‘Smooth sailing’ ahead for commodity prices in Canada
Experts predict less volatility as supply chains have begun to stabilize.
- The next 12 months could bring stable commodity pricing as supply disruptions have eased.
- Owner-furnished, contractor-installed (OFCI) arrangements, avoiding volatile materials during design and acquiring hard to find items like HVAC units early on have been some of the ways the industry has been dealing with high prices and long lead times.
- Economists predict some slowdown in the residential sector but this could be offset by high immigration targets set by the federal government.
The Whole Story:
The Canadian construction industry could have a year to catch its breath when it comes to material pricing.
Global construction consultancy firm Linesight released new data indicating the likely leveling out of prices in key commodities markets as supply chain disruptions ease and logistics return to a more normalized level. Linesight provides cost, schedule, program, and project management services to a multitude of sectors including life sciences, commercial, data centers, high-tech industrial, residential, hospitality, healthcare, and retail.
“Barring any major world events, it should be steady as she goes,” said Padraig Leahy, a director at Linesight. “Hyper inflation on commodity pricing is moderating. We see stability for the next 12 months.”
Leahy is a chartered quantity surveyor with over 30 years of industry experience in cost management. Essentially, he is an expert in construction economics.
“There was a tsunami that hit us in relation to COVID,” said Leahy. “All the shipping got out of position, cost to ship a container quadrupled. It was out of this world but that’s settled down. It’s slightly offset by the cost of fuel and labour went up but supply chains are back in kilter.”
Some key commodities findings in Linesight’s Q4 2022 Commodity Report include:
- Canadian lumber prices have continued along a slight downward trend over the past quarter as demand has remained subdued. Due to a high dependence on U.S. exports (85% of the US softwood imports are sourced from Canada), prices are linked to the US housing market, which is facing a prolonged downturn.
- Hauler strikes and a shutdown of major plants due to fires reduced cement supply in mid- to late-2022. Supply has gradually recovered, and stocks have been replenished while intensive demand from the housing sector has subsided.
- Although demand from the residential sector has subsided, energy prices have contributed to the high price of concrete blocks and bricks, which may continue to rise thanks to elevated oil and gas prices over the next quarter.
- Canada produces roughly 50% of the North American steel supply, but with supply-side issues easing and inventories stable, demand-side uncertainty has weakened prices.
- Anticipation of a global recession has hurt copper demand, though prices have picked up partly owing to political and social unrest in significant sources like Chile and Peru.
Adjusting to high costs and wait times
Leahy noted that clients have been working with Linesight during the past few years to choose the best products with the least amount of volatility for a project’s design. They are also budgeting in advance for significant commodities like electrical equipment and large HVAC equipment that they know they will eventually need so they can lock in price and availability.
He added that some have done master service agreements with mills or steel manufacturers to guarantee materials. But he noted that this is typically only done by large companies on large projects.
Another strategy has been for owner-furnished, contractor-installed (OFCI) arrangements.
“You have owners purchasing equipment in anticipation of a project so their contractor can install it later so projects don’t get delayed due to one piece of equipment,” said Leahy.
Hyperinflation events in the 70s and 80s
Just how unprecedented are these economic conditions? Leahy the last major hyperinflation event for Canada in recent memory was in the late 1970s and early 80s.
According to economists at TD Bank, in the 70s and 80s, there were two distinct inflation episodes that led to double-digit price increases in Canada. One from 1971 to 1976 and another from 1977 to 1983. In both cases, food and energy price shocks were the trigger. In the first episode, adverse weather in 1973 caused food prices to jump 18.4%. And following the Yom Kippur war in that same year, a quadrupling in the world price of oil caused a massive rise in gasoline prices. By December 1974, with Canadian inflation hitting a peak of 12.7%, the economy entered recession.
The second inflationary spike was an echo of the first. In 1978, meat prices skyrocketed by 70%, causing the overall food index to rise by 20.2%. Then the Iranian Revolution caused the 1979 Oil Crisis, which was followed by the Iran-Iraq war of 1980. This resulted in another doubling in the price of oil. Canadian gasoline prices ended up rising by 45.5% in 1981, which pushed Canadian CPI to an all-time high of 12.9%.
Residential slowdown likely
Leahy noted that while commodity pricing looks to be normalizing, residential construction will likely slow in 2023 due to overall economic sentiment and an increase in interest rates. But the Canadian government has announced a number of major infrastructure projects including road and light rail work in major metropolitan areas, which should help offset some of the slowdown in other areas of the construction industry.
“Canada has some oddities,” he said. “You have half a million people coming to the country from government immigration policy which will create demand so there could be a balance there as well. It might not hit as hard and be slightly offset.