 Construction Price Trends
Prepared by:
Financial Policy and Strategic Analysis
December 2011
Major influences on commodity prices – January – September 2011
Global influences
The variability in global economic prospects has played a major role in changes on the major commodity markets since the beginning of the year. Consistent with the more buoyant economic performance in the first quarter of the year, the prices of most commodities traded on the international market increased during that quarter. These price increases were led by changes in the price of crude oil. The average price of crude oil showed sustained increase from mid-2010, and throughout the first quarter of 2010 to reach the US$100 mark by March 2011. This was the first time since the second quarter of 2008 that the average monthly price of crude oil reached the US$100 mark. For the full quarter January – March of 2011, the average price of West Texas International Crude Oil was US$93.95 or 22.5 per cent above that registered during the first quarter of 2010.
As international commodity prices increased, the cost to the global economy increased proportionally. This added to other economic uncertainties and negatively affected prospects for the continuity of the already fragile global economic recovery. Growth in the large economy of the United States slowed during the second quarter of 2011 and the US dollar showed some weakening. In addition, economic risks in some European economies became more pronounced and helped to slow the pace of global economic growth during the second quarter of 2011 and influenced a less positive outlook for the global economy for the remainder of 2011.
During the July to September quarter, the global economic environment remained uncertain as global risk factors intensified. In particular, the European fiscal and financial crisis became more pronounced and its negative implications on global financial markets intensified. The intensification of the European crisis has presented another risk factor to global growth and that has resulted in weaker demand prospects which helped to weaken the prices of some commodities on the international market. During the third quarter of 2011, the prices of commodities such as steel (-2.9 per cent) and crude oil (-12.5 per cent) registered declines relative to the preceding quarter.
With the broadening of the European financial challenge, global growth prospects continue to be positive but uncertain. Global growth is expected to be influenced positively by continued strength in emerging economies, led by China. However, a number of factors will continue to act as a constraint to global growth. Chief among them is the need for fiscal consolidation and deficit reduction in some major developed economies. However, longer term prospects for global growth remain positive on the expectation of a global recovery and improvements in global demand conditions over that time horizon.
Domestic influences
During January – September 2011, the changes in some key construction inputs moderated relative to changes recorded in the similar period of 2010. These were mainly inputs which were more influenced by domestic (Canadian) factors. Some of these commodities include wood and lumber, cement, concrete and wages of 16 selected traded in the construction industry (see table 2).
The more subdued price changes for some construction inputs in the Canadian economy may reflect the existence of excess capacity in the Canadian economy. Although the Canadian economy emerged from the recession and continued to show growth, the level of production is estimated to have remained below capacity during the period. In the Canadian construction sector, the level of real output increased by 8.1 per cent in 2010. However, the level of output remained about 1 per cent below pre-recession level, indicating that excess capacity is likely to have existed in that sector in 2010 and into early 2011. Such local and sector-specific demand/supply conditions may have played a more significant role in local price changes relative to the prices of construction inputs which are determined more by global economic conditions, resulting in lower price changes in the prices of some local construction inputs.
NB – All double digit changes in the above tables are highlighted in red.
STEEL
Source: World Bank
Source: World Bank |
- For the period January – September 2011, the average price of steel on the international market, as captured by the World Bank’s Steel Price Index, remained above levels attained in the similar period of 2010.
- During the period, the average price of steel climbed 16 per cent.
- The increase in the price of steel during 2011 reflected a number of influences on the steel industry over the period including:
- Strong global growth prospects at the beginning of the year: At the beginning of the year, global growth prospects were very positive. This induced a market expectation for increased demand for steel with a resulting increase in the price of steel.
- The continuation of infrastructural stimulus program in many developed economies: The continuation of the fiscal stimulus program in many developed economies bolstered the market expectation for increased demand for steel and hence helped to support the increase in average prices, particularly in the first half of the year.
- Increase in the price of raw material: The price of coking coal, a major raw material in the production of steel, registered a relatively strong increase in price due to a reduction in supply in the global markets after a major flood in Australia, which is a major international supplier of the product.
- However, market conditions changed towards mid-year as major risks to global growth became more pronounced.
- In June 2011, the monthly average price of steel registered a monthly decline of 0.3 per cent, the first such decline since November 2010.
- Monthly change was again negative in July, and remained unchanged between July and September 2011.
