October 15, 2012
Canadian Construction Material Costs Remained Lethargic in August
Chief Economist, CanaData
CanaData (a product line of Reed Construction Data) calculates construction material cost indices based on two large data sets published by Statistics Canada, the Industrial Product Price Index (IPPI) series and the Raw Materials Price Index (RMPI) series.
For three major sub-series – residential, non-residential building and engineering work – components are weighted according to how much they are used in the specific category.
For example, lumber plays a proportionally bigger role in residential construction; steel and concrete are more prominent in non-residential building work; and energy products figure highly in engineering construction.
The August year-over-year results for CanaData’s indices were all relatively subdued. Residential construction increased the most, +2.7%. The non-residential building index was down 1.8% and engineering was +0.9%. The overall construction materials cost index was also +0.9%.
The “lumber and other wood products” aggregate was the major gainer in August at +7.0% year over year. Some forestry sector sub-categories surged ahead even more dramatically, with “veneer and plywood” at +14.7% and “particle board and wafer-board”, +8.0%.
Among all inputs, the most notable downturns were recorded by iron ore (-21.6% year over year) and structural steel shapes (-7.2%).
Weakness in the recent percentage changes notwithstanding, there are reasons to think construction material costs might be coming back to life. For example, U.S. home starts in August moved up to 750,000 units, seasonally adjusted and annualized. In the worst of the recession, they dropped to only 480,000 units in April 2009.
A better U.S. home-building sector will cause an uptick in North American lumber prices. The media is reporting that Canadian producers are finding more willing customers south of the border.
Sawmill closings during the lean years will restrict how quickly new supplies can be brought on stream, providing a further lift to prices. Plus there is another constraint on supply. B.C.’s timber reserves have been decimated by the mountain pine beetle.
Acting to somewhat counterbalance the strength in U.S. home-building will be a decline in the Canadian sector. Residential ground-breakings north of the border are expected to retreat from 210,000 units this year to 185,000 next year.
Non-residential building leans more towards concrete and steel usage. Globally, China accounts for the lion’s share of demand for those two products, plus copper, nickel, zinc and metals and minerals used as alloys. The Chinese government has announced a new infrastructure stimulus program to focus on steel mill expansions, new nuclear power plants and regional roads and highways.
The last time Beijing launched such a drive, it caused a spike in commodity prices. This time, there are mitigating circumstances. In an effort at renewal, the Beijing government is planning a changing of the guard. This happens once per decade. Senior members of the communist party will step back to make room for younger blood. Until the new leadership is established, there is bound to be a period of uncertainty.
Also, the scope of the spending will be smaller this time. Previously, the equivalent of $600 billion U.S. was set aside to bring on new public works projects. This time, the figure will be closer to $150 billion.
Australia is the largest supplier of iron ore to China’s steelmaking industry. Iron ore prices have been falling since early 2010 and are now steeply lower (-21.6% year over year). The Reserve Bank of Australia (RBA) has just lowered its key policy-setting interest rate by 25 basis points (where 100 basis points equals 1.00%) to 3.25%. This tells us the export-oriented Australian economy is struggling. What happens in Australia’s economy often mirrors conditions in China.
Oil and gas prices figure prominently in engineering construction. They are the basic building blocks for many products used in civil construction, including plastic pipe. The world price of oil has been pulling back of late, descending towards $90 U.S. per barrel. The price of natural gas is even more of a bargain, hovering around $3 U.S. per million cubic feet.
The U.S. has built up a large reserve of oil that is being stored in holding tanks. The availability of gas is even greater. The abundance in both cases is due to new supplies brought on by the opening up of shale-rock deposits. The prices of asphalt, gasoline and diesel fuel are all nearly flat year over year. Diesel fuel has picked up in the latest month-to-month comparison (+0.4%).
Before leaving the reader to study the accompanying table, let me report on another positive for the U.S. economy. The latest Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) has climbed back above 50.0% after three months of disappointment.
September’s figure was 51.5%, up 1.9 percentage points from 49.6% the month before. A PMI value above 50.0% means both the overall economy and manufacturing are expanding. Historically, 51.5% for the PMI has corresponded with +3.0% “real” (i.e., inflation-adjusted) growth in U.S. gross domestic product (GDP).
Keep in mind a couple of other factors. The capacity utilization rate in manufacturing, after dipping as low 60%, has returned close to 80%. And companies have been making large profits that they’ve been mostly hoarding to this point in the cycle.
