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Construction Price Trends

 


Prepared by:

Business Intelligence Center of Excellence
Information Management Division
July 2016

Major influences on commodity prices 2015

Introduction

The year 2015 was one on which the return to robust global economic growth remained elusive. Global growth remained weak by historic standards, and economic prospects uncertain. Such uncertainties were important in influencing the changes in commodity prices during the year. Other influences included reduced geopolitical risks, and oversupply in some commodity markets.

In the Canadian economy, excess production capacity remained throughout 2015 and continued to influence a relatively stable domestic price environment. With excess capacity, the economy maintained its capacity to satisfy any increase in demand by employing additional resources, with minimal price impact. As such, the average prices of commodities produced in the domestic economy for local consumption, remained fairly stable. Lower domestic prices changes were counterbalanced by the effects of a 15.8 per cent depreciation of the Canadian currency during the year, which supported higher domestic prices for imported commodities.

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

In 2015, a number of factors continued to linger and remained important influences on changes in the global commodity market. Chief among them were the continuation of slow global economic growth, and oversupply in some markets, particularly the crude oil market. According to estimates from the International Monetary Fund (IMF), global output increased by 3.1 per cent in 20151 representing the slowest global growth in six years. Reduced growth in the Chinese economy was a key source of the global economic slowdown observed. The Chinese economy continued to rebalance from investment to consumption. China is one of the top users of many commodities, such as metals (such as iron, copper and aluminium), as well as crude oil. With the slower growth and economic rebalancing the demand for many commodities, including crude oil waned.

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Note: All double digit changes in the above tables are highlighted in red.

On the supply side a confluence of factors influenced an increase in the supply of crude oil on the international market. First, production in the United States (US) increased in the region of 1 million barrels per day2. Further, in November 2014, the OPEC made a surprise decision not to limit oil production among members. The increase in supply alongside lower demand for crude oil created a demand-supply imbalance and triggered a lowering of crude oil price in 2014.

These conditions continued into 2015. Supply conditions in the global crude oil market remained one of excess, with additional supply expected in upcoming periods with the easing of sanctions on Iran.

The slower growth in the global economy, underpinned by slower growth in China, also influenced changes in the global steel industry. According to the World Steel Association, the rebalancing being undertaken in the Chinese economy resulted in lower activities in the construction in manufacturing sectors and a lowering of the demand for steel. As a result, the steel industry is now deemed to have experienced the end of a growth cycle and has entered a period of more subdued changes. Weaker growth in emerging and developing countries is expected to continue to weigh on the performance of the steel industry in 2016. However, demand from developed economies is expected to be positive, although at a more subdued pace than previously expected.

Since the start of 2016, the risk to lower global economic growth has risen. The forecasts from the International Monetary Fund (IMF) published in April 2016 was for global growth to be around 3.2 per cent, or 0.2 percentage points below the global growth forecast at the beginning of 2016. The economic rebalancing of the Chinese economy remained a key factor in the expectation for further slowing in growth. As one of the world largest consumers of commodities, the slowing in growth in China is likely to negatively impact global commodity demand resulting in the continuation of lower prices in the near term. Indirect impact through slower exports from commodity exporting countries could exacerbate the adjustment in some commodity markets in the short run. However, the continuation of weak prices in the commodity market will likely force some suppliers/producers to exit the market resulting in the market inching nearer to a more stable position of equilibrium.

Domestic influences

In 2015, growth in the Canadian economy was estimated at 1.2 per cent. This was below the pace of growth required to return the economy to capacity, and as such the Canadian economy is estimated to have operated at a level estimated to be below its full production level. This had a containing impact on domestic prices. This was exacerbated by lower commodity prices, particularly crude oil, which influenced the price of gasoline.

In 2015, the average price of crude oil as captured by the World Bank, declined by 47.3 per cent. A similar level of decline occurred in the price of West Texas International Crude Oil (-47.2 per cent) during the same period. As a result, the price of gasoline fell. The price of gasoline as captured by the Canadian Consumer Price Index (CPI), declined by 16.5 per cent in 2015, a significant contributor to a deceleration in the annual average rate of inflation in Canada from 2.0 per cent in 2014 to 1.1 per cent in 2015. The Canadian core inflation rate also remained relatively subdued at 2.2 per cent, which is just above the mid-point of the 1.0 per cent – 2.0 per cent inflation target range.

The price outlook in the Canadian economy continues to be tame. A key underlying factor is the continuation of excess production capacity. Although growth in Ontario and Quebec is expected to accelerate in 2016, slower growth in Western provinces is expected to limit overall growth in Canada and constrain production level to below estimated production capacity. As the Canadian economy continues to grow, it is expected to inch nearer to its production capacity, resulting in a reduction of excess supply of labour, a lowering of the national unemployment rate and a strengthening of wage and other price changes. A key risk to this expectation is the current uncertain global economic environment.

