January 27, 2010
Economy at a Glance | Jan. 28, 2010
Canadian construction material costs are still negative, but the situation is changing quickly
ALEX CARRICK
Chief Economist, CanaData
Much of the following information is based on the Industrial Product Price Index (IPPI) and Raw Materials Price Index (RMPI) series published by Statistics Canada. The latest results are for November 2009. Building material costs are now -2.9% year over year.
While this is a negative figure, it is much less so than the -11.5% of only two months previously. The situation has changed quickly.
Engineering construction costs are the biggest factor behind the decline moderation in overall construction costs. There are two factors at play: the wheelbarrow-loads of government money going into infrastructure projects, which are heavily weighted toward “civil” work; and the climb in energy prices. The international price of oil has recently recovered half of the drop it suffered from July 2008 to early 2009. Currently standing at $80 USD per barrel, the only question is how high oil prices will go and in what timeframe. The answer depends on the strength of world economic recovery. Based on past patterns, it would not be surprising to see engineering construction costs at +5% to +8% by the end of this year. No one yet is calling for oil prices to hit $140 USD per barrel this year as they did at their peak in the summer of 2008.
As the preceding paragraph implies, a key ingredient in building material costs is underlying commodity prices. In the forestry sector, housing starts in Canada have picked up in the last several months as an after-effect of the record level of activity in existing-home resales. But lumber prices still await a response to the wake-up call that has been issued to that sleeping giant, the U.S. homebuilding sector. Given that the inventory of unsold single-family homes south of the border is at a record low, there will be more shovels in the ground by the second half of this year. The percentage increase in U.S. starts will be large, but the actual level will still be conservative compared to history. There is the overhang of weak labour markets to contend with. Canada’s residential construction price index will stay low until later this year, and then begin climbing with a relatively gentle slope. A year-end figure of +3% to +5% seems reasonable.
As for other commodities – steel, cement, concrete, aluminum, copper, nickel and zinc – their prices are set by world demand and supply factors. China has taken a leading role. That nation is back on a very strong growth path of +8% to +10% real (inflation-adjusted) GDP. In fact, the Beijing government itself recognizes that this is not healthy. A substantial danger has already appeared in too-rapid home and equity price gains. Government efforts are underway to rein in record-high lending by the banks. The country is trying to negotiate a cliff-edged path with skyrocketing inflation on one side and dashed public expectations for prosperity on the other.
Copper prices have performed the strongest among all non-precious metal and energy commodities. An investment hiatus on account of the recession has held back increases to supply. Aluminum prices have also been on the move upward. This has mystified some analysts, since stockpiles are large and production capacity is not a problem. As for demand from North American non-residential building construction, this will remain weak in 2010. With the exception of publicly-financed projects in the commercial and institutional categories — e.g. city halls, community centres, hospitals and schools — large pools of excess capacity will mean little need for expansions in the office building and manufacturing plant categories. Non-residential building construction costs will only change 0.0% to +3.0% year over year by December.
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. His lifestyle blog is at www.alexcarrick.com
The last data point is November 2009.
Data source: CanaData weightings based on Statistics Canada’s Industrial
Product Price Index series/Chart: Reed Construction Data – CanaData.
