25 April 2008
The construction sector in North America has undergone phenomenal growth over the last few years and for some sectors the expansion looks set to continue through 2006. Increases in non-residential construction in both the US and Canada are expected this year but the gains are likely to be tempered by a downturn in residential construction.
According to the latest figures issued by the Census Bureau, the value of construction put in place in the US in January rose to record levels for the seventh month in succession. The seasonally adjusted figure of US$ 1.16 trillion represents a +0.2% rise from December 2005 and a +7.4% rise over the level recorded in January 2005. The prospects for 2006 look good too.
“The state of the construction industry in the US is generally good at the moment and non-residential is particularly strong,” said Associated General Contractors of America (AGC) chief economist Ken Simonson. “During 2005 there was strong growth in the retail sector through construction of new shopping malls and 'big box' outlets which helped push spending in non-residential construction up +5%. Investment in the public sector also rose in 2005, with growth in the sewerage, waste and roads industries helping to grow the sector +8%. Residential construction also grew +11% last year.
“I am expecting the hotel sector and construction on freight transportation projects to pick up this year. Non-residential should grow by another +8 to +10% but residential – which is significantly bigger than non-residential – is expected to decline by between -3 and -5% in 2006. This slump will have an impact on overall construction growth this year and bring it down to between 0 and +2%.”
Mr Simonson is not alone in predicting the growth in non-residential construction to continue through 2006 and into 2007. The latest Architecture Billings Index for non residential construction from the American Institute of Architects (AIA) also showed positive growth in January for the 12th consecutive month. The rise is also the 14th in the last 15 months. According to the AIA, there is usually at least a six to nine month time lag between architecture billings and construction spending which means that there is plenty of potential for growth in 2006 through to early 2007.
Highways and hurricanes
Federal funding for US roads has now been secured until 2009 following agreement of the Safe, Accountable, Flexible and Efficient Transport Equity Act: A Legacy for Users (SAFE-TEA-LU). This Bill, the successor to Transport Equity Act for the 21st century (TEA-21), was signed in August last year. “The fruits of this US$ 285.6 billion funding are expected to be seen on the ground during 2006,” said Mr Simonson. “But there is concern that rising highway construction costs may result in the money drying up well before 2009.”
Association of Equipment Manufacturers' (AEM) chairman Charles Stamp added, “There is also the risk that individual states may not have the ability to match the modest federal increase, which may limit the number of new contracts issued and slow down business. Also with higher oil and petrol prices, some are calling for money to be diverted away from highway needs into general taxpayer relief.”
The clean up in the wake of hurricanes Katrina and Ivan, which struck the US's southern states last year, is also likely to boost construction in the US during 2006. According to the Portland Cement Association's chief economist Ed Sullivan, while some reconstruction work has already started the main rebuilding work will get underway in the second half of this year and is likely to be spread over five years.
Canada's construction industry was valued at CA$ 66.6 billion (US$ 58.5 billion) in 2005, up +3.9% on 2004. “For the past few years residential construction has been the strongest sector with growth rates of up to +6% but last year non-residential outpaced residential,” said Canadian Construction Association executive director Jeff Morrison. “Residential grew by +1.1% in 2005, compared to around 4% for non-residential and we're expecting the trend to continue in 2006.
“Investment in energy related projects is probably having the biggest impact on non-residential growth. There is around CA$ 100 billion (US$ 88 billion) of construction work underway or planned for tar sands in Northern Alberta, which are believed to contain more oil than Saudi Arabia. There are also several hydroelectric schemes being built in Quebec and some offshore oil projects on the East Coast. Also, Vancouver will be hosting the 2010 Winter Olympics, so we are expecting a construction boom to develop there in the next few years.”
The AEM's latest Outlook Report suggests that the strong growth in construction equipment sector in North America in 2005 will be followed by further growth this year. According to the report, construction equipment growth in the US reached +13.9% in 2005 and is expected to be followed a further +9.3% increase in 2006. Sales in Canada grew by +13% last year and are predicted to gain another +8% this year.
“The North American economy has been robust and equipment sales very strong, with 2004 and 2005 being among the construction equipment industry's best in recent years,” said Mr Stamp. “Business volume remains solid but our members collectively do not believe that this level will be sustained in the long term.”
The rising price and shortages of some construction materials, including steel and cement, have been a significant issue in the North American market for the last few years.
“Steel prices this year should be similar to the average price in 2005, although they will not necessarily be stable. High oil prices remain an issue for construction, particularly for the roads market, but I am not expected any further significant rises,” said Mr Simonson.
“Cement and concrete prices will be more of a problem during 2006. The cost of concrete rose by more the +10% in 2005 and similar rises are likely this year due to cement shortages. We need more cement plants but no one seems to want one built near them, so supply is not keeping track with demand.”
The US has cut the tariffs imposed on imports of Mexican cement from US$ 26.28 per tonne down to US$ 3 per tonne from this month and the tariff will be dropped completely in 2009. The aim is to help ease the US's cement shortages but imports will still be restricted to 3 million tonnes per year.
According to Mr Sullivan, this will only ease problems on a regional basis and will not resolve the issue nationally. “The Mexican cement industry has the capacity to solve the current cement supply problems in the US but the potential is limited by lack of capacity to increase imports through either rail or water,” said Mr Sullivan.
“Around 30 states experienced 'tight' supplies last summer. The problem tends to dissipate over the winter but is likely to occur again this year due to lack of reserves. Cement plants used to hold an average of 19 days of supplies in stock but that has now dropped to just six due to continued high demand over the last few years. The capacity to produce another 11.5 million tonnes per year needs to be added by 2010.”
According to Mr Morrison, the Canadian market has also suffered from cement shortages in the past but not to the same extent as the US and supply is now keeping pace with demand. “Steel supply also seems to have settled down but the rising cost of materials has pushed up the overall cost of construction,” he said.
“Probably the most visible sign of the increasing costs at the moment is the current cost overrun on the 2010 Vancouver Olympics – however, a high proportion of the rise is down to increased labour costs. The supply of skilled labour, particularly in Western Canada, is more of a significant issue for our construction industry at the moment than the supply of materials.”
2007 and beyond
Prospects for 2006 look promising, but what is the outlook for next few years?
Mr Simonson is confident that it will be more of the same, “We're anticipating that the US construction industry will remain strong in 2006 and beyond – I don't foresee a recession on the horizon at the moment.” However, Mr Sullivan is more cautious. “I believe that there is a one in five chance that there will be a recession by the end of 2007 due to imbalances developing in the economy.”
With regards to the prospects for Canada, Mr Morrison said that he is confident that the construction market place will be very healthy for at least the next two years. “Residential construction should slowly start to pick up again from 2008 which will boost overall construction,” he said.