- Viewed on a quarterly basis, average steel prices showed quarterly increases between the third quarter of 2010 and the second quarter of 2011.
- However, as the risks to global growth became more evident in the second quarter of 2011, demand prospects waned and price increase started to wane.
- In the third quarter of 2011, the quarterly change in the average price of steel on the international market became negative (-2.9 per cent).
- Despite this pull back in quarterly prices, it is important to note that price levels remained above that registered in 2010 as well as above recession lows reached in 2009.
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CRUDE OIL
Source: World Bank
Source: World Bank
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- With the recovery of the global economy from recession in 2009, the average price of crude oil on the international market has shown sustained upward trajectory since 2009.
- After trending upwards throughout 2009 and registering a growth of 28.8 per cent in 2010, the average price of West Texas crude oil showed further increase during the first half of 2011.
- As measured by the World Bank, the monthly average price of West Texas International Crude Oil showed sustained growth during the first quarter of the year, moving from an average of US$89.15 per barrel in December 2010 to reach $102.92 in March 2010.
- This was the first time since September 2008 that the average price of West Texas crude reached the US$100 mark.
- In April 2011, the average price of West Texas International Crude Oil continued to increase, jumping by 6.8 per cent to reach $US109.96 per barrel.
- However, a number of factors in the second quarter of the year triggered a pull back in the average price of crude oil.
- These included:
- Global economic uncertainties;
- Depreciation of the US dollar; and
- Supply concerns due to political unrest in North Africa.
- Reflecting these concerns, the average price of West Texas International Crude Oil showed respective monthly declines of 7.9 per cent and 5 per cent in May and June 2011.
- Prices recovered slightly in July 2011, registering a monthly increase of 1.1 per cent.
- However, as global growth risks became more evident, price declines returned in August (-11.3 per cent) and September (-0.9 per cent).
- These declines resulted in a 12.5 per cent fall in the average quarterly price of West Texas crude during the July – September 2011 quarter, representing the first quarterly decline in average prices in a year.
- Notwithstanding these declines, the average price of West Texas Crude Oil remained above that registered during the similar period of 2010:
- In September 2011, average prices were 13.7 per cent above that recorded in September 2010;
- In July – September 2011, average prices were 17.9 per cent above that which was obtained in the same period of 2010; and
- For the January – September period, the average price of West Texas crude climbed 23 per cent above the average price registered during January – September 2010.
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ASPHALT
Source: Ontario Ministry of Transportation
Source: Ontario Ministry of Transportation
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- During the January – September period of 2011, changes in 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, mirrored changes in the price of international crude oil prices.
- As the price of crude oil increased in the first half of 2011, the price of asphalt (which is a by-product from crude oil) also increased.
- During the first three months, the MTO’s Performance Grade Asphalt Cement Price Index was 15.4 per cent above that of the first quarter of 2010.
- However, a 0.6 per cent decline in the asphalt index in June 2011 indicated that the decline which had emerged in the international crude oil market was having similar effects on the price of asphalt.
- The MTO Performance Grade Asphalt Cement Price Index continued to register monthly declines through to September 2011.
- These monthly changes underpinned a 3.9 per cent quarterly decline in the MTO’s Performance Grade Asphalt Cement Price Index for the July – September 2011 quarter.
- However, for the January – September period, the change in the Index remained positive, with an increase of 4.1 per cent relative to the similar period of 2010.
- Viewed over a longer term period, the average price of asphalt in the Toronto area maintained its long term upward trajectory, although moving down from the record high reached in 2008.
- As is customary, prices fell during the end of the road construction period in the fall of 2010 and remained at that level throughout early 2011.
- The seasonal jump in prices occurred in April 2011 before declining slightly in June and throughout the third quarter of the year.
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PORTLAND CEMENT
Source: MTO - Capital Expenditure
Price Statistics – STATSCAN |
- During the first half of 2011, price of Portland Cement as measured by STATSCAN’s Portland Cement Index, increased by 1.9 per cent over the similar period of 2010.
- The pace of growth for the year to June continued to lag behind that registered in 2010.
- During the first half of 2010, the price of Portland Cement increased by 4 per cent.
- The deceleration in the rate of growth in the price of cement started in 2010 when lower price changes characterized changes throughout the year culminating in an increase of 2.9 per cent for 2010 compared with a growth of 5 per cent in the preceding year.
