Peelregion.ca will be down this Saturday

The Region's website and online services will be unavailable on Saturday, August 19, between 8:30 a.m. - 4:30 p.m. for one hour due to maintenance. Website visitors may also experience intermittent outages during this time period. We apologize for the inconvenience this may cause.

A-Z List | Accessible Info | Careers | Contact Us

 
--
Images from Peel Region
Peel Data Centre Logo

Construction Price Trends

 


Prepared by:
Business Intelligence Center of Excellence
Information Management Division
May 2017

Major influences on commodity prices 2016

Introduction

In 2016, global economic growth remained below historic levels; estimated by the International Monetary Fund (IMF) at 3.1 per cent. This was down from the annual growth of 3.2 per cent registered in 2015 and was the slowest growth in global production observed in seven years. Weaker growth in the first half of the year’ due in part to elevated levels of uncertainties, was an integral part of the slower growth observed. These conditions kept changes in commodity markets subdued. The prices of most commodities followed a downward trend during the first half of the year, but recovered towards year end. Global growth forecasts for 2017 have improved and will likely provide a boost to commodity prices. Other factors such as the new production agreements by Organization of the Petroleum Exporting Countries (OPEC) reached in the second half of 2016, will also help, but positive supply factors such as technological advancement will continue to counterbalance.

In the Canadian economy, the price environment remained relatively tame. Inflation as measured by the Canadian Consumer Price Index (CPI) was 1.4 per cent in 2016. A key factor underpinning the tame price environment was the continuation of an estimated excess production capacity. Canadian Gross Domestic Product (GDP) growth remained relatively low (1.4 per cent) and below the level required to eliminate the estimated excess production capacity. As such, the economy continued to operate at a level that any increase in demand could be satisfied by employing excess labour and capital, and without any significant increase in average prices. The decline in the average price of crude oil (and gasoline) in 2016 also added to the lower price environment which prevailed. Price enhancing factors such as higher consumption expenditure, the continuation of relatively low interest rates and the depreciation of the Canadian dollar also persisted during the year and were influential in the inflation rate inching higher than 1.1 per cent registered in 2015.

The changes in the average price of commodities have direct and indirect effects on capital costs faced by the Region of Peel. For example, the Region is a direct consumer of sand and gravel and therefore directly faces variations in cost as the price of this commodity fluctuates. It also faces indirect cost fluctuations from changes in commodities such as crude oil, through its influence on the price of gasoline directly, as well as indirectly through the gasoline induced changes in the cost of transportation. This report will look at market changes for selected commodities which are key inputs (directly and indirectly) to construction activities in Canada. Specifically, the report will present an analysis of changes in the prices of commodities which are likely to influence changes in capital costs faced by the Region of Peel.

Global influences

The performance of the global economy remained lack lustre in 2016. At an estimated rate of 3.1 per cent, the growth in global output was slightly below the 3.2 percent achieved in 2015 and the slowest growth since 2008. Slow growth during the first half of the year provided the basis for the slower growth observed for the full year. With the two largest economies in the world showing slower growth, growth prospects also waned. This occurred at the same time that there were demand/supply imbalances in some markets, notably crude oil. Commodity markets usually respond to economic slowdown and waning economic prospects with lower prices. These factors, in addition to excess supply in the crude oil market underpinned the negative or weak changes in most commodity markets during the first half of 2016.

As the year progressed, economic prospects improved. Growth in the economy of the United States (US) accelerated from 0.8 per cent and 1.4 per cent in quarters one and two respectively, to 3.5 per cent in quarter three and 1.9 per cent in quarter four. Along with the higher US growth, OPEC and other oil producers agreed to cut output in November 2016. The agreement called for a cut of 32.5 million barrels per day and with that, there would be a reduction in the excess crude oil supply in the market. Reduced supply combined with improved growth prospects created the environment for a rebound in commodity prices during the latter half of the year. Towards year end commodity prices increased. However, in some markets (like crude oil) the increase was not sufficient to result in an increase in average price for the full year 2016.

enlarge [+]
Note: All double digit changes in the above tables are highlighted in red.

