By: Alex Carrick on September 1st, 2016
“Big Five” Commodities Still Not Kicking Up Their Heels
There is a ‘shorthand’ way of determining whether or not construction material costs are becoming markedly more expensive.
That methodology is to graph and study price movements in the "Big 5" commodities: lumber, cement, steel, copper and gasoline. Those building products (or raw material inputs) play outsized roles in construction projects.
The first three have special significance as framing materials. As for the other two, copper (plumbing and wiring) and gasoline (transportation), their usage is so widespread on and leading to construction sites, that they demand to be included. (Diesel fuel could be chosen over petrol, but the latter plays a bigger role in the economy at large, plus it serves as a good proxy for the former anyway.)
Graph 1 shows the relative performances of the five highlighted commodities since the end of the Great Recession in July 2009. In other words, Graph 1 concentrates only on the economy’s recovery and expansion phases since the Big Dip.
For ease of comparison, all five series have been given the same starting point and starting value.
For each series, its value in July 2009 has been set equal to 100.0. Subsequent months are then expressed relative to July 2009. (For example, if an actual price moves from say $60 per unit to $66 in 12 months, i.e., an increase of +10.0%, then its index value will increase from 100.0 to 110.0, also +10.0%, over the same period.)
The background data comes from the Producer Price Index (PPI) series calculated and published by the U.S. Bureau of Labor Statistics (BLS). (As a side note, most internationally traded commodities are priced in U.S. dollars. The implication for Canadians is that some construction material costs may be adversely affected by the low-valued ‘loonie’.)
Over the past seven-year time frame, only softwood lumber has shown a significant price increase. It now stands +40.0% compared with July 2009. Also significant, however, is the fact the softwood lumber curve, after rising from July 2009 to early 2013, has been essentially flat since then.
The next best record, on the upside, has been turned in by cement. Its price is presently +14.6% compared with its starting point in July 2009. But that’s a climb of barely more than +2.0% annually on average.
Steel and copper, after periods of sharp increases in late 2010 and early 2011, have returned to almost exactly where their journeys were launched. The former in July 2016, relative to July 2009, was +0.1% and the latter, -3.2%.
The cost of gasoline, which soared into early 2011, and stayed elevated for the next three and a half years, has plunged over the past two years and now sits -19.1% compared with July 2009.
Of course, cost comparisons can take on entirely different complexions when alternative horizons are chosen. Graph 2 is similar to Graph 1, except that it adopts January 2000 as its starting point. That is to say, values (i.e., costs) as at the beginning of the millennium are set equal to 100.0 and ‘actuals’ in following months are expressed relative to that kickoff point.
In Graph 2, it’s softwood lumber that has recorded almost no movement now versus its starting point way back in January 2000. There has been an increase, but of only +4.3%, on account of a zone of weakness – brought on by a subprime mortgage crisis which halted new home building in its tracks – that lasted from 2007 through 2012.
Cement has recorded the second lowest total-period percentage change, January 2000 to July 2009, +57.1% (or +3.5% per year on average). The price of steel has moved ahead a bit faster than cement, +66.6% for the whole period or +4.0% on average annually.
Readers may be surprised to learn that the price of copper construction products is currently +82.7% compared with January 2000. That’s +11.1% on average annually over the past sixteen and a half years. Even with its dizzying drop in price over the past several years, copper is still doing much better than it was a decade and a half ago.
Finally, the current price of gasoline, which nearly everyone views as being so cheap, is actually double (+101.1%) what it was in January 2000.
As with most things in life, the construction material costing story is inordinately skewed by perspective. Regardless, Graphs 1 and 2 raise little immediate cause for alarm.
(Since July 2009 Trough)
(Since January 2000)