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Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick, Chief Economist at ConstructConnect
Alex Carrick is Chief Economist for ConstructConnect. He is a frequent contributor to the Daily Commercial News and the Journal of Commerce. He has delivered presentations throughout North America on the Canadian, United States and world construction outlooks. A trusted and often-quoted source for … More »

Canada’s Construction Material Costs Tell Diverse Stories (Part 1 of 2)

January 26th, 2016 by Alex Carrick, Chief Economist at ConstructConnect

Article source: CMDGroup

Similar to the U.S., the price advances of many materials and building products going into the construction process in Canada remain restrained.

The +0.3% figure year-over-year (y/y) for total construction − from line 4 of accompanying Table 1 − does, however, incorporate considerable variation at the type-of-structure sub-category level.

At this time, a sizable gain in non-residential building material costs (+3.6% y/y), plus a mid-range increase in residential costs (+2.2% y/y), are being offset by a significant decline in engineering/civil costs (-3.2% y/y).

The divergent performances result primarily from: 1) demand/supply factors driven by activity levels in each of the three main type-of-structure sub-categories; and 2) different weightings of material inputs to build houses versus office buildings versus roads and highways.

The material composition of residential construction has a large forestry component, although domestic lumber prices are also affected by housing starts south of the border.

Non-residential building material costs, on the other hand, are influenced by different framing materials, cement/concrete and steel. The latter material, welded and/or sized to form structural shapes, is often imported.

And engineering/civil work has larger energy inputs (e.g., asphalt for roads). Not only is investment in mega energy projects being curtailed on account of the steep drop in the global price of oil, but many of the materials that form the bedrock of engineering construction are being beaten down by energy’s price collapse.

The results appearing in Table 1 are derived from the Industrial Product Price Index (IPPI) and Raw Materials Price Index (RMPI) series calculated and published by Statistics Canada. They are the closest Canadian equivalent to the Producer Price Index (PPI) information published by the U.S. Bureau of Labor Statistics.

The IPPI numbers measure what a Canadian producer receives when its goods are sent on their way through the front gate. They don’t include transportation, warehousing or retail distribution and advertising fees.

Canada’s currency value is playing a role in the IPPI results. The Canadian dollar has fallen by 35% versus the U.S. greenback since the beginning of 2014. Therefore, to the extent that U.S. imports are used in a Canadian production process, they will drive up costs.

At the very least, based on the exchange-rate devaluation, purchases of U.S.-made equipment have been rendered more expensive for manufacturers based north of the border.

Prior to the Bank of Canada’s last rate-setting meeting, Governor Stephen Poloz was strongly hinting, in his public pronouncements, that a further cut was imminent.

Apparently he was persuaded, more or less at the last minute, to change his mind.

The export-oriented Canadian manufacturing community is supposed to be benefitting most from the weaker-valued loonie. But even the President and CEO of the Canadian Manufacturers’ Association (CMA), Jayson Myers, said his members didn’t see any advantage to be gained from a rate cut that would further depreciate the country’s exchange rate.

In fact, what Canadian manufacturers would presently prefer is a period of stability for the loonie.

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Category: CMD Group

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