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
October 2015

Major influences on commodity prices January – June 2015

Introduction

Broad-based weakness continued in global commodity market during the first half of 2015. The market remained under the influence of a number of factors, chief among which was the slowdown in the global economy, and prospects for further slowdown underpinned primarily by a slower growth in China. Other market specific influences such as supply demand imbalances, currency movements, reduced geopolitical risks internationally, and the continuation of excess capacity in the Canadian economy, have also remained influential in changes observed in January – June 2015. These factors are expected to remain key determinants of changes in the prices of major commodities for the remainder of 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 and 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. In particular, 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

A number of global factors influenced key changes in the global commodity market in 2014. One market that experienced strong fluctuations due to key global issues was the international crude oil market. In 2014, growth in global output remained below pre-recession pace and slower than forecast at the start of the year. Slower growth in China, one of the top users of crude oil, was a source of the below forecast growth, which in turn curtailed the demand for many commodities, including crude oil.

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 day1. 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 the condition for a lowering of crude oil price in 2014. These conditions remained and/or intensified during the first half of 2015. Supply conditions in the global crude oil market have remained one of excess, with prospects for additional supply coming into the market, should sanctions be lifted from Iran.

The slower growth in the global economy, underpinned by slower growth in China, has also influenced lower prices in the steel industry. Further, consequent on a reduced global growth prospects, the expectation is for the demand for steel to remain weak resulting in the continuation of relatively low steel prices.

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

Current forecasts suggest that global growth will remain sluggish in 2015 as most economies continue to grapple with post-recession challenges. Projected growth for the Chinese economy was recently downgraded to contribute to the lacklustre global growth forecast. These factors are expected to keep the change in prices for some commodities low or negative. These include commodities such as crude oil and natural gas which are influential in the prices of other energy products. However, current forecast suggest that these prices are expected to recover in 2016 and beyond.

Domestic influences

Since the 2008-09 recession, the Canadian economy is estimated to be producing below its full production capacity level. During the first half of 2015, the total goods and services produced by the Canadian economy fell and thrust the economy into a technical recession. This was induced by the reduction in crude oil prices globally. Given regional differences in Canadian production, the impact of this price change was also regional and was evident in the changes in the price of some construction inputs. Specifically, the change in construction wage rates in some western Census Metropolitan Areas (CMAs) such as Calgary (1.3 per cent) and Edmonton (1.3 per cent) in January – June 2015 were well below the change nationally (3.4 per cent) as well as the change registered in the Toronto CMA (5.8 per cent). A similar pattern was observed in the changes in the Non-Residential Construction Price Index. The index for Calgary was unchanged; the index for Edmonton fell by 0.1 per cent; while that for the Toronto CMA increased by 1.8 per cent in the second quarter of 2015, relative to the comparable quarter of 2014.

Reflecting, among other things, the below capacity production in the economy and the fall in the price of crude oil (and gasoline), Canadian inflation remained relatively subdued during January to June 2015. Canadian headline inflation was 1.0 per cent in June 2015, the same as that registered in January 2015. Other influences such as the 6.7 per cent depreciation in the Canadian currency during the same period may have influenced the core inflation rate to remain above the 2.0 per cent mid-point of the Bank of Canada’s inflation target band of 1.0 per cent to 2.0 per cent. However, core inflation remained in a tight band of 2.1 per cent to 2.4 per cent during the period.

The forecast for 2015 is for a faster pace of growth in the wage rates of most of the selected trades. As the Canadian economy continues to grow, it will approach its production capacity, resulting in a reduction of excess supply of labour, a lowering of the national unemployment rate and a strengthening of wage rate increases. The slightly higher wage rate increases in most of the selected construction trades represented in Table 2 may be reflective of the Canadian economy that is expected to be closer to its production in 2015.