Domestic influences

The Canadian economy grew by 1.4 per cent in 2016, slightly higher than the revised growth of 0.9 per cent achieved in 2015. This pace of growth remained below that required to return the economy to capacity, and as such the Central Bank estimated that the Canadian economy continued to operate below its full production level. This meant that any increase in demand could be accommodated by utilizing existing unused factors of production (example labour or capital), without any significant increase in prices. Reflecting this, Canadian inflation remained tame during the year at 1.4 per cent, which was above the market expectation for an inflation rate of 1.6 per cent. The change in average construction wage rates decelerated during the year, moving from 2.2 per cent in 2015 to 1.0 per cent in 2016. Further, the wage rates of all construction trades reviewed showed relatively strong deceleration in growth over the same period.


The Canadian economy is expected to continue to operate below its production capacity in 2017 and into 2018. This is expected to remain a key constraint on price growth, allowing for the continuation of the relatively low inflation environment in Canada over the same time horizon. However, growth in the Canadian economy is expected to accelerate in 2017 and in the medium term. As this occurs, and the excess production capacity is used up, the national unemployment rate is expected to increase and wage rates are expected to inch higher. A key risk to this expectation remains the uncertain global economic environment; a risk that has increased as American policy makers assume a more inward looking economic policy stance.

Crude Oil

enlarge [+]
Source: World Bank’s Commodity Price Index
  • In 2016, the average price of crude oil on the international market decline.
  • As measured by the World Bank, the average price of crude oil fell from US$50.80 per barrel in 2015 to US$42.80 per barrel in 2016, a fall of 15.6 per cent.
  • The decrease registered in 2016 marked four consecutive years of decline in average oil prices.
  • The downward trend in the price of crude on the international market reflected the influence of a number of developments in the market including weak and uncertain global economic growth prospects, heightened risks in oil producing regions, and increase in the global supply of crude oil.
  • Viewed on a quarterly basis, the sharpest decline in 2016 occurred during the first quarter of the year (January – March) as the average prices of oil fell 22.5 per cent to reach a low of US$32.70 a barrel.
  • Increased supply and weak growth prospects were key factors in the decline observed during the quarter.
  • In the following quarter (April – June), average oil prices rebounded with an increase of 37.0 per cent to US$44.80 a barrel before falling again in the third quarter (July – September) to reach US$44.70 a barrel (-0.2 per cent).
  • The final quarter of 2016 (October – December) registered a noticeable 9.8 per cent increase to bring the average price of crude oil to US$49.10 per barrel.
  • This occurred as OPEC was able to agree on crude oil production cuts.
  • Despite the rebound in the average price of oil observed in the final quarter of 2016, this was not sufficient to outweigh the increase in price during the first three quarters of the year.
  • Reflecting this, the annual average price of oil price of crude oil for the full year 2016 increased.
enlarge [+]
Source: World Bank’s Commodity Price Index
  • Similar price changes were observed for West Texas International Crude Oil (WTICO).
  • In 2016, the average price of WTICO fell to US$43.20 a barrel, from US$48.70 representing a decline of 11.3 per cent.
  • The average WTICO price registered a sharp quarterly decline of 21.3 per cent in the first quarter of 2016 (January – March), when quarterly average prices reached a low of US$33.20 per barrel
  • Prices recovered in the second quarter of the year to an average of $US$45.50 per barrel in the second quarter before registering a relatively small decline in the third quarter of the year.
  • Average crude oil price recovered in the final quarter of the year influenced in part by supply restriction agreement reached by OPEC.
  • The variation in price changes during the year reflected the dominance of a number of factors throughout the year.
  • In the first quarter of 2016, noticeable oil price declines were observed due to:
    • Demand/supply imbalances: Although a sharp decline was observed in oil prices during the year, drilling of crude oil from most sources remained quite profitable and lucrative. At the beginning of 2016, there were still no restrictions put in place by OPEC to limit the production of crude oil. That, along with the development of more efficient methods of oil extractions allowed the supply of oil to remain at peak levels. Similar to that of the previous year, the demand of crude oil was still weak due to lack-luster economic performance in many economies including Europe, China, and the US. Consequently, excess crude oil supply in the presence of lower demand created the perfect market conditions for a fall in price.
  • Following the initial decline experienced in the first quarter of 2016, crude oil prices recovered in the second before showing further recovery in the final quarter of the year mainly due to two factors:
    • Increased Oil Demand: In correspondence with the weak state of the global economy (slowdowns in the US, China, and Europe), the demand for crude oil was weak during the first quarter. US economic growth picked up during the second quarter and global growth prospects improved. Demand also increased as reflected in higher imports for China and the US (two of the biggest consumers). With increased demand and improved economic prospects, the average price of crude oil increased in the second quarter of 2016.
    • OPEC agreement: The price of crude oil peaked at US $105.01 per barrel in 2012, but since, has experienced major declines. In November 2016, OPEC members reached an agreement to cut production and hence reduce supply, with aims of stabilizing the price of crude oil. The market reaction to the agreement by OPEC was a rise of price towards the latter part of the year.
  • Crude oil prices increased in early 2017 but returned to volatility in March and April in response to market uncertainties.
  • Over the next two years, the World Bank projects average crude oil prices to increase.
  • Current forecast is for average prices to increase to about US$60.00 per barrel by 2018.
  • The risks associated with this expectation are:
    • Compliance or non-compliance to OPEC agreement by members; and
    • The increase in supply by OPEC nonmembers, particularly in the US where rising output from shale production (increase in supply) is expected.

