In the economic expansion that preceded the current contraction in North America’s markets, there were two periods of intense increases in construction material costs. These came early in 2004, mainly due to coincident housing booms in both the U.S. and Canada, and in mid-2008, due to the run-up in world commodity prices. Since July of last year, global commodity prices have slipped way back. As a result, CanaData’s total construction materials cost index — based on industrial and raw material price indices calculated by Statistics Canada — has fallen by 12.7% over the past six months.

Summer 2008 the High Water Mark
The summer of 2008 was a watershed moment for a wide range of construction materials, especially those with large commodity bases. Since then, some of the largest percentage declines have come in: gasoline, -51.7%; asphalt, -49.5%; diesel fuel, -45.8%; concrete rebar, -32.9%; aluminum structural shapes, -7.2%; and steel structural shapes, -6.9%. Further upstream in the production process have been: petroleum and coal products, -43.8%; primary metal products, -15.9%; and chemicals and chemical products, -7.6%.

The few instances of material cost increases have been due to two factors: (1) production that lies downstream versus an earlier commodity price increase, resulting in a lag effect; or (2) a currency adjustment, since the Canadian dollar has fallen from par value to about $0.80 USD over the past year. Examples of the former are plumbing fixtures and valves (+6.9%) and electrical products (+6.8%) — both resulting from the high copper prices of a half-year ago — and of the latter, machinery and equipment (+5.5%).

The Engineering Sub-index
The total construction materials cost index is comprised of three sub-indices. None of these showed much movement on a month-to-month basis in February. However, there were some dramatic changes versus six months ago.

“Engineering” construction materials are -24.0%. This results primarily from the big drop in fossil fuel prices. Asphalt, sand and gravel, ready-mix concrete and cement prices are all either significantly negative or flat. Once publicly-funded infrastructure projects (especially in transportation) get underway, there will be gradual upward movement in these costs, beginning this fall and picking up steam from the spring of next year onward.

Non-residential Building
“Non-residential building” material costs are -6.5% versus six months ago. This is due to declines for major structural elements. For example, steel prices have been slashed due to the slowdown in China’s economy. Furthermore, reduced sea-lane transportation charges are permitting foreign product to be shipped to North America at lower cost than normal.

Such material costs are likely to stay down through this fall. One sure sign of these difficult times for producers has been the temporary mill closings by U.S. Steel Canada in southern Ontario. Another is Rio Tinto’s decision to put an iron ore expansion in Labrador on hold. Privately-funded non-residential building work will remain depressed this year and through much of next year. However, there will be extra demand arising from publicly-funded institutional building activity in the areas of schools and hospitals.

Residential Construction
Residential construction costs have remained steady over the past six months because the main input components experienced declines much earlier. U.S. housing starts began their steady sharp descent in February 2006. Lumber and wood product prices are up 4.7% on a year-over-year basis, due to the loonie’s decline and some sawmill closings.

This is a category of costs to watch, however. Lumber prices usually start to move higher about six months before a recovery in housing starts gets well and truly underway. Expect Canadian housing starts to remain substantially down well into next year, but U.S. housing starts should gradually start climbing from this summer onward.

2009 Forecasts
Expect residential construction material costs to range between 0.0% and +5.0% on average in 2009; non-residential building material costs to be -5.0% to 0.0%; and engineering material costs to come in at -10.0% to -5.0%. All three series should pick up speed as government-backed infrastructure-stimulus packages are rolled out.

Still, 2009 will be a very good year for construction costs — essentially flat when all three sectors are combined — offering a one-year window of bargains for owners undertaking projects. Construction material costs will start to gradually move higher again next year as world economic recovery picks up speed.