CRUDE OIL

enlarge [+]
Source: World Bank’s Commodity Price Index
  • The price of crude oil on the international market declined rapidly during the latter half of 2014, to influence a 7.6 per cent decline in average prices (to US$96.20) for the full year 2014.
  • During the first half of 2015, average crude oil price remained below levels recorded in the first half of the preceding year.
  • Based on the changes in the World Bank’s Average Crude Oil Index, during the first half of 2015, the average price of crude oil was US$53.20, or 49.3 per cent lower.
  • Most of the decline occurred in the first quarter when average prices fell 50.2 per cent 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.
enlarge [+]
Source: World Bank’s Commodity Price Index
  • In June 2015, the average price of a barrel of crude oil on the international market was US$61.30, or 43.5 per cent below the price of US$108.40 recorded in June 2014.
  • The decline in the price of crude oil started in the second half of 2014 with the confluence of a number of a number of factors which remained influential throughout the first half of 2015.
  • These include:
    • 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. At the same time, the growth in global output remained sluggish, led by a slowdown in the Chinese economy. This increased the risk of weaker global demand for crude oil. This, alongside an increase in the supply of oil, created a market imbalance which influenced a fall in price.
    • OPEC’s decision: In the midst of a global demand/supply imbalance, OPEC made a decision in November 2014 not to change (restrict) the production quota of its members, and with no change expected, the average price of crude oil continued to fall.
    • 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.
  • In addition to these factors, other factors have emerged since the start of 2015.
  • First, global economic growth prospects have waned since the start of the year as growth expected in the large Chinese economy was adjusted downwards.
  • This resulted in less positive market expectations for global growth and global demand for crude oil, and resulted in a continuation of the year-over-year declines in average crude oil prices during the first half of 2015.
  • The weakness in average price occurred across different markets, including West Texas International Crude Oil.
  • During January – March 2015, the price of West Texas International Crude Oil price declined by 50.8 per cent relative to January – March 2014, to US$48.60.
  • In the subsequent quarter, the price of West Texas International Crude Oil rose relative to the preceding quarter (to US$57.80), but remained below the average price of US$92.40 which prevailed in the corresponding quarter of 2014 (-43.9 per cent).
  • Market conditions continue to suggest ongoing weakness in prices for the remainder of 2015, as key market trends are expected to remain.
  • In particular, the current supply/demand imbalance is expected to remain and global demand is expected to show lacklustre growth in line with global growth prospects.
  • Since then, prospects for international crude oil prices have not improved.
  • In mid-July 2015, a deal was reached with Iran, which, if passed by the United States (US) congress, would ease the sanction on Iran, allowing for an increase in the supply of crude oil on the international market.
  • Further increase in supply in the presence of lower demand is likely to have a downward influence on average prices.

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 contrasts with a much wider gap between the two prices during subsequent periods and in particular, the first half of 2015, following significant depreciation of the Canadian currency.
  • During the first half of 2015, both the changes in crude oil price and in the Canadian currency were influential in the price of gasoline in Canada:
  • Over the half year period:
    • The price of West Texas crude oil fell by 43.7 per cent relative to the first half of 2015; and
    • The Canadian currency depreciated by 11.2 per cent relative, the same time period.
  • During the first half of 2015, the price of gasoline in Toronto CAN105.3 cents per litre or 20.9 per cent below the average price which prevailed in the first half of 2014 reflecting a combination of both influences.
  • With ongoing uncertainties in the international crude oil market, and the resulting fluctuations in the Canadian currency, gasoline prices are expected to remain volatile in the foreseeable future, reflecting the counterbalancing influences of both changes.
  • Current forecast suggests that the price of gasoline should average around CAN112 cents per litre in 2015.

ASPHALT

enlarge [+]
Source: Ontario Ministry of Transportation (MTO)
  • During the first half of 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), increased by 8.0 per cent.
  • This was a much faster pace of change when compared with the 1.3 per cent increase registered during the first half of 2014.
  • The increase in the first half of 2015 followed a 10.7 per cent rise in the MTO’s Performance Grade Asphalt Cement Price Index for the GTA for the full year 2014.
  • The sustained increase in asphalt price in the GTA continued to occur during a period in which crude oil fell and continued to reflect more 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.
  • As such, there is 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.
  • This reduced the supply of asphalt in the market and resulted in an increase in the price of asphalt.
  • The reduced price for the year to date reflected higher year-over-year prices during the first four months of the year.
  • In January and February 2015, MTO’s Performance Grade Asphalt Cement Price Index GTA was 22.6 per cent above prices which were recorded in January and February of 2014.
  • In March and April 2015, average prices remained higher than in the similar months of 2014 but moderated significantly to 8.4 per cent and 4.7 per cent respectively.
  • The moderation in the year-over-year price change continued into May (-0.3 per cent) and June (-6.3 per cent) when price changes became negative.
  • Viewed on a month-over-month basis, average prices remained unchanged during the first two months of the year, which was during the off-season for road construction.
  • The seasonal jump in prices expected in April, at the start of the road construction period, was absent in April 2015.
  • Beginning March 2015, MTO’s Performance Grade Asphalt Cement Price Index for the GTA registered its seasonal monthly increases through to May before registering a monthly decline in June 2015.
  • This decline continued into the post June period, characterizing changed also in July and August.
  • This suggests that the fall in the price of crude oil may be beginning to be filtered into the price of asphalt.
enlarge [+]
Source: Ministry of Transportation (MTO)