Gasoline

  • Crude oil is the source of a number of products including, liquid gas, gasoline, asphalt, lubricants and plastic.
  • Through the process of distillation and refinery, gasoline is derived from crude oil.
  • It is estimated that over 40 per cent of crude oil becomes gasoline.
  • Given that gasoline is derived from crude oil, the prices of both products generally move in the same direction.
  • However, other factors such as exchange rate movements and government taxes on gasoline can impact the price of gasoline paid by the final consumer, resulting in significant differential between the changes in the prices of gasoline and crude oil.
enlarge [+]
Source: Ontario Ministry of Energy; World Bank Commodity Price Index
  • An analysis of the changes in World Bank’s average price of crude oil and the price of regular unleaded gasoline in Toronto shows little differential between the two prices in 2008 when the Canadian dollar was at near par with the US dollar.
  • This was in contrast with that seen in 2016 as a noticeable price gap was observed between the two commodities.
  • The depreciation of the Canadian dollar may explain in part, the larger price differential observed between price of crude oil and that of gasoline in 2016.
  • In 2016:
    • The price of crude oil on the international market fell by 15.60 per cent to reach US $42.80 per barrel; and
    • The Canadian dollar continued to depreciate, falling by 3.6 per cent in 2016, after registering annual depreciation in the preceding six years.
  • In 2016, the price of gasoline in Toronto CAN registered a decrease of 5.1 per cent to a low of $100.50 cents per litre.
  • This was well below the 15.6 per cent decline observed in the average price of crude oil during the same period.
  • With the expected gradual rise in the average price of crude oil over the medium term, it is likely that the price of gasoline will also follow a similar upward trajectory.
  • However, ongoing global economic uncertainties are also likely to influence changes in gasoline prices over the short – medium term.

Asphalt

enlarge [+]
Source: Ontario Ministry of Transportation (MTO)
  • Asphalt (also known as bitumen) is a product made from a blend of many different materials, with the residue refined from crude oil being its largest component.
  • As such, changes in the price of asphalt have often varied with the price of crude oil.
  • However, other factors such as technological advancement and supply/demand conditions have also influenced changes in asphalt prices.
  • In 2016, the average price of asphalt in the Toronto Area, as captured by the MTO’s Performance Grade Asphalt Cement Price Index for the Greater Toronto Area (GTA), declined by 26.7 per cent, a more significant fall than that observed for the average price of crude oil.
  • A number of factors influenced the fall in asphalt prices in 2016, but was due to the fall in the price of crude oil and demand and supply imbalance in market:
    • Decrease in crude oil price: As the largest component in asphalt, any change in the price of crude oil will likely have associated impact on the price of asphalt. In 2016, there was a 15.6 per cent in the price of crude oil as it dropped to US$42.80 per barrel. As a result of the lower-priced oil, asphalt was able to be produced and sold at a much cheaper rate. Further, when the price of raw materials used in the production of a product goes down, supply will likely increase. This was the case with asphalt in 2016 as the supply of the product rose.
    • Higher preference for cement: Although asphalt is cheaper, it costs much more to repair and its life span is shorter. In 2016, there has been a shift of preference away from asphalt paving to concrete paving. This has lessened consumer demand for the product. The increase in supply of asphalt, at the same time that there was a decrease in demand for the product, created surplus supply in the market, a condition which resulted in a fall in asphalt prices observed in 2016.
  • Viewed on a monthly basis, the average price of asphalt in the Toronto Area, as captured by the MTO’s Performance Grade Asphalt Cement Price Index for the GTA, followed a downward trend, with further acceleration in the trend in 2016.

