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 - Jul 23, 2009

Alex Carrick
Canadian Construction Material Cost Changes Diverge Widely (Part 2)

In yesterday’s blog entry, I talked about what has been happening, longer term and more recently, in terms of key construction material prices. I covered foundation and structural materials − sand and gravel, cement, ready-mix concrete, iron ore, concrete reinforcing bars and structural steel shapes. Today, let’s look at some other key inputs and some equipment and machinery items. This is important in terms of what governments can expect in the bidding process that will precede their infrastructure spending initiatives.

The following is based on the Industrial Product Price Index (IPPI) series published by Statistics Canada for some key materials and inputs used in the construction process. The information is current as of May 2009. The following shorthand is used: “y/y” is May 2009 versus May 2008; “q/q” is May 2009 versus February 2009; and “m/m” is May 2009 compared with April 2009. Statistics Canada describes industrial product prices as being based on what Canadian producers receive for their product “at their front gate”.

(7) Electric wire and cable (-5.5% y/y; -1.1% q/q; and +0.4% m/m). Since 2000, the first blip in the electric wire and cable price index occurred in 2004, at +10.0% year over year for ten months in a row. At that time, housing demand in North America was very strong and China was becoming a presence in world commodity markets. Prices settled down again in 2005 and early 2006. But they shot up in mid-2006 to a peak of +30.0%.

It was in early 2006 that the international price of copper made its big move on world commodity markets. Copper increased in price by a multiple of seven within two years, beginning in early 2004. Then it stayed at that lofty level until a major correction took place in July of last year. Consequently, the year-over-year change in the price of products with a major copper component, including wire and cable, was flat for a number of years and then falling. The wire and cable IPPI figure has been between 0.0% and -5.0% since mid-2007. Over the last several months, mild signs of recovery in the Chinese domestic economy have been causing copper prices to start out on an upward jog again.

(8) Metal plumbing fixtures (+11.5% y/y; +0.8% q/q; and 0.0% m/m). Until recently, the timing of price changes for metal plumbing fixtures has been quite similar to the one exhibited by electric wire and cable. But the amplitude has been considerably less, never more than +14.0% year over year. Plumbing fixtures have also had a price run-up in the latest twelve months that has been unique. This may be due to strong job-site work on condominiums and a carryover of high-rise office building projects for which ground was broken in 2007. Metal plumbing fixture prices are currently +11.5% year over year.

(9) Asphalt (-2.5% y/y; +27.0% q/q; and +12.7% m/m). Asphalt for paving is comprised mainly of stone held together by small amounts of asphalt cement. It is the asphalt cement that is tied to the international price of oil, since it is a low-grade by-product of the refining process. There are also a limited number of suppliers in Canada.

Asphalt displayed a period of considerable price volatility in 2006 when it increased +60.0% year over year. But that was eclipsed by a percentage gain double that level in mid-2008, when the index value rose +120.0%. July 2008 was when many of the world’s commodities reached their price maximums in the latest “up” phase of the business cycle.

At that point in time, it became clear, due to problems in the financial sector and the freezing of credit, that “uncoupling” with respect to the rest of the world and the faltering U.S. economy was not going to happen. Recession struck everywhere and commodity prices were among the casualties. Asphalt prices are currently -2.5% year over year.

(10) Diesel fuel (-45.1% y/y; -11.1% q/q; and +3.1% m/m). The international price of oil rose to an all-time high of $145 USD (U.S. dollars) per barrel in July 2008. The subsequent slide brought the price level down to $45 USD per barrel in February of this year. The price then recovered to $70 in the early summer before sliding back to the current low $60 range. Diesel fuel prices have shown a similar pattern. They are -45.0% on a year-over-year basis, but they are starting to climb back up month over month.

(12) Construction machinery and equipment (+8.9% y/y; -0.1% q/q; and 0.0% m/m) and mobile earth moving equipment (+13.2% y/y; 0.0% q/q; and 0.0% m/m). These two machinery and equipment categories have been combined because they demonstrate similar price patterns. Year-over-year price changes for both series were virtually non-existent from the turn of the century right up until July of last year. An element in these prices is import competition. As the Canadian dollar was rising from 2003 to 2007, the price of imports was falling. Therefore, Canadian producers could not raise their prices.

July of 2008 was not just when commodity prices started to fall. It also marked an end, perhaps only temporary, to the strength in value of the Canadian dollar relative to the U.S. dollar. The loonie has been moving up and down with oil prices. As the Canadian dollar dropped through the fall of last year and into early 2009, import prices rose. This has given Canadian producers of construction equipment the opportunity to put through some long-delayed price hikes, somewhere between +10.0% and +15.0% for the two series. Expected strong investment in civil/engineering work is also helping to support prices.

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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