WAGE RATE INDEX

  • In the first half of 2015, there was an acceleration in the rate of increase in STATSCAN’s Union Wage Rate Index (average of 16 trades) of selected construction workers in the Toronto CMA as well as in Canada.
  • In the Toronto CMA, the index increased by 5.8 per cent.
  • In the first half of 2014, the index was unchanged.
enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • Similarly, the rate of increase in the national index accelerated from 1.7 per cent in the first half of 2014 to 3.4 per cent in the first half of 2015.
  • The increase in STATSCAN’s Union Wage Rate Index (average of 16 trades) occurred during a period when the Canadian economy registered a decline in real Gross Domestic Product (GDP), and therefore remained below its production capacity.
  • During January – March 2015, total Canadian real GDP declined by 0.2 per cent (0.8 per cent annualized), followed by a decline of 0.1 per cent (0.8 per cent annualized) in the April – June quarter.
  • The acceleration in the rate of growth in STATSCAN’s Union Wage Rate Index (average of 16 trades) may therefore indicative of attempts by workers to maintain purchasing power, given increase in some costs.
  • Although headline inflation remained relatively contained during January – June 2015, [ranging from a low of 0.8 per cent (in April) to a high of 1.2 per cent (in March)], the core inflation rate remained above the 2.0 per cent mid-point of the Central Bank’s inflation target range of 1.0 per cent to 2.0 per cent.

WAGE RATE INDEX: Carpenter

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • In 2014, there was a 1.8 per cent increase in STATSCAN’s wage rate index for carpenters (Toronto CMA), a faster pace of growth than the 0.9 per cent recorded in 2013.
  • During the first half of 2015, the acceleration in wage growth for carpenters continued, up 2.7 per cent when compared with the first half of 2014.
  • This was above the 0.9 per cent which was recorded during the first half of 2014, but is in line with the forecast 2.7 per cent wage growth for carpenters for the full year 2015.

WAGE RATE INDEX: Electrician

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • During the first half of 2015, the pace of growth of wages for electricians, as captured by STATSCAN wage rate index for electrician in the Toronto CMA, was above that observed during 2014.
  • The index rose by 2.6 per cent, which was above the 2.2 per cent increase registered during the first half of 2014.
  • Since 2002, the annual change in the wage rate 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 7.1 per cent and 5.2 per cent respectively.
  • For the full year 2015, the wage rate for electricians in the Toronto CMA is expected to increase by around 3.0 per cent.

WAGE RATE INDEX: Plumber

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • Between January and June 2015, the wage rate for the construction plumbers in the Toronto CMA increased at 2.7 per cent.
  • This was the same rate of increase as that observed during the first half of 2014, as well as the increases observed in 2014.
  • Current forecast suggest that the rate of change in the wage rate of plumbers will accelerate further to about 2.9 per cent for the full year 2015.

WAGE RATE INDEX: Sheet Metal worker

  • STATSCAN wage rate index for metal workers in the Toronto CMA increased by 2.4 per cent during the first half of 2015.
  • This represented a deceleration when compared with the increase of 3.1 per cent recorded during the first half of 2013.
enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • For the full year 2015, the wage rate for sheet metal workers in the Toronto CMA is expected to increase by about 2.6 per cent, a slightly lower rate than the 2.8 per cent recorded in 2014.

WAGE RATE INDEX: Brick Layer

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • During the first half of 2015, the wage rate index of brick layers in the Toronto CMA increased by 2.8 per cent.
  • This was a slower pace of growth than the 3.3 per cent registered in the similar period of 2014.
  • Current forecast suggests that the index will increase by about 2.9 per cent for the full year 2015.

WAGE RATE INDEX: Painter

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • The wage rate index for painters in the Toronto CMA increased by 2.4 per cent during the first six months of 2015.
  • The increase observed during the period remained in line with past trends.
  • In the first half of 2014, there was a 2.5 per cent increase in the index.
  • Further, the annual average increase in the index between 2002 and 2014 was 2.6 per cent.
  • The wage rate index for painters in the Toronto CMA is expected to maintain its current pace of growth in 2015 with a projected 2.5 per cent increase.