Wage Rate Index

  • In 2016, STATSCAN’s Union Wage Rate Index (average of 20 trades) of selected construction workers in Canada increased by 1.0 per cent, a deceleration compared to the 2.2 per cent growth registered in the preceding year.
  • Similar to that on the national level, both Ontario and the Toronto CMA experienced a slower pace of growth in the same index in 2016.
  • In Ontario and the Toronto CMA, the Union Wage Rate Index registered an increase of 0.7 per cent and 0.8 per cent, respectively.
  • Historically, the Union Wage Rate Index for both Ontario and the Toronto CMA has consistently shown similar annual changes, just as the case this year when the difference was only 0.1 per cent.
  • The relatively subdued changes in the index reflect the tame price changes being observed in the Canadian economy.
  • A major underlying reason for the relatively low changes is the fact that the Canadian economy is operating below its full production capacity.
  • Under such conditions, the unemployment rate is usually elevated and the changes in wage rates subdued.
  • Union wage rates are likely to continue to show little changes in the short term as the Canadian economy is expected to continue to operate below its production capacity until about mid-2018.

Wage Rate Index: Carpenter

  • As observed from the change in STATSCAN’s Wage Rate Index for carpenters in Ontario, there was an increase of 0.8 per cent in 2016.
  • This followed two consecutive years of stronger wage growth (1.8 per cent in 2014 and 2.5 per cent in 2015).
  • Based on long term trends, wage index for carpenters in Ontario should register some acceleration in growth in 2017, but this is likely to be constrained the other prevailing factors such as, a more moderate price environment.

Wage Rate Index: Electrician

  • In 2016, the wage index for Ontario’s electricians rose by 0.8 per cent, a much slower pace of growth relative to the 2.7 per cent increase observed in the preceding year.
  • The 0.8 per cent increase in 2016 was the slowest annual increase observed since the pre-recession year 2007 when the wage index rose by 0.9 per cent.
  • The slowdown of growth in the wage index for electricians is expected to continue in 2017 when a 0.5 per cent annual increase is projected.

Wage Rate Index: Plumber

  • In 2016, the growth of wages for plumbers working in Ontario, as captured by STATSCAN Wage Rate Index for plumbers was 0.9 per cent.
  • There was a 2.8 per cent growth observed in the previous year.
  • The slower pace of growth in 2016 followed two consecutive years in which the annual rate of increase accelerated.

Wage Rate Index: Sheet Metal worker

  • In 2016, the wage rate index for sheet metal workers in Ontario advanced by 0.8 per cent, a slower pace of growth relative to the 2.4 per cent increase registered in the previous year.
  • The 0.8 per cent increase in 2016 was the lowest growth observed since 1999 when the wage index rose 0.4 per cent.
  • Based on past trends, wage growth for sheet metal workers in Ontario should rebound somewhat in 2017.
  • However, such rebound will likely be constrained by the current tame wage growth in the Canadian economy given the continuation of excess production capacity.

Wage Rate Index: Brick Layer

  • STATSCAN’s Wage Rate Index for brick layers in Ontario increased by 0.9 per cent in 2016, down from 2.8 per cent recorded in the previous year.
  • Since 2002, the average annual percentage change in Wage Rate Index for brick layers was 2.7 per cent.
  • Using that average change as a benchmark, the 0.9 per cent increase seen in 2016 was low, reflecting the tame price environment in the Canadian economy.

Wage Rate Index: Painter

  • The Wage Rate Index for painters in Ontario increased by 0.7 per cent in 2016, down from 2.4 per cent in the preceding year.
  • Similar to the other wage indices observed, the pace of growth in the wage index for painters showed a distinct deceleration in 2016.
  • Past trends suggests that the wage index for roofers should rebound to a growth of over 2.0 per cent 2017.
  • However, the tame price environment is expected to continue throughout 2017 and will therefore constrain growth in wages during the year.