CRUDE OIL

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Source: World Bank’s Commodity Price Index
  • In 2015, the average price of crude oil on the international market fell.
  • Measured by the World Bank, the average price of crude oil fell from US$96.2 per barrel in 2014 to US$50.8 per barrel in 2015 (-47.3 per cent).
  • This represented a sharp acceleration in the rate of price decline when compared with a -4.9 per cent change in 2015.
  • The decline observed reflected a fall in average prices throughout most of the year.
  • The sharpest decline occurred during January 2015 when average prices fell 50.2 per cent relative to January – March 2014 to an average of US$51.60.
  • During the second quarter, average prices recovered to US$60.50, up 17.2 per cent relative to the first quarter of the year, but remained lower (-43.1 per cent) than the average price recorded in the second quarter of 2014.
  • In the following two quarters of the year, the changes remained negative to underpin the sharp 47.3 per cent decline in average prices for the full year 2015.
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Source: World Bank’s Commodity Price Index
  • Similar price changes were observed for West Texas International Crude Oil (WTICO).
  • Based on data from the World Bank, the price of WTICO fell 47.7 from US$93.10 per barrel in 2014 to US$48.70 per barrel in 2015.
  • Except for the April – June quarter, average prices showed declines throughout the year to result in an overall decline in price for the full year 2015.
  • The downward trend in the price of crude oil started in the second half of 2014 with the confluence of a number of factors, chief among which was supply/demand imbalances.
    • Demand/supply imbalances: At a selling price of over US$100 per barrel, drilling of crude oil from most sources became more profitable and lucrative. The production of crude oil from shale in the US increased (by an estimated 1 million barrels per day) and added to the global supply of crude oil. This influences an increase in non-OPEC producers, and along with the early lifting of sanctions from Iran, and high stock levels, created excess supply in the crude oil market. While supply increased, global output growth was lower than expected, underpinned by a slowdown in the large Chinese economy. This increased the risk of weaker global demand for crude oil. Excess crude oil supply in the presence of lower demand, created the perfect market conditions for a fall in price.
  • Other factors which influenced lower crude oil prices in 2015 included:
    • OPEC’s decision: The decision by OPEC in November 2014 not to change (restrict) the production quota of its members fueled market expectation for excess supply to continue indefinitely.
    • Uncertainties in major oil producing regions: At the start of the year, there were a number of uncertainties regarding production levels in some oil producing countries in the Middle East due to ongoing conflict. At the start of the year, the risk of lower supply was relatively high. However, as the year progressed, production increased (particularly in Libya) and added to the market supply to further influence average prices downwards.
    • Mild winter: The northern hemisphere experienced a mild winter and this resulted in low demand for crude oil and further weakness in prices.
  • For the first five months of 2016, the price of crude oil on the international market has increased in the region of 26.0 per cent.
  • While further increases may occur, global economic uncertainties and ample supply of crude oil are two factors that are likely to constrain the growth in crude oil prices in the short run.
  • The World Bank forecasts suggest that the average spot price for a barrel of crude oil will be about US$41.0 in 2016. Down from US$50.80 in 2015.

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.
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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 contrasts with a much wider gap between the two prices during subsequent periods and in particular, in 2015, following significant depreciation of the Canadian currency.
  • In 2015, both the changes in crude oil price and in the Canadian currency were influential in the price of gasoline in Canada:
  • Over the one year period:
    • The price of West Texas crude oil fell by 47.3 per cent relative to the first half of 2015; and
    • The Canadian currency depreciated by 15.8 per cent relative, the same time period.
  • In 2015, the price of gasoline in Toronto CAN $105.9 cents per litre, or 17.3 per cent below the average price which prevailed in 2014.
  • In early 2016, the price of gasoline in Toronto continued to show monthly variabilities in line with the price of crude oil and other economic developments.
  • Ongoing global economic uncertainties are likely to influence changes in gasoline prices over the short – medium term.

