Alex Carrick: Commodities and Construction are redefining the Canadian Economy

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We’re all aware of construction activity. It’s visible evidence of dynamic growth in our cities and neighbourhoods.

We witness it on our drives to work, school and entertainment. Cranes dot the landscape lifting steel and concrete to erect new office and residential towers.
Construction activity is also a source of frustration when roadwork or bridge repairs cause us to be late for an appointment. The same holds true when a home renovation project drags on much longer than expected. This is often more than counter-balanced when the final result exceeds all expectations.

What most people are not aware of is the growing importance of construction to the overall Canadian economy.

In 2000, there were 2.8 manufacturing jobs in the country for every one construction job. In January 2011, the ratio had dropped to 1.5 to one. Over the intervening period, the number of manufacturing jobs fell by more than one-fifth while the number of onsite hardhat jobs increased by nearly 50 per cent.
The reasons for the decline in production-line workers have been well-documented. There has been the outsourcing of work to countries where labour is cheaper. Nations in the Far East along the Pacific Rim immediately come to mind.

In domestic markets, there have been quality improvements for environmental and safety reasons that have meant fewer big ticket items need to be made. The auto industry stands out. The average lifetime of a motor vehicle has been greatly extended, cutting down on demand.
Automation and robotics have played obvious roles as well.

Over the first decade of this century, construction employment rose rapidly for three primary reasons. Residential construction was unusually strong in the 2002 to 2008 period. That was a function of a vibrant economy that lasted until the ceiling caved in due to the U.S. sub-prime mortgage collapse and the bankruptcy of Lehman Brothers.

There followed two years of stimulus infrastructure projects provided by all three levels of government in 2009 and 2010. Neither of these two factors will be guaranteed mainstays for construction activity levels in the next decade.

However, the third major source of construction jobs in the zeros (i.e., 2000 to 2010) will continue to be dominant in the years ahead, projects tied to hot commodities markets.

Many of the largest Canadian construction projects over the last 10 years were resource-based. They ranged from oilsands mega developments and natural gas pipelines through diamond and potash mines, continuing on to supersized hydroelectric projects.

In the late-2008 through summer-2009 recession, international commodity prices eased for a time. But emerging market demands fueled by growing middle classes and large public works projects have shifted fossil fuels and metals and minerals prices higher again, not to mention food prices.

The price of copper is setting a new record high. Nickel and aluminum prices have moved up to levels not seen in two years. China’s nuclear power expansion program has provided a boost to uranium prices. Prospects for diamond prices have improved to the point where DeBeers is bringing forward a new major mine in Northwest Territories. The list of raw materials projects goes on and on.

For the construction industry, commodities play an often conflicting dual role. Commodities are the basic materials from which all building products are formed. One need only consider the copper that goes into plumbing supplies, the oil and natural gas used in making plastic pipe and vinyl and the aluminum rolled and fabricated into ductwork.

Increases in commodity prices therefore have an accompanying upward impact on construction material costs. But at the same time, higher commodity prices are an incentive for major owners in the resource sector to allocate money for major capital projects.

The impact of the expanding world market for commodities can only be positive for expansions of Canadian raw materials production, meaning increased construction activity.

The manufacturing vs. construction jobs relationship—with the former falling and the latter climbing—will moderate in the years ahead. Some manufacturing jobs will be repatriated to North America as a nascent labour movement gains firmer hold in China, putting upward pressure on costs.

Nevertheless, in broad strokes the trend will continue, assured in part by the proliferation of commodities exchanges in financial markets. There is greater acceptance of commodities as an asset class with a host of attractive possibilities for investors to hold.

In the future, whenever there is a shift in investment strategy from security in the form of bonds and real estate towards greater risk as implied by equities, currencies and commodities, there will also be higher prices in a segment of the economy that will warrant moving construction equipment and skilled trades people into position. 

Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit www.dailycommercialnews.com/features/economy. Mr. Carrick’s lifestyle blog is at www.alexcarrick.com and he would welcome a follow on Twitter (Alex_Carrick) or Facebook. 

www.alexcarrick.com

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