The prospects for an improvement in industrial building construction are appearing brighter.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.
PER CENT CHANGE IN AUGUST 2012 INDEX FROM: |
|||||||
| 6 Years Ago |
3 Years Ago |
1 Year Ago |
6 Months Ago |
3 Months Ago |
1 Month Ago |
||
| Total, all commodities | 6.6% | 5.7% | -0.3% | -0.8% | -1.0% | -0.1% | |
| Key Aggregates: | |||||||
| Lumber and other wood products | 2.2% | 5.1% | 7.0% | 4.7% | 1.4% | 0.3% | |
| Primary metal products | -4.9% | 5.5% | -10.7% | -7.4% | -2.7% | -0.8% | |
| Metal fabricated products | 7.0% | 1.6% | -0.7% | -1.2% | -1.3% | -0.2% | |
| Machinery and equipment (includes HVAC) | 5.8% | 1.0% | 1.9% | 0.4% | -0.3% | -0.4% | |
| Electrical and other communications products | -2.3% | -3.0% | 0.1% | 0.1% | -0.4% | -0.5% | |
| Non-metallic mineral products/td> | 8.2% | 1.0% | 0.3% | -0.3% | -0.3% | -0.2% | |
| Petroleum and coal products | 19.8% | 31.3% | 0.6% | -1.9% | -1.9% | 3.4% | |
| Chemicals and chemical products | 15.7% | 9.7% | -2.0% | -2.4% | -3.8% | -0.2% | |
| Construction Inputs: | |||||||
| Veneer and plywood | -0.5% | 1.5% | 14.7% | 11.9% | 6.9% | 2.1% | |
| Particle board and waferboard | -10.7% | 2.9% | 8.0% | 1.9% | 0.0% | 0.0% | |
| Shakes and shingles | -7.2% | -4.1% | 2.3% | 1.2% | -1.3% | -2.0% | |
| Wooden doors, windows, cabinetry, millwork | 2.6% | 1.3% | 2.2% | 0.8% | 0.4% | 0.2% | |
| Gypsum wall board, lath and plaster | -14.8% | -4.6% | -1.6% | -0.5% | -2.9% | 0.0% | |
| Sand and gravel | 29.3% | 7.8% | 1.7% | 1.3% | 0.0% | 0.0% | |
| Glass and glass products | 5.6% | -1.4% | -0.7% | -0.9% | -0.4% | -0.4% | |
| Cement (portland) | 16.4% | 2.1% | 0.1% | -0.3% | 0.0% | -0.1% | |
| Ready-mix concrete | 15.6% | 3.9% | 1.6% | 0.2% | 0.2% | 0.0% | |
| Concrete brick and building blocks | 14.7% | 0.7% | 0.1% | 0.0% | 0.0% | 0.0% | |
| Clay products (brick) | -2.0% | 0.6% | 0.4% | 1.4% | 0.5% | 0.0% | |
| Aluminum structural shapes | -6.6% | 2.0% | -1.5% | -0.8% | -0.2% | -0.3% | |
| Concrete reinforcing bars (including fabricated) | 0.0% | 18.3% | -1.1% | -0.1% | -1.0% | 0.0% | |
| Structural steel shapes (including fabricated) | 3.3% | -2.4% | -7.2% | -11.9% | -11.7% | -0.4% | |
| Prefabricated metal buildings | 5.0% | 0.1% | 0.0% | 0.0% | 0.0% | 0.0% | |
| Doors and windows (metal) | 5.0% | 2.2% | -1.0% | -2.2% | -2.1% | -0.1% | |
| Roofing and siding (metal) | 27.2% | 5.0% | -1.5% | 0.1% | -0.3% | 0.0% | |
| Roof deck and flooring (metal) | 4.8% | 1.6% | -1.7% | 0.0% | 0.0% | 0.0% | |
| Thermal insulation and fibrous glass | -2.5% | -0.4% | 0.4% | -0.2% | -1.1% | 0.0% | |
| Bolts, nuts, screws, washers, fasteners | 9.8% | -1.0% | 0.0% | 0.0% | 0.0% | 0.0% | |
| Builders' hardware | 2.1% | -0.1% | -0.6% | -2.1% | -1.7% | -0.8% | |
| Plumbing fixtures and valves (metal) | 16.4% | 2.9% | -1.1% | -0.6% | 0.0% | 0.0% | |
