August 12, 2010

Economic update

Industrial products price index promises break on materials

ALEX CARRICK

CanaData Chief Economist

A key indication of where construction material costs may be headed can be found in two Statistics Canada series, industrial product price indices (IPPI) and raw materials price indices (RMPI). With respect to the latest numbers, for June 2010, there is no cause for alarm.

The IPPI dropped 0.9% from May to June, after recording an increase in the two previous months. Petroleum and metals were the chief causes of the decline in June.

Some mild up and down changes notwithstanding, the IPPI has been essentially flat since late 2008. It remains well below the peak achieved in mid-2008. July 2008 was when world oil prices topped out at $145 USD per barrel.

A number of other commodities were also priced at or near record highs at that time. Those days were the last hurrah for many commodity prices before the global recession really took hold.

Raw material prices have generally been trending upward since late 2008. China’s exceptional growth rate, spurred on by massive infrastructure spending, initiated a search around the world for ores, metals and fossil fuels to keep steel and cement flowing to building sites.

With signs that world economic recovery is slowing, however — due to austerity measures in Europe and credit tightening to forestall a property price boom-bust scenario in China — raw material prices have entered a phase of easement as well.

The RMPI fell significantly from April to May (-7.3%) and then stayed about flat (-0.3%) from May to June.

The government infrastructure programs in Canada have been quite fortunate in their timing. The public sector is getting about as big a bang for its buck as it might ever hope to achieve.

Construction costs, at least on the material side, are staying relatively moderate due to restraint from upstream IPPI and RMPI impacts.

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