February 28, 2011

Canada’s construction material costs are trekking higher

ALEX CARRICK

Chief Economist, CanaData

The geopolitical premium on the price of oil is now between $10 and $15 USD (U.S. dollars) per barrel. This has lifted crude above $100.

While there is still a ways to go, uncomfortable memories flood back of when oil reached its all-time peak of $147 per barrel in July 2008. That was a time of record-setting highs across a range of raw material prices.

The cause of the most recent uptick in oil prices has been the potential domino effect of regime change in the Arab world. However, oil prices were already moving up prior to the latest political uncertainty.

In fact, recoveries in North American and parts of Europe, augmented by breakout nations’ absorption of foodstuffs and building materials, have been moving oil and other commodity charges skyward for some time. What has been the impact on construction costs?

CanaData calculates construction price indices based on results from Statistics Canada’s Industrial Product Price Index (IPPI) and Raw Materials Price Index (RMPI) series. Building material costs have been receiving a prod from metals and minerals cost hikes for more than a year.

Based on CanaData’s weighting of Statistics Canada’s information, the overall construction materials cost index in December 2010 – the latest period for which data is available – was +4.4% year over year.

Among the three major sub-indices, residential material costs remained almost flat (+0.6% year over year) primarily due to ongoing weakness in wood products.

This is not to say there haven’t been year-over-year movements in lumber prices, particularly in the Prairie region (+14.0%). Elsewhere in the country, softwood lumber has shown life in Quebec (+6.1%) and Ontario (+5.4%) while remaining quiet on both coasts.

The percentage changes for lumber were somewhat exaggerated because prices were so low the year before. A more significant movement in lumber prices awaits a revival in the moribund U.S. housing market.

The non-residential building materials sub-index was +6.1% year over year in December. Engineering material costs moved up even faster, +6.9%.

Among major aggregations, the biggest movers were petroleum and coal products (+13.7% year over year) and primary metal products (+11.4%).

Focusing in on specific product lines, the greatest year-over-year changes were recorded by concrete reinforcing bars (+17.9% year over year), structural steel shapes (+16.6%), diesel fuel (+10.1%), plastic pipes and pipe fittings (+8.2%), asphalt (+6.2%), clay products and brick (+4.6%), metal roofing and siding (+4.2%), plumbing fixtures and valves (+3.8%) and aluminum structural shapes (+2.9%).

All of the major construction equipment measures as recorded in the IPPI registered year-over-year declines. This was confirmed in another Statistics Canada measure, the Machinery and Equipment Price Index (MEPI), for the fourth quarter of 2010.

The MEPI declined 1.2% between Q3 and Q4 2010 and fell 2.4% when compared with Q4 2009. The appreciation in value of the Canadian dollar over the past year (nearly +5.0%) has played a significant role in keeping machinery and equipment prices down, since many of the goods purchased within the MEPI designation come from across the border.

If the run-up in world oil prices does cause a slowing in world economic growth and in particular, if it results in the U.S. economy pulling back after finally tentatively emerging from its shell, it will be negative for Canada. However, this nation continues to be among fortune’s favorites in one respect.

Each extra dollar in the price of oil brings a smile to the faces of energy executives and finance ministers in fossil-fuel-rich provinces. The boon to the construction industry from oil project development is also a cause for celebration, provided the largesse is distributed in a meaningful way across the provinces.