This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Construction Industry Forecasts

Notes from Alex Carrick - Feb 09, 2011

Alex Carrick
A ballet with three principal dancers - commodities, construction and manufacturing

The further integration of Canada into the world economy is proceeding with lightning speed. The evidence of the momentous changes underway appears in the headlines every day. From a sectoral standpoint, there are three principal players with interlocking relationships and altering levels of importance in the overall economy - commodities, manufacturing and construction.

The Toronto Stock Exchange (owned by TMX Group Inc.) and the London Stock Exchange (owned by London Stock Exchange Group PLC) are in negotiations to merge and become a single entity. The gain for the LSE would be greater access to resource sector stocks.

The LSE is already heavily weighted with the world’s largest mining companies, including BHP Billiton and Rio Tinto. However, the merger would also see Canadian giants such as Barrick Gold and Teck Resources listed on the LSE, giving them a more prominent profile. The TSE would also add to its roster of listings. And Canadian companies would acquire greatly expanded sources of capital, as well as heightened recognition by the international investing community.

The proposal is a business decision. Stock exchanges aren’t making as much money from traditional sources as in the past. Basic stock trading has become less lucrative. E-brokers have taken away business and cut margins. Profits now lie in IPOs, buyout action and new listings. 

None of this takes away from the fact the LSE and TSE are a natural fit due to their strengths in resource sector equities. The proposed merger is an effort to take advantage of the opportunities that are coming in the rapidly growing world of commodities trading. The expansion of raw materials output as a result of emerging nation needs will require enormous amounts of capital.

In turn, the capital will be used to fund construction projects. The TMX-LSE joint venture is one way of guaranteeing that a lack of money shouldn’t be a hold-up. The proposed merger is part of a world-wide trend. There are plans afoot for the Australian stock exchange to hook up with Singapore’s bourse, contingent on government approval. The New York Stock exchange has joined with the exchanges of France, Belgium and the Netherlands through NYSE Euronext. 

The Bank of Canada’s commodity price indices illustrate the extent of recent movements in raw materials costs. Not all of the increases in price are demand related. Some portion is due to the generalized migration of funds from secure bonds purchased for safety in the recession to riskier investments, augmented by huge increases to the money supply, particularly in the U.S. Nevertheless, an increase in output is becoming mandatory for some commodities (e.g., copper).

In uncharacteristic fashion, energy has been holding back the gain in the overall commodity price index. While the global price of oil has moved up dramatically, it is still well short of its record high. Natural gas prices have lain dormant for the past two years. Natural gas is one commodity where supply has greatly increased thanks to advances in extraction technology.

However, the BOC’s commodity price index excluding energy reached a new high in January 2011. It was led by agricultural products and metals and minerals. Both of those sub-indices also recorded new records. Cattle prices have been doing particularly well. Hogs and wheat prices are also on the comeback trail. Corn prices are up, partly due to corn’s role as a feedstock for hogs.

Elsewhere in the world, sugar and coffee prices are riding highs. In metals and minerals, copper is setting new records amidst a supply shortage and nickel and aluminum have returned to levels not seen in several years. Coal and iron ore prices are benefiting from emerging nation demand, combined with supply disruptions caused by violent weather conditions in certain parts of the world. Australia with flooding and a cyclone has been a prime example of the latter effect.

Many of these price improvements are incentives for capital spending projects. Forestry is an exception. Prices in that sector have come back significantly versus their May 2009 lows. Capacity cutbacks for sawmills, newsprint and pulp production have helped. But the lumber sub-component price index will remain weak until there is a recovery in U.S. housing starts.

Finally, in the agricultural sector, farming communities are experiencing more lucrative markets. But a problem is highlighted by our fertilizer producers. In other nations which are gearing their production to export markets, farm output is growing faster than in this country. Fertilizers (e.g., Canadian potash) are helping them achieve their goals. In the meantime, Canadian farmers are being heavily subsidized and many operations remain too small to take on global competitors.

In other headline news, talks have been initiated to further integrate security efforts in Canada and the U.S. The degree to which this occurs is of some concern to many – particularly when it allows law enforcement officers on either side of the border to pursue suspected perpetrators or criminals onto the sovereign territory of the other country. Nevertheless, there is general recognition that a means to reduce bottlenecks at border crossings is vital for the trade between the two countries. Goods trade is comprised primarily of manufactured items and commodities.

Motor vehicles and consumer goods make up major portions of the manufacturing trade between Canada and the U.S. Building materials and construction equipment are also important. Then there’s also the matter of the foreign-made mining and drilling equipment needed to extract resources. Commodities, construction and manufacturing are intertwined in a riotous contest for dominance that will help each grow stronger and prove beneficial for Canada as a whole.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.


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