Wage Rate Index: Plasterer

  • In 2016, the growth of wages for plasterers working in Ontario, as captured by STATSCAN Wage Rate Index was 0.1 per cent.
  • Compared with the 0.3 per cent growth recorded in 2015, this represented slowing in growth, the sixth consecutive year of slower growth in this wage index.

Wage Rate Index: Roofer

  • STATSCAN’s Wage Rate Index for roofers in Ontario increased by 0.9 per cent in 2016.
  • Compared with a 2.7 per cent increase observed in 2015, the change in the Wage index for roofers in 2016 was relatively weak.
  • The wage index for roofers is forecast to continue to moderate in 2017.

Wage Rate Index: Insulator

  • As measured from the change in STATSCAN’s Wage Rate Index for insulators in Ontario, the wage rate for Ontario’s insulators increased by 0.8 per cent in 2016.
  • This was a strong significant slowing in the rate of increase when viewed against 2.7 per cent in recorded in 2015.
  • Current forecast suggest a pick up in the increase in wage rate for insulators in 2017.
  • However, a risk to this forecast is the current excess production capacity in the Canadian economy and the resulting tame inflationary environment.

Non-Residential Construction Price Index

  • In 2016, the Non-Residential Construction Price Index (NRCPI) for the Toronto Census Area (CMA) increased by 2.9 per cent, exceeding the 1.8 per cent growth posted in 2015.
  • The increase recorded in 2016 represented the sixth consecutive years of annual growth.
  • Further, since 2013 when an increase of 0.4 per cent was recorded, the annual growth in the index has shown sustained annual acceleration.
  • The pace of growth in the NRCPI in the Toronto CMA was well ahead of the 1.0 per cent increase registered at the national level.
  • In fact, the growth in the Toronto CMA was only exceeded by Vancouver, British Columbia, where a 4.0 per cent increase was recorded in 2016.
  • In 2016, the NRCPI increased in five of the seven CMAs reported, with Calgary and Edmonton being the two to register decreases:
    • Calgary: -2.6 per cent; and
    • Edmonton: -2.9 per cent.

Inflation

  • The Canadian inflation environment remained tame in 2016.
  • Measured by the change in the Canadian Consumer Price Index (CPI), the annual inflation rate in the Canadian economy in 2016 was 1.4 per cent.
  • This was lower than the market expectation which was for an annual average inflation rate of 1.6 per cent.
  • The lower than expected inflation in 2016 reflected two main factors:
    • Lower crude oil prices; and
    • The continuation of excess capacity in the Canadian economy.
  • However, when compared with 2015, the annual average inflation rate of 1.4 per cent was above the 1.1 per cent registered in 2015 reflecting the prevalence of some inflationary factors, chief among which were:
    • The continuation of an accommodative monetary policy environment (historically low interest rate), which continued to facilitate higher consumption expenditure;
    • Sustained strength in consumption expenditure, both private and public which both increased by 2.4 per cent and 2.0 per cent respectively; and
    • A 3.6 per cent depreciation of the Canadian currency during the year. This was the seventh consecutive year that the Canadian currency depreciated.
  • Seven out of the eight major sub-indices of the CPI recorded a higher index in 2016.
  • The shelter index increased by 1.6 per cent to contribute over 40.0 per cent of the increase in the CPI observed in 2016, while a 1.5 per cent rise in the average price of food is estimated to have contributed over 20.0 per cent of the inflation observed during the same period.
  • There were similar inflation patterns in Ontario and the Toronto Census Metropolitan Area (CMA) to those observed at the national level.
  • In Ontario, the average inflation rate accelerated from 1.2 per cent in 2015 to 1.8 per cent in 2016, with shelter and food also the two main contributors.
  • In the Toronto CMA, the annual inflation rate accelerated from 1.5 per cent in 2015 to 2.1 per cent in 2016.
  • Current forecasts suggest that the Canadian inflation environment will remain tame in 2017 as the economy continues to operate below its full production capacity.
  • However, reflecting in part the upward trajectory of crude oil prices, the Canadian inflation rate for 2017 is projected to inch upwards to about 2.0 per cent.