Drop in Oil Prices Leads to Easing of Materials/Equipment Components, Cost Index Finds
October 30, 2014Current construction costs increased for the 33rd consecutive month in October, according to IHS and the Procurement Executives Group (PEG). The headline current IHS PEG Engineering and Construction Cost Index (ECCI) eased to 54.5% in October, down from 57.8% in September.
The materials/equipment component of the ECCI registered 53.0 in October, down 6.0% from last month, but still showing higher prices on balance. However, there was a noticeable change in sentiment in October, with all 12 components easing relative to the robust September reading. Four components showed falling prices in October, the most since December 2013, with the weakest reading coming in the copper-based wire and cable index.
“The weakness in commodity prices since the start of September reflects a general softness in demand and, in particular, the lackluster performance of the big emerging markets, which have been the source of demand growth for the past decade,” says John Mothersole, research director for IHS Pricing and Purchasing Service. “These declines are just starting to push downstream into fabricated material and equipment prices with a further easing of the materials/equipment ECCI quite likely in the months ahead.“
The current subcontractor labor index strengthened to 58% in October, up from 54.9% in September. Regions that experienced elevated readings included Western Canada and the U.S. South and Northeast. Respondents again expressed concern over tightness in skilled labor markets in the Gulf Coast and Alberta regions, specifically in reference to qualified welders.
The six-month headline expectations index eased to 70.8% in October, down 1.6% from last month. The sub-indexes were split, with the materials/equipment portion downshifting and the subcontractor labor component strengthening. The materials/equipment portion registered 68.3%, with readings softening across the board, albeit still well above the neutral threshold and thus indicating higher expected prices. The regional detail conveyed strong expectations in the U.S. South for projects in the hydrocarbon sector to accelerate during 2015.
The ECCI is based on data independently obtained and compiled by IHS from the procurement executives of leading engineering, procurement and construction firms. The headline index tracks industry-specific trends and variations, identifying market-turning points for key projects, and is intended to act as a leading indicator for wage and material inflation specific to this industry.
Each survey response is weighted equally for every $2 billion in spending in North America. Respondents are asked whether prices—either actual paid transactions or company-informed transactions—during the current month for individual materials, equipment, and regional subcontractor rates, were higher, lower or the same as the prior month.
Respondents are then asked for their six-month pricing expectations among these same subcategories. The results are compiled into diffusion indexes, in which a reading greater than 50 represents upward pricing strength and a reading below 50 represents downward pricing strength.
