February 16, 2012
Construction costs are up year over year, but have eased in latest six months
Chief Economist, CanaData
For many firms operating in Canada, one of the best sources of data on costs can be found in the Industrial Product Price Index (IPPI) and Raw Materials Price Index (RMPI) series published by Statistics Canada.
The information is analogous to what appears in the well-known and widely-watched Producer Price Index (PPI) report in the U.S.
The IPPI monitors what producers receive as their goods leave the plant. Mark-ups that come from wholesaling, retailing and transportation are not included.
For the construction industry, a primary use of the IPPI and RMPI data can be to assess the movement in material costs.
CanaData compiles separate material cost indices for residential, non-residential building and engineering construction by applying weights to the components most commonly used in each.
The total construction material cost index is a composite of the three major sub-indices.
Some of the material components used to varying degrees in the three major categories of construction are lumber, concrete, structural steel, rebar, glass, gypsum, electrical and plumbing fixtures and so on. They are a step up in the production process beyond raw commodities.
Since commodities are the basic inputs that go into building products, there is a strong connection between raw material prices, most of which are captured in the RMPI series, and construction material costs.
Other factors are also significant, including the availability of the product, as reflected in inventory levels, and perhaps most important of all, market demand.
As of December 2011, CanaData’s total construction material cost index was +3.1% versus December 2010.
By way of comparison, the year-over-year increase in Canada’s Consumer Price Index (CPI) in the same month was lower at +2.3%.
The year-over-year increase in the total construction cost index was made up of a -0.2% figure for residential, +3.1% for non-residential building and +5.8% for engineering.
The total construction increase (+3.1%) suggests more cost pressure than is presently the case. A 12-month comparison is too long. One needs to look at more recent results. The majority of price increases occurred in the first half of last year. During the past six months, the total index has declined 0.9%.
Engineering material costs have been -2.3% in the latest six months and non-residential building has been level, at +0.1%. Residential (+0.5%) has been the exception.
The residential increase was mainly on account of lumber prices (+1.8% in the last six months, although -0.8% year over year).
The number of home starts in Canada was strong in the second half of last year, exceeding 200,000 units per month (seasonally adjusted and annualized) on several occasions.
The strength was mainly in condos, however, and they don’t account for as much wood usage as the singles market.
Longer term, lumber prices have been essentially flat for the past six years. That’s a period of time that exactly corresponds with the weakness in the homebuilding market south of the border.
As soon as starts begin to improve in the U.S., expect lumber prices to move higher, especially since there have been so many sawmill closures and capacity reductions.
Most of the other components of the residential material sub-index have shown limited movement both on a year-over-year basis and during the last six months. This includes doors and windows, gypsum wall board, glass, ready-mix concrete, concrete block, thermal insulation and plumbing and light fixtures.
One product category has recorded a notable decline, particle board, where the cost has been -12% year over year and 8% in the latest six months. A long-term trend is apparent. Over the past six years, the price of particle board has fallen 43%.
In non-residential construction, concrete reinforcing bars have been +3.7% year over year, but -2.9% in the latest six months; metal doors and windows +4.8% year over year, but only +1.0% since June; and electric wire and cable +2.7% year over year, but +1.3% in the last six months.
There has been one stand-out item -- structural steel primary and fabricated shapes -- in non-residential building. This component has been +11.3% year over year and +3.8% in the latest six months.
Key determinants for steel prices are spot rates for scrap and the strength of the world economy. The latter sets the pace for steelmaking activity in Europe and China and has a major influence on prices paid for iron ore as well as on metallurgical and coking coal prices.
Engineering construction is the category that ties most closely to raw material or commodity costs. This comes mainly through the usage of energy products in several ways – as inputs (e.g., plastics), for heating outdoors in winter and to provide transportation to remote sites.
The world price of oil shot up in the first half of last year due to uncertainty about where the Arab Spring was leading and on account of actual supply disruptions in Libya. Once the Libyan conflict was resolved, prices eased a little in the second half of the year.
But they’ve recently started back on a climbing path. There are more threats to the supply from the Middle East. A showdown with Iran over its development of nuclear weapons casts a looming shadow.
Some key engineering component prices have performed as follows: plastic pipes and pipe fittings +4.9% year over year, -1.6% in the latest six months; asphalt, which can be highly volatile, +10.9% year over year, -13.9% in the last six months; gasoline +9.8% year over year, but -7.6% more recently; and diesel fuel, +17.2% year over year and +5.2% since June.
Job-site activity in the engineering construction category has been undergoing a transformation from publicly-sponsored work, as part of previous infrastructure stimulus programs, to newly-initiated private sector resource projects.