ASPHALT

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Source: Ontario Ministry of Transportation (MTO)
  • For the full year 2015, 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 3.0 per cent.
  • This contrasted with the increase (10.7 per cent) recorded in 2014.
  • The decline in 2015 reflected developments during the second half of the year when the average price of asphalt fell by 12.7 per cent to outweigh an 8.0 per cent increase recorded during the first half of the year.
  • The decline was not unexpected given that the price of crude oil has registered annual declines over the past two years, including a relatively sharp decline in 2015.
  • Traditionally, the prices of crude and that of asphalt move in the same direction, reflecting the fact that the latter is a by-product of the former.
  • In recent years, there has been an increase in coking at oil refineries, a process used to extract maximum refined oil from the production process, leaving a lower residue, which is the source of asphalt.
  • This has resulted in a reduction in the residue which goes towards making asphalt, and therefore a reduction in the amount of liquid asphalt derived from each barrel of oil resulting in a reduction in the supply of asphalt in the market and a resultant increase in the price of asphalt.
  • In 2014, the price of asphalt in the Toronto Area increased by 10.7 per cent, despite a 7.6 per cent and 4.9 per cent decline in the world average of world and West Texas International Crude prices respectively.
  • In 2015, there was another annual decline in the price of crude oil internationally.
  • Although not at the same pace as the fall in the price of crude oil, the price of asphalt fell
    (-3.0 per cent) in 2015.
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Source: Ontario Ministry of Transportation (MTO)

WAGE RATE INDEX

  • In 2015, STATSCAN’s Union Wage Rate Index (average of 20 trades) of selected construction workers in Canada increased by 2.2 per cent, a slight deceleration when compared with the 2.4 per cent increase registered in 2014.
  • The same index for Ontario and the Toronto CMA both registered increases of 2.4 per cent in 2015, the same rate as they both registered in the preceding year.
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Source: Capital Expenditure Price Statistics – STATSCAN
  • Since 2005, the Union Wage Rate Index for both Ontario and the Toronto CMA has consistently shown similar annual changes.
  • The relatively tame increases in STATSCAN’s Union Wage Rate Index (average of 16 trades) occurred during a period when the Canadian economy continued to operate below its production capacity.
  • Current forecast suggest that the change in the index will remain tame in 2016 at about 2.0 per cent.

Ontario Wage Rate Indexes

Wage Rate Index: Carpenter

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Source: Capital Expenditure Price Statistics – STATSCAN
  • In 2015, the change in STATSCAN’s Wage Rate Index for carpenters in Ontario increased by 2.5 per cent.
  • This represented the second consecutive year of acceleration in the rate of change in the index following increases of 1.2 per cent and 1.8 per cent in 2013 and 2014 respectively.
  • The forecast for 2016 is for the change in this index to moderate slightly to 2.3 per cent.

Wage Rate Index: Electrician

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Source: Capital Expenditure Price Statistics – STATSCAN
  • In 2015, the growth of wages for electricians, as captured by STATSCAN Wage Rate Index for electrician in Ontario, was above that observed during 2014.
  • The index rose by 2.7 per cent, an acceleration relative to the 2.5 per cent increase registered in 2014.
  • Since 2002, the annual change in the Wage Rate Index for electricians in the Toronto CMA has averaged just above 2.0 per cent, except for 2008 and 2009 when the changes were well above average at 7.2 per cent and 5.3 per cent respectively.

Wage Rate Index: Plumber

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Source: Capital Expenditure Price Statistics – STATSCAN
  • In 2015, the change in the Wage Rate Index for plumbers in Ontario accelerated slightly to 2.8 per cent, up from 2.6 per cent recorded in 2014.
  • At 2.8 per cent increase, the change in the Wage Rate Index for plumbers in Ontario was 0.1 percentage point less the 2015 growth forecast.

Wage Rate Index: Sheet Metal worker

  • STATSCAN Wage Rate Index for sheet metal workers in Ontario increased by 2.4 per cent in 2015.
  • This represented a sustained slowing in the pace of growth since 2013.
  • In 2013, a 3.3 per cent increase was observed, followed by an increase of 2.9 per cent in 2014.
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Source: Capital Expenditure Price Statistics – STATSCAN

Wage Rate Index: Brick Layer

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Source: Capital Expenditure Price Statistics – STATSCAN
  • In 2015 the Wage Rate Index of brick layers in Ontario increased by 2.8 per cent, a lower rate of growth than the 3.2 per cent increase recorded in 2014.

Wage Rate Index: Painter

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Source: Capital Expenditure Price Statistics – STATSCAN
  • STATSCAN Wage Rate Index for painters in Ontario increased by 2.4 per cent in 2015, a slight deceleration from 2.5 per cent increase recorded in 2014.
  • The increase observed was the same at the rate registered in 2013, and in line with rates observed over the past five years.
  • The annual average increase in the index between 2004 and 2015 was 2.5 per cent.

