Wire, PVC, Oil and Transportation –Cost Volatility: Magnitude & trends

Those supplying, installing and commissioning items such as electrical equipment are typically associated with wire, polyvinyl chloride (PVC), oil and transportation in some manner. Historically, contractors delivering this type of work operated in an environment with an expected price range and timeline, enabling prices to be sustained for project durations. Canadian construction continues to grapple with volatile resource prices (materials, transportation, etc.), the magnitude of which are unprecedented.

The extent of this cost volatility will be explored further in this paper, recognising that the cost of such uncertainty continues to be multi-factorial, multi-dimensional and leading to a change in modus operandi. The events leading to such cost volatility include the following, in isolation or combination:

• Pandemic-Related Issues: COVID-19 restrictions have led to supply chain issues such as reduced and delayed availability of materials, constraints to the supply chains and accompanying disruptions. These have resulted in significant increases in the prices of commodities such as those typically used in construction.

• Worldwide Events: For example, the Russia-Ukraine conflict has increased the prices of commodities. Russia is one of the leading producers of a great number of mineral commodities and oil. The conflict has had multiple impacts on the costs and availability of construction materials.

• Economic Drivers: Ongoing evolution of unpredictable economic cycles, impacted by the pandemic and worldwide events, directly affects interest rates and contributes to price increases, thereby causing inflationary pressures.

These issues, events and drivers have impacted the construction industry and led to unpredictable fluctuations within the Canadian market.

The Raw Materials Price Index (RMPI) measures price changes for raw materials purchased for further processing by manufacturers operating in Canada. In September 2022, RMPI was up 67.4 per cent compared with March 2020. Comparatively, there was a 16.7 per cent decline in March 2020 when compared with January 2018.

The Industrial Product Price Index (IPPI) measures price changes for major commodities sold by manufacturers operating in Canada. In September 2022, IPPI was up 27.8 per cent compared with March 2020. Comparatively, there was a 0.8 per cent increase in March 2020 when compared with January 2018.

Inflationary pressures in Canada rose sharply in 2022. The Consumer Price Index (CPI) rose 6.8 per cent on an annual average basis in 2022, whilst the inflation rate was 3.4 per cent in 2021 and 0.7 per cent in 2020.

These increases in the RMPI, IPPI and inflation reflect the impact of the rising costs of manufacturing, resources and transportation that contributed to pandemic-related issues, worldwide events and economic drivers.

Contractors bidding for long-term, fixed-price contracts are particularly vulnerable to fluctuations, even if they have taken and continue to take commercially reasonable steps to mitigate the consequences of the current economic situation, e.g., making financial/ commercial allowances for resource escalation.

The world is experiencing a disruption within the supply chain. For instance, companies supplying wire and cable have experienced ongoing delays from key PVC suppliers, resulting in a slowdown of production that has led to a pause in the manufacturing of specific products.

These events often require contractual or other relief to wire, PVC, oil and transportation, as set out below:

Copper or aluminum are primary components of wires. The price characteristics for copper and aluminium are shown in Chart 1 (Copper) and Chart 2 (Aluminium):

Copper

2018, Jan.: Pre-Pandemic

1. Nasdaq: 3.2134 USD/Pound(lbs)

2. Investing.com: 3.2145 USD/Pound(lbs)

2020, Mar.: Pandemic

1. Nasdaq: 2.3591 USD/Pound(lbs)

2. Investing.com: 2.3545 USD/Pound(lbs)

2022, Feb.: Pandemic/Russia-Ukraine Conflict

1. Nasdaq: 4.5066 USD/Pound(lbs)

2. Investing.com: 4.5056 USD/Pound(lbs)

2022, Dec.: Pandemic/Russia-Ukraine Conflict

1. Nasdaq: 3.8202 USD/Pound(lbs)

2. Investing.com: 3.8221 USD/Pound(lbs)

Aluminium

2018, Jan.: Pre-Pandemic

1. Markets Insider: 2,217.7727 USD/Ton

2. Investing.com: 2,216.9205 USD/Tonne

2020, Mar.: Pandemic

1. Markets Insider: 1,633.9486 USD/Ton

2. Investing.com: 1,633.5455 USD/Tonne

2022, Feb.: Pandemic/Russia-Ukraine Conflict

1. Markets Insider: 3,213.7625 USD/Ton

2. Investing.com: 3,215.7500 USD/Tonne

2022, Dec.: Pandemic/Russia-Ukraine Conflict

1. Markets Insider: 2,435.2100 USD/Ton

2. Investing.com: 2,434.6500 USD/Tonne

Chart 1: Copper Historical Price Graph. (Sources: Nasdaq and Investing.com)

Chart 2: Aluminium Historical Price Graph. (Sources: Markets Insider and Investing.com)

There were declines in the prices of copper and aluminum pre-pandemic. The pandemic, Russia-Ukraine conflict, and other economic factors dramatically increased prices, with a rise of more than 98.9 per cent for copper and more than 114.7 per cent for aluminum from March 2020 to March 2022. Since March 2022, these prices have followed the overall downward trend.

