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By Anirban Basu
August 28, 2017
Energy Prices Remain Subdued, However...
One might think that construction materials prices would be rising briskly, given broader economic phenomena. For the first time in ten years, the world’s major economies are in a period of synchronized expansion. Monetary policy remains accommodating as central banks around the world are striving to keep interest rates unusually low.
The world’s largest economy, America, is now in its ninth year of recovery. The U.S. is hurtling towards full employment and is associated with record-shattering stock prices, a strong housing market, and a confident consumer. Both China and India, representing the world’s two most populous societies, are poised to grow in the neighborhood of seven per cent this year. Even Japan’s economy is showing significant signs of life, with that economy expanding four per cent on a yearly basis during the recently completed second quarter.
Despite all of that, materials prices have only expanded gradually after being battered lower during the latter half of 2014 and throughout much of 2015. According to the U.S. Bureau of Labor Statistics’ Producer Price Index, prices for inputs to construction in July 2017 were virtually unchanged from those in July 2011. Current input prices are actually lower than they were in July 2013. Nonresidential construction input prices have behaved similarly, exhibiting little meaningful growth over the past several years, with periods of declining materials prices roughly offsetting periods of growth.
This is not to suggest that there has been an utter absence of material price inflation. Moreover, inflationary pressures in certain materials categories have been building, in part because of the emerging U.S. trade policy.
The most visible manifestation of America’s oscillating perspectives on trade is a tariff implemented in May by the Trump administration upon Canadian lumber. The May tariff represents the latest chapter in a multi-decade dispute between Americans and Canadians. Many American producers claim that Canada has an unfair competitive advantage since many loggers are effectively subsidized by being able to access publicly-owned land.
According to PPI data, softwood lumber prices rose 9.9 per cent during the one-year period ending July 2017. Duties imposed by the U.S. government upon Canadian lumber range from 3 to 24 per cent. It should be noted that to date, the increase in lumber prices, though problematic, has not been as great as many feared and predicted.
Certain materials prices are rising even more quickly. For instance, according to government data, the price of steel mill products has risen by more than 10 per cent over the past year. The same can be said for the iron and steel price category. Nonferrous wire and cable prices are up by more than five per cent.
This may have something to do with China, which produces roughly half of the world’s steel. When China’s construction bonanza ended several years ago, that steel began to flood global markets. Plummeting prices were the result. By September 2015, the price of steel fell to its lowest level in eleven and a half years, according to the MEPS steel price index.
More recently, Chinese economic growth has begun to stabilize. As a consequence, global commodity markets have come into better supply/demand balance. Still, the world is home to enormous productive capacity, including with respect to oil and natural gas. As of this writing, the price of oil remains below $50/barrel, despite efforts by OPEC and non-OPEC nations to truncate supply. It is a testament to the world’s capacity to produce the resource and the lingering fragility of the global economic expansion.
Moreover, demand for materials remains uneven. While a number of U.S. private construction categories, like office and commercial remain active, public infrastructure spending remains subdued. The level of construction spending in such categories as public safety, water supply, and flood control have actually declined over the past three years, limiting demand for materials and helping to suppress aggressive materials price increases.
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