Construction, Engineering Index Costs Down After Record High

The IHS Markit PEG Engineering and Construction Cost Index hit a record-high 79.1 in April.

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Demand has weakened in China due to pandemic lockdowns, leading to a reduction in some construction- and engineering-related prices, according to IHS Markit. The company, which is owned by S&P Global and The Procurement Executives Group (PEG), produces its monthly IHS Markit PEG Engineering and Construction Cost Index. The index provides an economic indicator for the construction sector and came in at 79.1 in May, after it was 88.5 in April, and predicts additional future price indexes. 

According to IHS Markit, the subcontractor labor index rose 0.6 index points in May to 85.8 from 85.2 in April, while the sub-index for materials and equipment costs fell 13.6 index points to 76.3.

Shipping costs rose for the 21st consecutive month in May, with routes from Asia and Europe to the U.S. totaling index levels of 72.7 and 81.8, respectively. The sub-indexes for metals prices eased noticeably in May: the structural steel sub-index dropped from 91.7 in April to 68.2, the carbon steel pipe sub-index fell 27.7 sub-index points to 68.2, the sub-index for alloy steel pipe fell by 20.8 sub-index points to 75, and the copper-based wire and cable index fell from 91.7 in April to 75.

“Reaching an all-time record high of $10,730/metric ton on 7 March on the LME, copper prices in early May have dropped below $9,300/metric ton, an eight-month low,” said John Mothersole, director of pricing and purchasing research at S&P Global Market Intelligence. “The current retreat in prices is tied to weakness on the demand side from the contraction in mainland Chinese consumption and the compounded effect of widespread lockdowns to control COVID-19 outbreaks, which are now affecting production across a range of industries in addition to the construction sector. Higher interest rates and rising inventories have also started to take their toll.”

The sub-index for current subcontractor labor costs came in at 85.8 in May, an increase from April’s index figure of 85.2. According to survey responses, labor costs continued to rise in all regions of the U.S.  and Canada.

The six-month headline expectations for future construction costs index remained at 79.7 in May. The six-month expectations index for materials and equipment came in at 72.9, 2.8 index points lower than last month’s figure, but still well above the 50-point mark indicating price increases. The six-month expectations index for sub-contractor labor increased 6.6 index points this month to 95.6, with respondents expecting labor costs to rise significantly by the year’s end in all regions of the U.S. and Canada.

Respondents continued to report material shortages in May, referencing longer lead times for metals and electric components, in particular.