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industrial product prices tame in february, but watch out

Industrial Product Prices Tame in February, but Watch Out

Insight and Analysis of Construction Industry Trends

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Alex Carrick

RCD Chief Economist

Apr 28, 2008

Statistics Canada reports that the industrial product price index (IPPI) was -0.8% year over year (y/y) and +0.1% month over month (m/m) in February 2008 (i.e., versus February 2007 and January 2008 respectively). These were both very modest changes. However, recent oil price hikes suggest that more radical cost and price adjustments are coming.

The IPPI monitors the prices that Canadian producers receive when their goods leave the plant. Since Canadian producers export many of their goods, their prices are often quoted in foreign currencies, mainly in terms of the U.S. dollar. Therefore, fluctuating currency values can have quite an impact on the price, when converted back into Canadian dollars.

Between February of last year and February of this year, the Canadian dollar rose 20% versus the U.S. dollar. This helped to soften IPPI gains considerably.

The IPPI is a middle-stage price indicator that does not include the transportation, wholesaling and retailing costs that enter into the Consumer Price Index (CPI). The earliest-stage cost indicator is the Raw Materials Price Index (RMPI), which includes input materials acquired from both Canadian and foreign sources.

About half of the IPPI major sub-categories have more or less direct tie-ins with residential and non-residential construction activity. The most recent results for those sub-groupings within the IPPI were as follows:

(1) lumber and other wood products: -7.1% y/y and -0.7% m/m;

(2) furniture and fixtures: +1.3% y/y and 0.0% m/m;

(3) primary metal products (steel and aluminum): -9.0% y/y and +2.5% m/m;

(4) metal fabricated products (structural steel): +0.7% y/y and +0.7% m/m;

(5) machinery and equipment (includes construction machinery and HVAC − heating, ventilating and air conditioning equipment): -4.2% y/y and -0.3% m/m;

(6) motor vehicles and other transportation equipment: -9.2% y/y and -0.7% m/m;

(7) non-metallic mineral products (cement, concrete, gypsum and glass): +2.1% y/y and -0.1% m/m;

(8) petroleum and coal products (includes gasoline and diesel fuel, plus paving material and shingles): +26.1% y/y and +0.3% m/m;

(9) chemicals and chemical products (includes synthetic rubber and paint): +3.3% y/y and -0.2% m/m.

Lumber and wood prices generally are weak due to the collapse of the U.S. housing market. Primary metal prices, which are mainly for steel and aluminum, have been muted due to currency change. However, much higher prices are now being paid internationally in new contracts to supply the chief ingredients used to make steel (specifically coal and iron ore). As a result, world steel prices have been moving up dramatically.

In February, energy prices were quite well behaved. Since then, however, and particularly in this latest month of April, oil prices have gone into orbit again. New record highs are being set almost daily. There has to be an expectation that the IPPI will be lifted higher in the next several months of publication. Unfortunately, the time lag required for government to compile and publish such a measure as the IPPI means that it cannot keep up when there is a late-breaking development. However, the history does help with extrapolations.

In its long-term historical context, the IPPI currently stands at only 115.6. This is a relatively modest 15.6% increase from its base level figure of 100.0 established in 1997. However, the RMPI (for raw materials) had a February 2008 value of 190.0 relative to 1997=100, which means an increase of 90% (or almost a doubling) over the past slightly-more-than 10 years.

Alex Carrick