Engineering and construction materials prices fall for first time in 40 months on coronavirus impacts, IHS Markit says

Construction costs increased once again in March, according to IHS Markit (NYSE: INFO) and the Procurement Executives Group (PEG). The current headline IHS Markit PEG Engineering and Construction Cost Index registered 50.2, a figure barely above the neutral mark. The last time the headline index registered an almost flat pricing was in November 2016. After 40 months, the materials and equipment index came in at 49.4, indicating falling prices. The sub-contractor labor index showed continued price increases, with an index reading of 52.0.

Survey respondents reported falling prices for five out of the 12 components within the materials and equipment sub-index. These included ocean freight (Asia to U.S. and Europe to U.S.), fabricated structural steel, carbon steel pipe, copper-based wire and cable. Prices for five categories rose while prices for two categories (alloy steel pipe and exchangers) remained the same. Index figures for all categories dropped relative to February, indicating that a greater proportion of the respondents are observing lower prices. The sharpest drops were reported for ocean freight.

“Ocean freight has taken a notable hit with the onset of coronavirus,” said Deni Koenhemsi, senior economist with IHS Markit. “As China tried to contain COVID-19, industrial production contracted substantially, and the transportation of goods nearly came to a halt. In the first two months of 2020, U.S. imports from Asia dropped 6.2 percent year-over-year, and imports from China were down 15.5 percent. Although the number of blank sailings is beginning to taper off-meaning we will see higher imports from China to United States-the rapid spread of the virus in Europe and North America could cause the downward trend to continue.”

The sub-index for current subcontractor labor costs came in at 52.0 for March. For the United States, labor cost remained flat in the Northeast, Midwest and West, but increased in the South. For Canada, the labor cost index was flat in western Canada but rose for eastern Canada.

The six-month headline expectations for future construction costs index reflected increasing prices for the 43^rd consecutive month, registering 58.2, a sharp decline from February’s reading of 67.6. The six-month materials and equipment expectations index came in at 57.6 this month, down from 68.0 last month. Prices for all materials, equipment and freight are expected to rise with the exception of carbon steel pipe and exchangers, which are expected to see flat pricing. Expectations for sub-contractor labor slipped to 59.7 in March. All regions of the U.S. are expected to see higher labor costs; labor costs in Canada are expected to stay flat.

In the survey comments, respondents noted lower demand conditions due to the coronavirus.