struggle to meet demand. One material that’s particularly hard hit is lumber with its prices up a staggering 288% this year.
As a result, construction stocks like Home Depot, one of the biggest suppliers of lumber, declined amidst an optimistic earnings report. Nevertheless, the home improvement retailer remains optimistic stating that the lumber prices will not have any long-term impact on the business.
On the date of publication, the author held had no position in any of the stocks mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.