December 19, 2012

Canadian Construction Material Costs Splinter Based on Market Segment

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 October year-over-year results for CanaData’s indices stayed mostly quiet. Residential construction increased the most, +4.5%. The non-residential building index was down 2.8% and engineering was +1.5%. The overall construction materials cost index was +1.6%.

Among key aggregates, the “lumber and other wood products” category increased fastest, +7.1% year over year. One forestry sector sub-category, “particle board and waferboard”, recorded a huge rise, +52.2%. “Veneer and plywood” prices were +6.7%, “shakes and shingles”, -1.7% and “wooden doors, windows, cabinetry and millwork”, +6.7%.

Lumber – especially softwood lumber – is most important for residential construction. Regionally, the year-over-year increases in softwood lumber prices were quite strong almost everywhere. Ontario led the way (+20.6% year over year), followed by the Atlantic Region (+19.0%), Quebec (+16.6%) and the Prairies (+10.4%). By comparison, the B.C. softwood lumber price increase (+6.4%) was more relaxed.

The strength in lumber prices coincides with the upsurge in U.S. housing starts. Home starts south of the border have approached 900,000 units, seasonally adjusted and annualized, in the latest two months (863,000 in September and 894,000 in October). In the first eight months of the year, they averaged 730,000 units.

In the worst of the recession, U.S. new home starts fell as low as 478,000 units. That occurred in April 2009. Lumber prices weren’t going to show any resilience under those market conditions. In fact, the trend was to shut sawmills and lower capacity. This is leading to added price pressure now that the cycle has turned more positive.

In Canada, housing starts through the first ten months of this year have averaged 218,000 units. A figure above 200,000 units for Canada is eye-catching. Based strictly on demographic factors such as immigration and the number of family formations, the annual new homes figure should be about 185,000 units per year.

With U.S. home foreclosures on the wane and new home starts on a recovery path, a further advance in lumber prices seems almost assured. Plus the October IPPI results haven’t captured whatever lumber price increases may have resulted from Hurricane Sandy.

The demand for lumber quickly increases during and after a natural disaster. It’s used in efforts to prevent storm damage, then to cover over broken doors and windows afterwards. And, of course, it’s a primary building material as re-construction efforts get underway.

In the non-residential building category, the prices of the three main structural alternatives were either flat or negative on a year-over-year basis. The price of ready-mix concrete was +0.9% year over year. Concrete reinforcing bars were -2.5% and structural steel shapes were -11.9%.

The cyclical recovery in commercial and industrial work that was anticipated earlier this year has been postponed at least into 2013. Throughout 2012, the ongoing debt problems in Europe have caused continual downward re-adjustments in growth projections for the world economy.

The latest steps adopted by European finance ministers to help Greece meet it debt obligations without stifling all hope of better economic times ahead for that country do hold promise. The helpful measures include extending repayment periods and concessions on interest rates – in some cases, lowering them and in others, suspending them for up to a decade.

Finally, the engineering construction sub-index is heavily influenced by energy prices. Derivatives of oil and natural gas provide many of the building products used in civil work, from plastic pipe to asphalt paving.

In North America, there is currently a glut of fossil fuel supplies. A technological advance known as hydraulic fracturing (or “fracking” for short), which facilitates the extraction of gas and oil from shale rock, has resulted in a boom in energy development.

In Canada’s latest (October) Consumer Price Index (CPI) report, the year-over-year cost of gasoline was +4.0%. The price of natural gas, however, moved decidedly in the other direction, a stunning -11.6%. Canadian natural gas prices are being affected by the upsurge in U.S. supplies.

Two of the other notable year-over-year price movements in the IPPI and RMPI construction-related price index series were plastic pipes and pipe fittings, +5.3%, and asphalt, +4.7%.

That’s on the upside. On the downside, the price of iron ore dropped 15.5%. Chinese steelmaking demands are the chief determinant of iron ore prices.

With slower growth in Europe, the Chinese economy has lost a step or two. Chinese manufacturing has weakened and GDP growth has fallen back to +7.5% from +10.0% or higher.

But there are early indications China’s activity levels are beginning to emerge from the doldrums.

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.

Industrial Product Price Indexes and Raw Materials Price Indexes
<
PER CENT CHANGE IN OCTOBER 2012 INDEX FROM:
6
Years Ago
3
Years Ago
1
Year Ago
  6
Months Ago
3
Months Ago
1
Month Ago
 
Total, all commodities 9.0% 7.3% -0.2%   -0.6% 0.3% -0.1%
 
Key Aggregates:  
Lumber and other wood products 3.8% 8.2% 7.1%   4.2% 0.4% -0.3%
Primary metal products -4.2% 9.3% -3.1%   -1.3% 2.5% -0.8%
Metal fabricated products 7.1% 2.8% -1.6%   -1.4% -0.3% 0.1%
Machinery and equipment (includes HVAC) 6.0% 2.1% 1.0%   0.3% -0.3% 0.5%
Electrical and other communications products -2.4% -2.2% -1.0%   -0.1% -0.9% 0.1%
Non-metallic mineral products 8.4% 1.4% 0.0%   0.0% 0.2% 0.0%
Petroleum and coal products 52.7% 36.6% 1.2%   -2.1% 4.7% -1.1%
Chemicals and chemical products 14.9% 8.6% -3.0%   -4.9% -0.1% 0.7%
 
