Construction Costs Yet to Rise in 2015

Prices are being driven lower by falling oil and commodity prices.

📅   Fri March 27, 2015 - National Edition
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Construction costs fell again March, according to IHS and the Procurement Executives Group . The headline current Information Handling Services (IHS) PEG Engineering and Construction Cost Index (ECCI) registered 44.7 in March, a slight uptick from February’s record low, but still considerably below a neutral reading. The headline index has not indicated rising costs since December 2014.

“The rout in crude oil markets is clearly having a chilling effect on capital expenditure plans,” said Mark Eisinger, senior economist at IHS. “That said, survey respondents remain optimistic that projects are simply being delayed and not canceled.”

The current materials/equipment index registered 43.0 in March, a slight improvement from February’s 39.6 reading, but still consistent with the overall narrative of softer prices. Nine of twelve individual components registered falling prices in March, led by copper-based wire and cable, carbon steel pipe, alloy steel pipe, and fabricated structural steel.

Copper-based wire and cable has now shown falling prices for five of the past six months. “Non-ferrous metals markets continue to be weighed down by the specter of slowing consumption growth in key emerging markets and dampened investor interest due to the pending normalization of US monetary policy,” said Frank Hoffman, senior economist at IHS.

Ready-mix concrete was the outlier in the March survey as the only underlying component showing higher month on month prices. “Three main forces are supporting cement and ready-mix prices in this environment,” said IHS economist Charlie McCarren. “First, the demand environment is improving, even if not all end markets are steadily progressing. Second, since the recession, the cement industry has become more concentrated, improving the remaining cement manufacturers’ leverage over pricing. And finally, a wave of potentially costly CAPEX investments will likely hit the cement industry this year as it struggles to comply with the 2010 National Emissions Standards for Hazardous Air Pollutants (NESHAP); the current pricing environment likely reflects the industry’s attempt to co-opt clients into sharing part of the costs.”

The current subcontractor labor index eased further to 48.7 in March, down from 49.0 in February to its softest reading since January 2012. Nearly all regions registered flat labor costs, with Eastern Canada as the only exception posting a slight easing. For the second month in a row, the Southern U.S. did not register higher month on month labor costs. Nevertheless, tightness in skilled labor markets was still reported in the Gulf Coast.

The six month headline expectations index dropped to 45.9 in March, a record low following the 48.7 reading in February. For just a third time in survey history, the forward looking index implies falling price expectations over the six month horizon and is another sign of the weakness in current market conditions.