| Plastic pipes and pipe fittings | 17.3% | 21.1% | 3.5% | 6.0% | 2.9% | -0.2% | |
| Electric wire and cable | 0.7% | 8.6% | 1.2% | 0.3% | 0.0% | 0.0% | |
| Lighting Fixtures (incandescent) | 0.2% | -2.2% | -0.6% | 0.0% | 0.0% | 0.0% | |
| Paint and varnish | 12.0% | 6.7% | 3.2% | 1.0% | 0.5% | 0.1% | |
| "Heavy" Inputs: | |||||||
| Construction machinery and equipment | 11.5% | 1.3% | -0.1% | 0.0% | 0.0% | -0.1% | |
| Mobile earth moving and allied equipment | 15.2% | 0.8% | 1.5% | 0.0% | 0.0% | 0.0% | |
| Mixing and paving equipment (concrete and asphalt) | 1.7% | -1.4% | -3.0% | -0.1% | -0.3% | -0.4% | |
| Steel pipe and tubing (to transport oil and gas) | 5.9% | 3.9% | -0.2% | -0.2% | 0.3% | -0.1% | |
| Concrete pipe | 13.3% | 1.6% | 0.5% | 0.1% | 0.1% | 0.0% | |
| Asphalt (one month behind) | 10.3% | 20.1% | -0.4% | 3.1% | -7.0% | -0.2% | |
| Gasoline (one month behind) | 21.5% | 31.5% | 1.9% | 2.9% | -0.8% | 2.5% | |
| Diesel fuel (one month behind) | 14.6% | 36.2% | 0.3% | -7.0% | -3.5% | 4.1% | |
| Raw Materials Prices: | |||||||
| Total raw materials | 7.3% | 14.2% | -4.0% | -4.8% | -0.1% | 3.4% | |
| Mineral fuels (thermal coal, crude oil and natural gas) | 0.3% | 11.6% | -2.7% | -8.3% | 0.0% | 9.1% | |
| Wood | 1.9% | 6.8% | 6.5% | 4.3% | 3.8% | -0.2% | |
| Ferrous materials | 1.6% | -0.1% | -15.2% | -11.8% | -11.5% | -3.2% | |
| Iron ore | 10.8% | -3.2% | -21.6% | -12.3% | -12.2% | -9.7% | |
| Non-metallic minerals | 35.3% | 15.7% | 2.8% | 2.8% | 1.4% | 0.0% | |
| Stone | 18.5% | 5.2% | 2.1% | -0.1% | -0.3% | -0.1% | |
| Some Regional Comparisons | |||||||
| Lumber, softwood, Atlantic Region | 11.4% | 20.9% | 19.1% | <11.6% | 4.6% | 0.4% | |
| Lumber, softwood, Québec | 11.6% | 24.0% | 21.3% | 13.9% | 3.7% | 0.5% | |
| Lumber, softwood, Ontario | 39.4% | 36.2% | 28.0% | 24.5% | 6.6% | 3.0% | |
| Lumber, softwood, Prairie Region | -13.4% | 21.0% | 12.2% | 9.4% | 3.6% | 1.7% | |
| Lumber, softwood, spruce-pine-fir, B.C. Interior | 0.6% | 8.4% | 12.8% | 8.0% | -0.4% | -0.5% | |
| Ready-mix concrete, Atlantic Region | 19.4% | 2.9% | -3.4% | 0.0% | 0.0% | 0.0% | |
| Ready-mix concrete, Québec | 13.1% | 5.4% | 3.6% | 0.3% | 1.0% | 0.0% | |
| Ready-mix concrete, Ontario | 10.3% | 2.8% | 1.2% | -0.2% | 0.0% | 0.0% | |
| Ready-mix concrete, Prairie Region | 35.7% | 7.4% | 1.8% | 0.2% | 0.0% | 0.0% | |
| Ready-mix concrete, British Columbia | 1.8% | -0.6% | 1.4% | 0.5% | 0.0% | 0.0% | |
| Type of Construction Indexes: | |||||||
| Residential | 2.8% | 2.4% | 2.7% | 1.6% | 0.4% | 0.2% | |
| Non-residential building | 4.8% | 3.2% | -1.8% | -2.5% | -2.8% | -0.1% | |
| Engineering construction | 14.9% | 13.7% | 0.9% | 0.3% | -1.3% | 0.8% | |
| TOTAL CONSTRUCTION | 8.4% | 7.4% | 0.9% | 0.2% | -1.0% | 0.4% | |
Chart: Reed Construction Data - CanaData.