WAGE RATE INDEX: Plasterer

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • Following no change in 2014, the wage rate index of the plasterers in the Toronto CMA remained unchanged (0.0 per cent) during the first half of 2015.
  • Over the period 2002 – 2013, the index registered an average annual increase of 3.0 per cent., influenced by relatively robust increases between 2007 and 2011, when the index recorded an average increase of 3.8 per cent.
  • Since peaking at 5.8 per cent, the index showed sustained moderation in growth culminating in no change in 2014.
  • The current forecast is for the index to show an increase of about 0.9 per cent increase in 2015.

WAGE RATE INDEX: Roofer

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • The wage rate index for roofers in the Toronto CMA increased by 3.1 per cent during the period January – June 2015.
  • This was a faster pace of growth than the 2.6 per cent recorded in the first half of 2014.
  • Current forecast is for the change in the wage rate index for roofers in the Toronto CMA to moderate to about 2.6 per cent for the full year 2015.

WAGE RATE INDEX: Insulator

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • In the first half of 2015, the wage rate index for insulators in the Toronto CMA increased by 2.7 per cent over that which existed in the first half of 2014.
  • The pace of growth observed was the same as that registered in the first half of 2014.
  • For the full year 2015, the change in the wage rate index for insulators in the Toronto CMA in 2015 is expected to be about 2.9 per cent.

NON-RESIDENTIAL CONSTRUCTION PRICE INDEX

enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • In the second quarter of 2015, the Non-residential Construction Price Index (NRCPI) for the Toronto Census Metropolitan Area (CMA) increased by 1.8 per cent when compared with the second quarter of 2014.
  • This was a faster pace of growth than that registered at the national level (1.1 per cent).
  • The growth in non-residential construction prices over the period was lower in western CMAs of Calgary (0.0 per cent) and Edmonton (-0.1 per cent).
  • The CMAs Toronto (1.8 per cent), Ottawa – Gatineau, Ontario Part (1.4 per cent) and Halifax (1.2 per cent) led the increase.
  • When compared with the preceding quarter, the change in the NRCPI for the Toronto CMA was 0.4 per cent, or just below the 0.5 per cent increase registered at the national level.
  • The increase observed during the quarter was mainly due to higher cost of material and labour costs.
enlarge [+]
Source: Capital Expenditure Price Statistics – STATSCAN
  • The 1.1 per cent increase observed between the second quarter of 2015 and that of 2014 (1.1 per cent) was well above the 0.7 per cent increase observed in the second quarter of 2014.
  • However, it was comparable to the 1.3 per cent increase observed for the full year 2014.
  • With the changes observed during the first half of 2015, the increase in the NRCPI for the Toronto CMA is now expected to be in the region of 2.2 per cent, up from the previous forecast of 1.9 per cent.

INFLATION

enlarge [+]
Source: Consumer Price Index – STATSCAN
  • The Canadian inflation environment remained relatively tame during the first half of 2015.
  • Measured by the change in the Canadian Consumer Price Index (CPI), the headline inflation rate fluctuated within a narrow band of 0.8 per cent to 1.2 per cent.
  • In June, the Canadian headline inflation rate was 1.0 per cent.
  • The relatively tame inflation environment during the first six months of 2015 reflected a number of factors, chief among which was the reduction in the price of crude oil, which influenced lower gasoline prices.
  • During the six month period January – June 2015, the average price of gasoline in Canada, as captured by the Canadian CPI, declined relative to the corresponding month of 2014.
  • The declines ranged from -21.8 per cent in January to -14 per cent in June.
enlarge [+]
Source: Consumer Price Index – STATSCAN
  • In addition to the constraining impact of lower crude and gasoline prices in the Canadian economy, the Canadian economy was estimated to have remained below its production capacity during January – June 2015, a condition which usually influences lower prices.
  • Lower crude oil prices also influenced a 6.7 per cent depreciation of the Canadian currency since the start of 2015.
  • This resulted in higher domestic prices for imported goods and services and therefore would have added some inflationary impulses in the Canadian economy.
  • This may have been an influence on the Canadian core inflation rate which has remained above the 2.0 per cent mid-point of the Bank of Canada’s core inflation target range of 1.0 per cent to 2.0 per cent during the period.
  • The Canadian inflation environment is expected to remain relatively tame during the remainder of the year resulting in an inflation rate of around 1.2 per cent for the full year 2015.
  • The Bank of Canada expects the core inflation rate to average around 2.0 per cent in 2015.

1 AAM Investment Management (AAM Thought Leadership): A Detailed Analysis Into the Fundamental Factors Affecting Crude Oil Prices; pp 6.