There is a glitch. The current moderation in commodity prices not only serves to lower some material costs, it also makes previously anticipated and counted-on investments in mega resource projects less of a sure thing.
For the moment, a repeat of the very large spikes in construction material costs that occurred in 2004 and 2008 – nearly +15% year over year – isn’t a concern.
But as both those years also showed, circumstances can alter relatively quickly. It wouldn’t be wise to be complacent.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.
PER CENT CHANGE IN DECEMBER 2011 INDEX FROM: |
|||||||
| 6 Years Ago |
3 Years Ago |
1 Year Ago |
6 Months Ago |
3 Months Ago |
1 Month Ago |
||
| Total, all commodities | 10.7% | 5.5% | 2.8% | 0.0% | -0.6% | -0.7% | |
| Key Aggregates: | |||||||
| Lumber and other wood products | -8.5% | -2.6% | -0.8% | 1.8% | 0.0% | 0.3% | |
| Primary metal products | 19.8% | 17.6% | -5.2% | -6.2% | -7.0% | -2.4% | |
| Metal fabricated products | 10.0% | -1.3% | 2.5% | 0.6% | 0.2% | 0.0% | |
| Machinery and equipment (includes HVAC) | 5.9% | -2.1% | 2.2% | 1.9% | 1.0% | 0.3% | |
| Electrical and other communications products | 0.1% | -5.1% | 1.0% | 1.3% | 0.6% | 0.0% | |
| Non-metallic mineral products | 11.8% | 2.8% | 0.5% | 0.3% | 0.0% | 0.1% | |
| Petroleum and coal products | 42.4% | 61.7% | 12.8% | -2.0% | -2.1% | -3.7% | |
| Chemicals and chemical products | 14.8% | 8.5% | 4.8% | -2.1% | -0.6% | -0.7% | |
| Construction Inputs: | |||||||
| Veneer and plywood | -14.7% | -9.0% | 1.1% | 2.1% | -1.0% | 0.4% | |
| Particle board and waferboard | -42.6% | -13.3% | -12.1% | -8.2% | -6.5% | 0.0% | |
| Shakes and shingles | 9.0% | -14.8% | 2.8% | 3.8% | 1.6% | -0.2% | |
| Wooden doors, windows, cabinetry, millwork | -3.6% | -2.2% | -0.6% | -1.0% | -0.5% | -0.1% | |
| Gypsum wall board, lath and plaster | -8.8% | -4.2% | -0.6% | 2.1% | 0.0% | 0.0% | |
| Sand and gravel | 34.4% | 8.4% | 2.1% | 0.0% | 0.0% | 0.0% | |
| Glass and glass products | 8.3% | 0.0% | 0.5% | 1.1% | 0.2% | -0.1% | |
| Cement (portland) | 19.0% | 7.7% | -0.6% | -2.2% | -1.2% | 0.0% | |
| Ready-mix concrete | 19.3% | 2.8% | 1.3% | 0.2% | 0.2% | 0.1% | |
| Concrete brick and building blocks | 19.7% | 8.6% | -0.4% | 0.0% | 0.0% | 0.0% | |
| Clay products (brick) | 5.4% | 2.2% | 2.7% | 0.5% | 1.1% | 0.4% | |
| Aluminum structural shapes | -0.9% | -0.4% | -0.6% | -1.4% | -0.8% | -0.4% | |
| Concrete reinforcing bars (including fabricated) | 4.2% | 2.4% | 3.7% | -2.9% | -1.7% | -0.7% | |
| Structural steel shapes (including fabricated) | 17.6% | -8.6% | 11.3% | 3.8% | 1.0% | -0.1% | |
| Prefabricated metal buildings | 6.9% | 0.9% | 0.0% | 0.0% | 0.0% | 0.0% | |
| Doors and windows (metal) | 9.1% | 0.2% | 4.8% | 1.0% | 0.5% | 0.0% | |
| Roofing and siding (metal) | 37.9% | 9.4% | -0.7% | -1.7% | -0.6% | -0.6% | |
| Roof deck and flooring (metal) | -6.7% | -5.2% | 0.4% | -7.2% | 3.3% | 1.3% | |
| Thermal insulation and fibrous glass | 1.4% | -0.1% | -0.3% | 0.8% | 0.1% | 0.0% | |