Construction Inputs:  
Veneer and plywood -5.9% 4.9% 6.7%   4.4% -2.1% -4.0%
Particle board and waferboard 37.6% 33.8% 52.2%   30.3% 16.0% 0.1%
Shakes and shingles -9.2% -2.9% -1.7%   -0.7% -3.1% 0.5%
Wooden doors, windows, cabinetry, millwork 6.6% 5.2% 6.7%   3.6% 2.1% 0.0%
Gypsum wall board, lath and plaster -13.3% -4.9% -3.6%   -0.3% 3.9% 0.0%
Sand and gravel 29.3% 7.8% 1.7%   0.0% 0.0% 0.0%
Glass and glass products 5.2% -0.5% -0.9%   -0.1% -0.3% 0.1%
Cement (portland) 16.0% 2.4% 0.2%   0.0% -0.1% 0.0%
Ready-mix concrete 15.7% 3.6% 0.9%   0.1% -0.2% 0.0%
Concrete brick and building blocks 14.7% 0.7% 0.1%   0.0% 0.0% 0.0%
Clay products (brick) 0.2% 6.1% 0.1%   -0.1% 0.0% 0.0%
Aluminum structural shapes -6.1% 3.5% -1.0%   -1.1% -0.2% 0.3%
Concrete reinforcing bars (including fabricated) -1.2% 18.0% -2.5%   -2.5% -0.7% 0.0%
Structural steel shapes (including fabricated) 4.9% 10.6% -11.9%   -11.6% -0.1% 0.2%
Prefabricated metal buildings 4.7% 0.1% 0.0%   0.0% 0.0% 0.0%
Doors and windows (metal) 4.8% 4.8% -2.1%   -2.1% -0.1% 0.0%
Roofing and siding (metal) 26.1% 2.7% -1.3%   -1.2% -0.9% 0.0%
Roof deck and flooring (metal) 3.4% 4.8% 3.1%   0.0% 0.0% 0.0%
Thermal insulation and fibrous glass -1.7% -0.5% -0.4%   -0.1% 1.4% 0.0%
Bolts, nuts, screws, washers, fasteners 9.8% -1.0% 0.0%   0.0% 0.0% 0.0%
Builders' hardware 0.5% -1.0% -0.5%   -1.4% -0.6% 0.0%
Plumbing fixtures and valves (metal) 16.8% 5.2% -0.5%   -0.4% 0.2% 0.0%
Plastic pipes and pipe fittings 20.1% 20.3% 5.3%   2.8% 0.3% 0.0%
Electric wire and cable 4.6% 8.5% 3.6%   1.3% 1.3% 0.0%
Lighting Fixtures (incandescent) 0.2% -2.2% 0.0%   0.0% 0.0% 0.0%
Paint and varnish 11.5% 7.4% 2.2%   -0.2% 0.0% 0.0%
               
"Heavy" Inputs:  
Construction machinery and equipment 11.2% 0.3% -0.3%   -0.3% -0.4% 0.0%
Mobile earth moving and allied equipment 15.2% 0.0% 1.5%   0.0% 0.0% 0.0%
Mixing and paving equipment (concrete and asphalt) 1.5% -1.5% -2.5%   -0.2% -0.5% 0.1%
Steel pipe and tubing (to transport oil and gas) 5.0% 4.5% -1.6%   -0.9% -0.9% 0.0%
Concrete pipe 13.4% 1.6% 0.4%   0.1% 0.0% 0.0%
Asphalt (one month behind) 36.7% 36.8% 4.7%   -4.7% 0.5% 0.8%
Gasoline (one month behind) 60.1% 37.3% 3.0%   -4.9% 1.6% -3.1%
Diesel fuel (one month behind)  46.0% 40.6% -1.5%   -2.8% 6.8% -0.4%
 
Raw Materials Prices:  
Total raw materials 18.3% 14.5% -2.8%   0.4% 4.9% 0.0%
Mineral fuels (thermal coal, crude oil and natural gas) 27.5% 9.5% -5.8%   -0.5% 10.8% 0.5%
Wood 0.3% 7.5% 6.4%   8.7% 0.8% 1.4%
Ferrous materials 9.5% 4.8% -9.8%   -10.2% 0.2% 2.5%
Iron ore 12.1% 2.1% -15.5%   -12.3% -7.7% 7.2%
Non-metallic minerals 35.0% 15.7% 0.9%   2.3% 0.1% 0.0%
Stone 18.2% 5.2% 2.6%   -0.1% -0.1% 0.0%
 
Some Regional Comparisons  
Lumber, softwood, Atlantic Region 10.7% 21.1% 19.0%  8.0% 0.2% 0.1%
Lumber, softwood, Québec 12.4% 24.4% 16.6%   7.5% -1.3% -0.5%
Lumber, softwood, Ontario 33.1% 35.8% 20.6%   11.5% 0.9% -0.5%
Lumber, softwood, Prairie Region -6.7% 22.0% 10.4%   5.2% 1.1% -0.5%
Lumber, softwood, spruce-pine-fir, B.C. Interior 2.0% 12.6% 6.4%   3.8% -3.0% -0.1%
 
Ready-mix concrete, Atlantic Region 19.4% 2.9% 0.0%   0.0% 0.0% 0.0%
Ready-mix concrete, Québec 12.2% 4.2% 0.8%   -0.2% -0.8% 0.0%
Ready-mix concrete, Ontario 10.2% 3.1% 0.3%   0.0% 0.0% 0.0%
Ready-mix concrete, Prairie Region 35.8% 7.5% 1.9%   0.1% 0.0% 0.0%
Ready-mix concrete, British Columbia 2.8% -1.6% 0.9%   0.5% 0.0% 0.0%
 
Type of Construction Indexes:
Residential 6.3% 5.2% 4.5%   2.9% 1.5% -0.3%
Non-residential building 5.1% 5.8% -2.8%   -2.9% 0.1% 0.0%
Engineering construction 25.8% 16.4% 1.5%   -1.5% 1.1% -0.3%
TOTAL CONSTRUCTION 14.1% 10.1% 1.6%   -0.3% 1.0% -0.3%


Data source: Statistics Canada (IPPI and RMPI).

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