Growth in Construction Costs Show Signs of Slowing, IHS Markit says

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Monday, October 29, 2018 10:00 am EDT
"The elevated steel pipe prices in the last two years were driven by higher steel input costs; with falling steel costs, steel pipe prices will also move down. However, upside pricing risks remain, with quotas on Korean and Brazilian imports as well as higher demand from the energy sector."

Construction costs increased once again in October, according to IHS Markit (Nasdaq: INFO) and the Procurement Executives Group (PEG). The current headline IHS Markit PEG Engineering and Construction Cost Index registered 59.8 this month, 2.4 points lower than last month’s reading, indicating prices rose at a weaker pace compared to September. Despite the slower pace, survey results show that prices have been rising consistently for the last two years. 

Materials and equipment prices rose at a slightly slower pace in October, with the index posting 61.3, down from the September figure of 62.9. Price increases for materials and equipment were stronger in 11 of the 12 subcomponents in October. Only heat exchangers had flat pricing; there were no categories with falling prices. Copper based wire and cable had the largest gain compared to September, rebounding from last month’s reading of 40.9 to reach 52.9. Alloy steel pipe, although comfortably above flat pricing with an index figure of 65, had the highest drop compared to September.

“We expect steel pipe prices to decline moderately over the remainder of 2018 and into 2019,” said Amanda Eglinton, principal economist – pricing and purchasing, IHS Markit. “The elevated steel pipe prices in the last two years were driven by higher steel input costs; with falling steel costs, steel pipe prices will also move down. However, upside pricing risks remain, with quotas on Korean and Brazilian imports as well as higher demand from the energy sector.” 

Current subcontractor labor prices increased at a slower pace this month, with the index falling 4.2 points to 56.2. Despite this retreat, October marked the 15th straight month of increasing prices. Labor costs continued to increase in the U.S. West and South but were flat in the U.S. Northeast and Midwest. In Canada, the Eastern part of the country registered higher labor costs while for the West, labor costs remained the same. 

The six-month headline expectations for construction costs index reflected expectations of increasing prices for the 26th consecutive month. The index fell 7 points in October, after posting a record-breaking increase in September. The materials/equipment index fell 4.9 points to 74.0. Expectations for future price increases were widespread, with all material indexes moving above 65.0 and some such as freight reaching almost 90. Price expectations for sub-contractor labor dropped 12.0 points, reversing part of September’s large increase. Nevertheless, labor costs are expected to rise in all regions of the U.S. and Canada. 

In the survey comments, respondents indicated a tight labor market for all skilled trade workers as well as some tightness with regards to imported steel. 

To learn more about the IHS Markit PEG Engineering and Construction Cost Index or to obtain the latest published insight, please click here.

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