| Bolts, nuts, screws, washers, fasteners | 10.9% | -4.8% | -1.0% | 0.0% | 0.0% | 0.0% | |
| Builders' hardware | 6.8% | 2.4% | 0.0% | -0.3% | 1.0% | 0.0% | |
| Plumbing fixtures and valves (metal) | 26.0% | 5.2% | 2.0% | 0.1% | 0.0% | 0.0% | |
| Plastic pipes and pipe fittings | 2.6% | 12.3% | 4.9% | -1.6% | -1.0% | -0.1% | |
| Electric wire and cable | 20.2% | 9.6% | 2.7% | 1.3% | 0.2% | 0.0% | |
| Lighting Fixtures (incandescent) | 1.7% | -0.3% | -1.7% | 0.6% | 0.0% | 0.0% | |
| Paint and varnish | 11.7% | 2.9% | 3.5% | 0.1% | 0.4% | 0.0% | |
| "Heavy" Inputs: | |||||||
| Construction machinery and equipment | 13.0% | 2.2% | 0.9% | 0.6% | -0.3% | 0.0% | |
| Mobile earth moving and allied equipment | 12.9% | 0.0% | 0.4% | 0.0% | -0.6% | 0.0% | |
| Mixing and paving equipment (concrete and asphalt) | 5.5% | 1.4% | 2.0% | 2.0% | 0.0% | 0.0% | |
| Steel pipe and tubing (to transport oil and gas) | 8.0% | -0.2% | 2.2% | -1.3% | 0.2% | 0.0% | |
| Concrete pipe | 17.3% | 5.7% | 0.2% | 0.1% | 0.1% | 0.0% | |
| Asphalt (one month behind) | 83.3% | 46.5% | 10.9% | -13.9% | -5.6% | -4.0% | |
| Gasoline (one month behind) | 38.1% | 81.7% | 9.8% | -7.6% | -7.7% | -2.8% | |
| Diesel fuel (one month behind) | 39.0% | 41.3% | 17.2% | 5.2% | 4.3% | -5.2% | |
| Raw Materials Prices: | |||||||
| Total raw materials | 30.6% | 51.9% | 4.7% | -2.8% | 0.3% | -2.4% | |
| Mineral fuels (thermal coal, crude oil and natural gas) | 30.8% | 103.6% | 10.8% | 0.0% | 5.7% | -3.0% | |
| Wood | 4.4% | -6.6% | 0.9% | -1.6% | 1.5% | -0.1% | |
| Ferrous materials | 18.3% | 2.5% | -1.1% | -3.7% | -4.3% | 0.4% | |
| Iron ore | 30.8% | -13.2% | -9.0% | -7.0% | -11.2% | 0.2% | |
| Non-metallic minerals | 36.4% | 11.5% | 7.5% | -1.0% | 0.5% | 0.1% | |
| Stone | 19.7% | 7.0% | 0.2% | 0.3% | -0.1% | 0.3% | |
| Some Regional Comparisons | |||||||
| Lumber, softwood, Atlantic Region | -14.1% | 1.3% | -1.6% | <2.2% | 0.8% | 1.1% | |
| Lumber, softwood, Québec | -19.0% | -1.8% | -1.2% | 4.9% | 1.6% | 0.8% | |
| Lumber, softwood, Ontario | 2.2% | 7.8% | 1.6% | 11.5% | 1.5% | 1.1% | |
| Lumber, softwood, Prairie Region | -29.0% | 9.7% | -9.9% | 4.5% | -2.1% | 0.7% | |
| Lumber, softwood, spruce-pine-fir, B.C. Interior | -14.8% | 2.2% | -2.1% | 7.0% | 0.2% | 1.5% | |
| Ready-mix concrete, Atlantic Region | 23.6% | 8.7% | -3.4% | -5.3% | -3.4% | 0.0% | |
| Ready-mix concrete, Québec | 9.4% | 3.0% | -1.8% | -0.7% | 1.4% | 0.0% | |
| Ready-mix concrete, Ontario | 16.6% | 3.2% | 4.7% | 2.6% | 0.0% | 0.0% | |
| Ready-mix concrete, Prairie Region | 37.0% | 7.6% | 1.4% | 0.0% | 0.0% | 0.0% | |
| Ready-mix concrete, British Columbia | 10.4% | -6.2% | -0.9% | -1.4% | 0.9% | 0.4% | |
| Type of Construction Indexes: | |||||||
| Residential | 0.7% | 0.2% | -0.2% | 0.5% | -0.3% | 0.1% | |
| Non-residential building | 10.9% | -0.5% | 3.1% | 0.1% | 0.1% | -0.1% | |
| Engineering construction | 26.3% | 19.7% | 5.8% | -2.3% | -1.2% | -1.6% | |
| TOTAL CONSTRUCTION | 13.2% | 8.0% | 3.1% | -0.9% | -0.7% | -0.7% | |
Chart: Reed Construction Data - CanaData.
