Further Price Declines in Materials Generate Weakness in Equipment Prices

Current construction costs fell again in September, according to IHS Inc. and the Procurement Executives Group (PEG). The headline current IHS PEG Engineering and Construction Cost Index (ECCI) registered 43.8 this month, down from 45.7 in August and well below the neutral mark. The headline index has not indicated rising costs since December.

The current materials/equipment index slipped to 41.6, down from 44.2 in August. The pricing environment appears to be deteriorating, with the current materials/equipment index registering its lowest reading since February of this year. This month also marks the second-lowest reading for the materials index in the last four years. The underlying detail shows falling prices for 11 of the 12 individual components tracked by the survey.

Prices for steel products showed continued weakness, with the indexes for fabricated structural steel, carbon steel pipe and alloy steel pipe falling. Further turbines and pumps fall to their lowest level since we began collecting data in 2011, indicating that price declines have become more widespread. Ready-mix concrete was the only material index to register price gains in September and has been the strongest index over the year. 

“Turbine prices have been trending sideways to downward in 2015. Turbines face a combination of softer demand, falling input costs and a strong dollar that hurts exports and forces competition against imports,” said John Anton, principal economist for IHS Pricing and Purchasing. “Steel and copper are down sharply – steel is the biggest input and is down over 23 percent,” Anton continued. “Coupled with a strong dollar that hurts exports and lowers the price of imports, it is no surprise turbines are declining. More price weakness is expected for 2016 as many of the negative factors listed above are just beginning to be priced in.”

The current subcontractor labor index registered 49.0 in September. This marks the second consecutive month below the neutral mark. In the US, subcontractor labor costs showed mixed results. Subcontractor labor prices rose in the US Northeast, stabilized in the US South and fell in the US West. Subcontractor labor costs in both Western and Eastern Canada remained below neutral in September.

The six-month headline expectations index rose to 50.3 in September, reverting back to slightly stronger pricing expectations. The materials/equipment index fell to 47.7 in September from 48.8 in August. Nine individual components registered lower price expectations, led by electrical equipment and heat exchanges. Ready-mix concrete continued to show strong future pricing expectations. Expectations for future subcontractor labor costs in the US moved above the neutral mark, with the US South leading in higher prices. While expectations for subcontractor labor hit the neutral mark in Eastern Canada, it remains below neutral for Western Canada.