August 11, 2009
Economy at a Glance — August 11, 2009
Some Canadian construction material costs set to rise
ALEX CARRICK
Chief Economist, CanaData
Based on Industrial Product Price Index information from Statistics Canada, Reed Construction Data-CanaData calculates material construction cost indices - for overall construction and major type-of-structure sub-categories.
The year-over-year change for total construction in May 2009 was -7.9%. This was comprised of residential construction at +1.6%, non-residential buildings at -5.1% and engineering work at -15.7%. Material cost changes may still be sleeping lightly, but there are signs that they are starting to stir.
The residential materials cost index has been essentially flat for the past four years. A heavy weighting in the residential materials index goes to lumber prices. Lumber prices have been on a downward trajectory since early in 2006, which was when U.S. housing starts began their steep descent. In the most recent period, weak Canadian housing starts have had a significant impact on lumber prices regionally. For example, softwood lumber is -12.4% in Ontario versus six months ago and -6.7% in B.C. versus three months ago.
Non-residential building material costs are falling because of the weakness that has emerged in the privately-financed categories of construction, commercial and industrial. Weakness in product demand from the manufacturing sector is being matched by declines in retail sales and office space needs in the commercial sector.
Major material sub-components of non-residential building construction have been pulling back on the cost front. Included here would be support and framing materials such as concrete rebar (-34.6% year over year), structural steel shapes (-10.1%) and aluminum structural shapes (-6.7%). The key question concerns how long this will last.
Capital spending in China has played a big role in determining prices in these product areas in the past. There is mounting evidence that the Chinese dragon is hungry for nourishment again. Government agencies are trying to line up key raw material supply lines. This will have an impact on costs everywhere in the not too distant future. Some commodity prices (e.g., nickel and copper) are already on the move upward. For the moment, however, concrete reinforcing bar and structural steel prices are still languishing in Canada, even on a quarter-over-quarter basis (e.g., -10.3% and -16.5% respectively).
No one should be complacent about the engineering material cost index. The large year-over-year drop is due to international oil prices. They peaked in July of last year. Then they bottomed out in February of this year. The year-over-year change in gasoline prices, for example, has been -24.3% in Canada, according to the Consumer Price
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has a blog site. His lifestyle blog entries are at www.alexcarrick.com
The last data point is May 2009.
Data sources: CanaData weightings based on Statistics Canada Industrial Product Price Index series. Chart: Reed Construction Data – CanaData.
