Construction input cost analysis
Cost pressures continue
Materials
Construction material costs in Canada grew again in Q2 2024, accelerating by 2.0 percent on the quarter after Q1 2024’s increase of 1.1 percent. Several copper items saw double digit increases while drylining, concrete masonry units and insulation rounded out the top five increases in Q2 2024.
Steel pipe/tube, plastic pipe/tube and porcelain floor tiles saw steady reductions, falling by 3.0, 0.9 and 0.8 percent on the quarter in Q2, respectively. This, however, wasn’t enough to lessen gains in the overall index which now rests 44.9 percent above pre-COVID-19 levels.
Source: Statistics Canada
Domestic freight costs finally caught up to global movements in freight, adding additional pressures to some material items. The Canadian general freight index’s four month moving average climbed by 3.5 percent in the three months to June 2024, as Freightos’ Global Container Freight Index increased by 98.1 percent over the same period. More recently, rail strikes, albeit short lived, have caused minor supply chain disruptions, delays, and cost concerns.
However, costs are still expected to be problematic in the short-term. Four of the top five organization obstacles listed by construction firms in Statistics Canada’s Q3 2024 Canadian Survey on Business Conditions were linked to price pressures. The top spot went to cost-related obstacles, with 73.8 percent of respondents suggesting that material costs could be a challenge for the remainder of the year.
Changing tariffs may impact construction material costs more pertinently in the coming months and quarters in Canada as well. On the import side, a new steel and aluminum surtax on Chinese products (a 25.0 percent increase as of 15th of October 2024) could place an additional burden on costs.
From an export perspective, USA’s Department of Commerce has increased tariffs on the importation of Canadian softwood lumber products from 8.05 percent to 14.54 percent. Should this hike discourage spending in America, some supply could be unlocked in Canada, which could exert some downwards pressure on lumber prices.
The effect of these changes will be largely dependent on exposure to particular materials and components, and whether or not construction projects are already in flight, being procured, or in the pipeline. Nonetheless, forward planning is still advised, and early supply chain engagement is encouraged to better manage and mitigate cost risks.
Labour
While still increasing, the pace of growth in construction wages notably softened in Q2 2024. Compensation of employees, average weekly earnings and unit labour costs increased by 1.8, 1.7 and 1.3 percent on the year, respectively. This, perhaps, is a result of greater slack in the labour market as demand weakens and workforce constraints lessen.
Construction employment fell by 0.7 percent on the quarter in Q2 2024 while unemployment grew by 6.9 percent. At the same time, the unemployment rate hit 5.7 percent in the same period. Construction vacancies also dropped to 44,970 in Q2 2024, recording a vacancy rate figure of just 3.7 percent - the lowest value since the pandemic began.
That being said, even with softening employment figures and more slack creeping into the labour market, construction is never far from a talent crisis. Skills shortages are embedded into the industry, with many trades in short supply. Nearly half of the firms polled in Statistics Canada’s Q3 2024 survey on Business Conditions suggested that labour related challenges will be an issue in the coming three months. This indicates that while labour market pressures are easing and wage growth is becoming more subdued, many organizations expect labour restriction to endure.
Poor industry productivity is also a metric for consideration in driving lower growth for construction wages. Construction labour productivity, (the ratio between construction GDP and hours worked) fell by 0.6 and 2.0 percent on the quarter and year, respectively.
Source: Statistics Canada
Productivity can be a difficult statistic to measure, and published metrics ought to be reviewed with a degree of skepticism. However, Statistics Canada’s labour productivity measure generally implies that the main driver behind poor productivity in recent times has been a lower volume of work. What has struggled to change is hours worked. Unless more can be done, with fewer and more efficient inputs, productivity will remain constrained. Wage growth, as a result, is unlikely to be sustained.
Machinery and equipment
The cost for machinery and equipment in Canada increased again in Q2 2024, rising by 1.7 and 3.1 percent on the quarter and year, respectively. Stable demand for equipment like excavators, bulldozers, graders, and asphalt pavers to support infrastructure development has maintained cost pressures.
Despite recent reductions, interest rates still remain elevated. This has implications for the cost of construction machinery and equipment as financing constraints persist and operational costs remain tight. However, as construction sector growth alleviates and supply improves, further easement in machinery and equipment costs growth should materialize.
Source: Statistics Canada
