May 15, 2008

Higher oil prices hit roofing, road-building industries

IAN HARVEY

correspondent

As world crude prices surge higher, there’s a mixed effect on the Canadian construction industry.

On the good-news side of the ledger, higher oil and gas prices mean increased exploration in Newfoundland, Nova Scotia, Alberta, British Columbia and Saskatchewan, according to the Conference Board of Canada’s 2008 forecast. That in turn means increased construction activity in both the residential and non-residential construction sectors.

The bad news, however, is painfully obvious: Higher input prices for fuel and petroleum-derivate materials, which in turn drive inflationary pressure on labour and other materials, means bidding is less predictable and profits are squeezed, says the Conference Board.

The first to feel the pinch are the roofing and road-building sectors, both dependent on asphalt cement which has seen a 50 per cent jump in price-per-tonne over the winter.

While not unexpected given crude’s rapid climb, it’s another input factor and hurts contractors who have already had bids accepted based on lower material costs.

Add in the economic slowdown triggered by the U.S. credit meltdown and things start to look darker.

“In the short term, non-residential construction investment is expected to benefit from high corporate profits,” the Conference Board Outlook 2008 report says.

“However, as slower economic growth chills investor enthusiasm for major construction projects, the bulk of spending will be propelled by major projects that have already started or been announced.

Lower demand growth also means price growth will decelerate to 3.3 per cent in 2008, after four consecutive years of stellar growth.”

It expects non-residential construction industry profits, which fell by over 24 per cent in 2007, will drop again this year because of rising material and labour costs.”

Jeff Morrison of the Canadian Construction Association says while fuel prices are a significant cost for members, there’s no hard data yet to show what the impact is, though “obviously we’re seeing it in areas with asphalt.”

Anecdotally, he says, there’s a concensus oil price increases are going to prompt cutbacks on projects.

“You may see a building which was going for LEED gold, downsize to LEED silver, though that’s not just the oil factor but as a result of all factors such as the economic downturn,” Morrison adds.

“There’s always fluctuations in the business world and there’s only so far infrastructure money can go,” notes Pat Vanini, executive director of the Association of Municipalities of Ontario. “It’s frustrating but it’s too early on the road – pun intended – to see if it means there will be cut backs.”

Angelo Mucillo of Bulk Transfer, a haulage contactor with 150 trucks carrying everything from aggregate to concrete, says they’ve had a fuel surcharge in place for some time.

“I think most of our clients are understanding — they see fuel prices,” he explains.

“The surcharge varies from when the contract was written. Obviously the surcharge is going to be higher if the contract was originally from a few years ago than one we’re just starting.

“The problems only arise if it’s for work already underway and budgets are set.”

“It’s all inflationary and my guess is most companies are adjusting on the fly,” says Katherine Jacobs Director of Research and Analysis for the Ontario Construction Secretariat.

“The impact hasn’t yet fully worked its way through the system though a lot of assumption about projections and forecasts were made with oil based on $80 a barrel.”

Print | Email | Comment