Oil

Oil provides raw materials for PVC and is a resource refined into transportation fuel. The price characteristics for Brent Oil are shown in Chart 3:

Brent Oil

2018, Jan.: Pre-Pandemic

1. Nasdaq: 69.0224 USD/BBL

2. Investing.com: 69.0786 USD/BBL

2020, Mar.: Pandemic

1. Nasdaq: 33.8932 USD/BBL

2. Investing.com: 33.7291 USD/BBL

2022, Feb.: Pandemic/Russia-Ukraine

Conflict

1. Nasdaq: 94.0489 USD/BBL

2. Investing.com: 94.1015 USD/BBL

2022, Dec.: Pandemic/Russia-Ukraine

Conflict

1. Nasdaq: 81.3414 USD/BBL

2. Investing.com: 81.6110 USD/BBL

There was a decline in the price of Brent Oil pre-pandemic. The pandemic, Russia-Ukraine conflict and other economic factors dramatically increased the price of Brent Oil, rising more than 247.1 per cent from March 2020 to June 2022. Since June 2022, the prices have been on a general downward trend. For the overall trend during the pandemic period, there was a significant price rise of more than 139.9 per cent, from March 2020 to December 2022.

PVC

The price characteristics of polyvinyl chloride are shown in Chart 4:

Polyvinyl chloride

2018, Jan.: Pre-Pandemic

• Statista: 921 USD/Metric Ton

2020, Mar.: Pandemic

• Statista: 889 USD/Metric Ton

2022 Jan. to Oct.: Pandemic/ Russia-Ukraine Conflict

• Statista: 1,182 USD/Metric Ton

There was a decline in the price of PVC pre-pandemic, but a sharp increase of 63.0 per cent from 2020 to 2021.

• Some stabilization in pricing volatility

• Multi-factorial events continue.

• Supply chain seeks ongoing relief.

Below are some indicators for transportation costs:

1. For-hire motor carrier freight services price index (FHMCFSPI - Truck Transportation): Establishments primarily engaged in the truck transportation of goods. These establishments may carry general freight or specialized freight.

2. Freight Rail Services Price Index (FRSPI): Mainline freight rail industry in Canada. The industry consists of establishments primarily engaged in operating railways for the transport of goods over a mainline rail network.

3. Couriers and Messengers Price Index (CMSPI): Courier and messenger services provided by long- and short-distance delivery companies to Canada-based business clients.

4. Brent Oil: Refineries turn crude oil into transportation fuels such as gasoline, diesel and aviation fuels.

The Transportation Index is shown in Chart 5 below:

Transportation Index

2018, Jan.: Pre-Pandemic

1. Statistics Canada: 105.3 (FHMCFSPI-Truck Transportation)

2. Statistics Canada: 95.0 (FRSPI)

3. Statistics Canada: 95.6 (CMSPI)

2020, Mar.: Pandemic

1. Statistics Canada: 112.9 (FHMCFSPI-Truck Transportation)

2. Statistics Canada: 108.5 (FRSPI)

3. Statistics Canada: 102.2 (CMSPI)

2022, Feb.: Pandemic/RussiaUkraine Conflict

1 Statistics Canada: 129.4 (FHMCFSPI-Truck Transportation)

2. Statistics Canada: 113.9 (FRSPI)

3. Statistics Canada: 117.0 (CMSPI)

2022, Sep.: Pandemic/RussiaUkraine Conflict

1. Statistics Canada: 144.9 (FHMCFSPI-Truck Transportation)

2. Statistics Canada: 125.9 (FRSPI)

3. Statistics Canada: 130.4 (CMSPI)

Chart 5: Transportation Historical Index Graph. (Source: Statistics Canada)

Transportation indices above indicate a continual growth of transportation across the board. Pre-pandemic increases ranged between 6.9 per cent and 14.2 per cent from January 2018 to March 2020, compared with increases ranging between 16.0 per cent and 28.3 per cent from March 2020 to September 2022. As previously noted, there was an increase in oil prices from March 2020 to June 2022.

Unexpected market fluctuations due to the pandemic, worldwide events and complex economic issues have resulted in volatile material pricing and ongoing supply chain disruptions. Particularly, significant increases were observed in the prices of construction materials from 2020 to 2021. Due to these unprecedented and unforeseen events, contractors and subcontractors are increasingly being left in untenable situations.

Although the Russia-Ukraine conflict continues to restrain economic activity, there appears to be a moderation in the rising tide of material costs in 2022, and material prices are anticipated to gradually decrease over a projection horizon (timeline unknown) from their elevated levels.

Uncertainties from the ongoing Russia-Ukraine conflict and other economic drivers have played and continue to play a vital role in the construction industry. Restoring price stability could be achieved sooner if the conflict and economic uncertainties dissipate faster. The impacts on project viability and performance are perpetual rather than temporary. Skillful management of cost volatility and price uncertainty is acquiring an appreciation.

Marc Oosthuizen

BTech (QS), CEC Senior Contracts & Commercial Specialist Lakeland Consulting Inc.

Marc Oosthuizen has expertise in Commercial and Contracts management having worked extensively on projects in South Africa, Zambia, the Caribbean and Canada. Marc has assisted clients in addressing complex disputes whilst being part of a solution-focused team.

Karen Cheung

Bsc(Surv), PQS, MRICS, MCInstCES

Contracts & Commercial Specialist

Lakeland Consulting Inc

Karen Cheung is a Professional Quantity Surveyor and Chartered Surveyor with experience of working on projects in Hong Kong and, recently, in Canada. She has been involved in project planning/design, pre-contract, delivery and post-construction phases.