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SAND AND GRAVEL
Source: Capital Expenditure Price
Statistics – STATSCAN |
- In 2010, the average price of gravel and sand in Canada, as captured by STATSCAN’s Sand and Gravel Price Index, increased by 3.9 per cent.
- This represented a faster pace of growth relative to the 2.2 per cent increase registered in 2009.
- However, this pace of growth registered in 2010 remained below the 7.9 per cent and 8.7 per cent increases recorded in 2008 and 2007 respectively.
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READY MIX CONCRETE
Source: Capital Expenditure Price
Statistics – STATSCAN |
- The pace of growth in the price of Ready Mix Concrete in Canada registered sustained slowing in 2009 and 2010, with respective annual changes of 0.7 per cent and 0.5 per cent.
- These rates of growth were well below the annual average increase of 5 per cent in the price of ready mix concrete during the preceding three years.
- The deceleration in the average price for Ready Mix Concrete reflected, in part, lower demand associated with the negative impact of the 2008-09 recession on activities in the building industry.
- The slowdown in the price of Ready Mix concrete continued during the first quarter of 2011 when STATSCAN’s Ready Mix Concrete Price Index increased by 0.3 per cent relative to the half of 2010.
- This was below the 0.7 per cent rise in price registered during the comparable period of 2010.
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WAGE RATE INDEX
Source: Capital Expenditure Price
Statistics – STATSCAN |
- During January – June 2011, STATSCAN’s Union Wage Rate Index (average of 16 trades) of selected construction workers in the Toronto CMA increased by 2.1 per cent, down from a 3.1 per cent increase registered during the first quarter of 2010.
- The continuation of the slow down in the rate of change in wage rates in the construction sector continue to reflect broader economic factors including:
- Excess capacity in the Canadian economy: The Canadian economy is estimated to be operating below its long run production capacity. This condition has characterized the Canadian economy since the recent recession in 2009. This has manifested itself in the labour market as higher unemployment rates and a moderation in wage growth.
- The direct impact of the recession on the building industry: The recession negatively impacted directly on building activities, resulting in lower demand for construction workers, and therefore created an environment conducive to lower wage growth in that trade.
- Lagged effect of a lower inflationary environment: In addition to the direct and indirect impact of the recession on the wage rate for construction workers, the lower inflationary environment may have also impacted wage growth. In 2009 and 2010, the annual inflation rates in the Canadian economy were 0.3 per cent and 1.8 per cent respectively. During the same periods wage rates of selected construction workers in the Toronto CMA increased by respective rates of 4.1 per cent and 2.7 per cent. During January – September 2010, the increase in this wage rate was 2.1 per cent, which was more in line with the year-over-year inflation of 2.2 per cent recorded in September 2011.
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NON-RESIDENTIAL CONSTRUCTION PRICE INDEX
INFLATION
Source: Consumer Price Index
– STATSCAN
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- During the first nine months of 2011, inflation in the Canadian economy accelerated.
- Throughout the six month period, the headline or year-over-year inflation in the Canadian economy ranged from 2.2 per cent in February 2011 to 3.7 per cent in May.
- This contrasted with an inflation rate range of 1.0 per cent to 1.9 per cent during the similar period of 2010.
- The acceleration in the inflation rate in the Canadian economy during 2011 reflected a number of influences including:
- The price impact of the Harmonized Sales Tax in July 2010: It is estimated that the tax added about 0.4 percentage points to the headline inflation rate;
- The increase in the price of crude oil over the period: The price of crude oil on the international market maintained its upward path over the one year period. Based on World Banks’ West Texas International Crude Oil Price Index, the price of crude oil increased 23 per cent during the January – September period of 2011. Between September 2010 and September 2011, the increase in price was 3.2 per cent; and
- Increase in the price of food on the international market: The increase in the average price of food in the Canadian economy as captured by the CPI was a major source of the acceleration in inflation during the first nine months of 2011. The increase in the price of food has not been unique to Canada as data from the World Bank suggests that the change in world food prices have been strong during 2011. For the January – September period of 2011, the price of food and grains in low-to-middle income countries showed respective increases of 32.4 per cent and 48.4 per cent. Over the same period, the price for Canadian wheat on the world market increased by 56.3 per cent.
- For the full year 2011, the inflation rate in the Canadian economy is expected to be about 2.4 per cent, up from 1.8 per cent registered in 2010.
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