Wage Rate Index: Plasterer

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Source: Capital Expenditure Price Statistics – STATSCAN
  • Over the period 2004 – 2015, the Wage Rate Index for plasterers in Ontario registered an average annual increase of 2.8 per cent.
  • This was influenced by relatively high increases registered in 2004 and 2005, at 5.0 per cent and 5.2 per cent respectively.
  • Since 2010, the annual increases in the Wage Rate Index for plasterers in Ontario have shown sustained deceleration to reach 0.3 per cent in 2014.
  • In 2015, Wage Rate Index for plasters increased by 0.3 per cent, the same as the rate recorded in 2014.

Wage Rate Index: Roofer

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Source: Capital Expenditure Price Statistics – STATSCAN
  • The Wage Rate Index for roofers in Ontario increased by 2.7 per cent 2015.
  • This was a slightly higher than the pace of growth observed in 2014 (2.6 per cent) and lower than that observed in 2013 (2.9 per cent).

Wage Rate Index: Insulator

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Source: Capital Expenditure Price Statistics – STATSCAN
  • In 2015 the Wage Rate Index for insulators in Ontario increased by 2.7 per cent.
  • The pace of growth was slightly higher than the 2.6 per cent increase registered in 2014
  • On average, between the period of 2004 and 2015, the Wage Rate Index for insulator workers was at 2.2 per cent.

NON-RESIDENTIAL CONSTRUCTION PRICE INDEX

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Source: Capital Expenditure Price Statistics – STATSCAN
  • In the fourth quarter of 2015, the Non-residential Construction Price Index (NRCPI) for the Toronto Census Metropolitan Area (CMA) increased by 2.4 per cent when compared with the fourth quarter of 2014.
  • This was a much faster pace of growth than 0.7 per cent growth registered at the national level.
  • Vancouver, BC was at the same growth rate with Toronto CMA, 1.7 per cent.
  • The pace of growth in the NRCPI was also above the rates registered in major CMA’s across Canada:
    • In the Western CMA, Calgary and Edmonton, the NRCPI declined (-1.4 per cent) during the same period;
    • There was a 1.6 per cent increase in the index in Ottawa (including Gatineau, Ontario Part), Halifax, and Nova Scotia.
  • When compared with the preceding quarter, the change in the NRCPI for the Toronto CMA was at 0.3 per cent, same as the change registered at the national level.
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Source: Capital Expenditure Price Statistics – STATSCAN
  • In the full year, 1.8 per cent increase was observed between 2015 NRCPI, 0.5 percentage point above the increase observed in 2014.
  • At 1.8 per cent increase, though below the forecasted rate of 2.2 per cent expected at the end of the year, the Toronto CMA NRCPI was well above the national level rate of 0.9 per cent in 2015.

INFLATION

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Source: Consumer Price Index – STATSCAN
  • The Canadian inflation environment remained tame in 2015.
  • The annual average inflation rate as measured by change in the Canadian Consumer Price Index (CPI) was 1.1 per cent, a deceleration relative to the 2.0 per cent registered in 2014.
  • There were two main factors behind the lower inflation rate observed in 2015. These were:
    • The Canadian economy continued to operate below its production capacity; and
    • The average price of crude oil on the international market declined (-47.2 per cent) for the second consecutive year, and influenced a decline in the price of gasoline locally.
  • On average, the price paid by Canadian consumers for gasoline declined by 16.5 per cent in 2015.
  • This was the first decline in the price of gasoline since 2009.
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Source: Consumer Price Index – STATSCAN
  • These two factors created strong deflationary influence on the inflation rate during the year to dwarf other influences such as the depreciation of the Canadian currency.
  • In 2015, the Canadian currency depreciated by 15.8 per cent to add counterbalancing influences through an increase in the domestic price of imported goods and services such as food.
  • Higher food price, was the main contributor to inflation rate in 2015.
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Source: Consumer Price Index – STATSCAN
  • While the average inflation rate in Canada decelerated in 2015, the core inflation rate, which excludes the eight most volatile items in the CPI (including gasoline), inched upward.
  • For the full year, the core inflation rate was 2.2 per cent in 2015, up from 1.8 per cent recorded in 2014.
  • Throughout the year, the rate remained approximately above 2.0 per cent mid-point of bank of Canada’s core inflation rate.
  • It ranged between a high of 2.4 per cent recorded in July to a low of 1.9 per cent recorded in December.
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Source: Consumer Price Index – STATSCAN
  • Stable prices are expected to remain a feature of the Canadian economic environment, with an expected rate of around 2.0 per cent.
  • The core inflation rate is also expected to be around the 2.0 per cent mark during the same period.

1 IMF, World Economic Outlook Update, April 2016.
2 AAM Investment Management (AAM Thought Leadership): A Detailed Analysis Into the Fundamental Factors Affecting Crude Oil Prices; pp 6.