Cost Volatility
Wire, PVC, Oil and Transportation – Cost Volatility: Magnitude & trends Context & Background
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: • P andemic-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. • W orldwide 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. • E conomic 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.
26 CONSTRUCTION ECONOMIST | SPRING 2023 | www.ciqs.org
Significances of Events
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.
Impacts & Implication
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: