Cast-in-Place Concrete:

A Scan of Economic and Competitive Conditions

Prism Economics and Analysis December 2004

Prism Economics and Analysis Suite 404 160 Eglinton Avenue East Toronto, ON M4P 3B5 www.prismeconomics.com Tel: (416)-484-6996 Fax: (416)-484-4147 John O’Grady Project Director ogrady@prismeconomics.com Direct Telephone: (416)-652-0456 Direct Fax: (416)-652-3083 www.ogrady.on.ca

Page No. 1

Cast-in-Place Concrete: A Review of Economic and Competitive Conditions

A. Executive Summary 3

B. Construction Outlook: National, Ontario and GTA 7

C. Portland Cement and Ready-Mix Concrete Shipments 13

D. Concrete Intensity of Construction 14

E. Prices and Costs 16

F. Relative Construction Costs 22

G. Implications for the Cast-in-Place Industry 24

Page No. 2

Page No. 3

Cast-in-Place Concrete: A Scan of Economic and Competitive Conditions

A. Executive Summary

Outlook

• National Outlook: Both CanaData and the Canadian Construction Association (CCA) anticipate significant and continued growth in real construction spending1 from 2005 to 2007. These forecasts, which are consistent with the consensus outlook, are more optimistic than the Canadian projections of the Portland Cement Association, which anticipates a marginal decline in construction spending.

• Ontario Outlook: CanaData projects that real construction spending in Ontario will increase by 8.8% from 2005 to 2007. The CCA projects Ontario construction growth at 9.6% over the same period. Recent building permit data are broadly consistent with these forecasts.

• Sector Outlook (Ontario): In the ICI sector, industrial construction is expected to weaken. However, based on the CanaData and CCA forecasts, this decline will be more than offset by strong growth in commercial construction and moderate growth in institutional construction. High-rise residential construction is projected by CMHC to increase marginally in 2005 and then taper off by approximately 5%-6% in 2006.

• In Ontario, and in the GTA in particular, the demand in 2005 for cast-in-place concrete should be equal to 2004, if not greater.

• The anticipated increase in ICI spending will create new market opportunities for the cast-in-place concrete sector. However, many of the buildings encompassed by this increased spending are structures for which structural steel is often a competitive alternative to concrete for above-grade

1 “real” spending is net of inflation.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

$199

7 M

illio

ns

Civil

ICI

Resient

Construction Spending, Ontario $ 1997 (millions) 1995 – 2004: Statistics Canada 2005 – 2006: projected by CanaData CanaData, Annual Construction Forecast (2004-2006 Edition)

Page No. 4

structural supports. For the union sector, the commercial and institutional segments of the ICI sector are highly competitive and may require additional strategies to achieve a satisfactory market share.

Concrete Intensiveness of Construction:

• Trend analysis indicates an overall decline in the concrete intensity of construction of about 1.3% per year.

• The overall trend in the concrete intensiveness of construction mixes three factors: changes in technology, changes in the sectoral composition of construction, and changes in the choice of materials.

• One of the key factors is the use of structural steel or pre-cast for above grade structural members in place of poured concrete. In 1-2 story buildings, structural steel has effectively displaced concrete. These structures predominate in the industrial sector and also represent a sizeable proportion of commercial construction, especially in the retail industry.

Materials Prices

• Over the past 15 years, ready-mix prices in Ontario have been comparatively stable. Since 1991, 75% of the time, prices have been within 3% of the average for the period 1991-2004. This is in sharp contrast with other building materials and commodities which are subject to much sharper price swings. In particular, ready-mix prices in Ontario have been much less volatile than in other parts of Canada

• Asphalt: Since 1993, there has been a strong upward trend in the price of asphalt. Over the past five years, the price of asphalt, on a national average basis, has increased by over 30%, compared to an increase of approximately 10% in the price of ready-mix. Given the outlook for petroleum prices, this comparative advantage is likely to further improve over the next several years.

• Structural Steel: From 1992-2005, the price of ready-mix increased by an average of 1.6% per year. By contrast, the price of structural steel increased by an average of 3.4% per year. In 2005, the

60.0

65.0

70.0

75.0

80.0

85.0

90.0

1997 1998 1999 2000 2001 2002 2003Met

ric T

onne

s of

Por

tland

Cem

ent p

er $

1,00

0 ($

1997

) of C

onst

ruct

ion

Spen

ding

Trend Line

Portland Cement Consumption in Metric Tonnes per $1 million (in $1997) of Construction Spending 1997 - 2004 Portland Cement Association Statistics Canada

80.0

90.0

100.0

110.0

120.0

2000 2001 2002 2003 2004

Ready-MixStructural Steel

National Price of Ready-Mix and Structural Steel Index: 1997 = 100 Statistics Canada

Page No. 5

selling price of structural steel increased sharply, rising by more than 15% over prices at the beginning of 2004.

Estimators’ Costs:

• One of the most commonly used Canadian sources of estimators’ costs is the Hanscomb Yardsticks for Costing, published by R. S. Means. This costing guide does not take account of local cost conditions or local productivity differences.

• Estimators’ costs for above grade work increased by 66.2% for multi-use forming and 60.8% for single use forming. By contrast, estimators’ costs for structural steel work increased by only 20.1%, on average.

• If contractors’ quoted costs differed significantly from this pattern, the industry would have a serious issue with the procedures used to estimate costs in the Hanscomb publication.

Trade Work Costs:

• The costs of structural trade work, which includes the cast-in-place industry increased by substantially more than the costs of architectural trade work (i.e., interior finishing and decorating), mechanical trade work (plumbing, HVAC, other pipe work), and electrical trade work.

• Over the five years ending in 2004, structural trade work increased in cost in the Toronto market by approximately 40.8%.

Relative Costs by Building Type:

• Over the past 15 years, comparisons by building type indicate a modest decline in the cost attractiveness of concrete across a broad range of structures. This is consistent with the evidence of a decline in the concrete intensiveness of ICI construction.

• Concrete’s cost advantage increases with both height and square footage. In low rise structures, and especially in single story structures, structural steel has a clear cost advantage.

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

1 2 3 4

Cos

t Adv

anta

ge (+

) / D

isad

vant

age

(-)

4 to 7 Stories

12 to 24 Stories

1985 1991 1997 2003

Cost Advantage (+) or Disadvantage (-) Concrete vs. Structural Steel Apartment Buildings R. S. Means, Square Foot Costs

Page No. 6

• Parking garages represent the only building type in which concrete’s advantage is decisive, regardless of size and height. In all other building types, where concrete has an advantage, it is moderate and could be eroded by changes in the cost of materials, installation costs, or technology which enhances the engineering advantages of structural steel or pre-cast.

Implications for the Cast-in-Place Industry

1. The medium-term outlook for the cast-in place industry is positive, but less positive than for the construction industry as a whole.

2. The long-run trend has been towards less concrete intensiveness in construction.

3. Recent movements in materials prices have favoured concrete.

4. Estimators’ costing manuals do not present concrete in a favourable light across a

range of low to medium height structures. The relative cost trend depicted by the cost manuals is consistent with the trend towards less concrete intensiveness in construction.

5. In light of its competitive environment, the industry faces significant productivity,

cost and marketing challenges.

Page No. 7

B. Construction Outlook: National, Ontario and the GTA

Both CanaData and the Canadian Construction Association (whose forecasts are provided by Informetrica Ltd.) anticipate significant and continued growth in real construction spending over the next three years.2 These projections are notably more optimistic than the Canadian forecast of the Portland Cement Association. They are also much more optimistic than the forecasts of the Bank of Montreal and TD Bank and moderately more optimistic than the forecast of Scotiabank.3

National Forecasts of Changes in Real Construction Spending

Ontario Outlook:

CanaData publishes the only detailed forecast of the construction outlook at the regional level. In its most recent published forecast, CanaData projects that over the three years 2005 to 2007, construction spending in Ontario will increase by 8.8% in real terms.4 This is a moderately more

2 “Real” spending nets out the effect of inflation. 3 Of the major banks, only BMO, Scotiabank and TD Bank publish separate forecasts for construction. 4 CanaData / Reed Construction Information Annual Construction Forecast (2005-2007 Edition)

2005 2006 2007 Three Years

CanaData 2.8% 3.4% 3.7% 9.9%

Canadian Construction Association 4.1% 3.0% 1.6% 8.7%

Portland Cement Association Canadian Forecast 0.2% -0.3% 0.0% -0.1%

Scotiabank 2.0% 1.9%

Bank of Montreal -0.2% 1.6%

TD Bank 0.7% 1.0%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

$199

7 M

illio

ns

Civi

ICI

Res

Forecast

Construction Spending, Ontario $ 1997 (millions) 1995 – 2004: Statistics Canada 2005 – 2006: projected by CanaData

Sector

Projected Growth over Three Years

(2005-2007)

Residential 2.5%

ICI 20.5%

Civil 12.2%

Total 8.8%

based on CanaData Forecast

Page No. 8

conservative projection than the forecast released by the Canadian Construction Association in November 2004. The CCA projects real construction spending in Ontario to increase to 9.6% over the same period. Recent building permit data are broadly consistent with these forecasts. In 2004, the value of building permits issued in Ontario was 2.9% above 2003. Building permits tend to lead actual construction activity by 12-18 months.

In the CanaData projection, the ICI sector will account for more than half of the anticipated growth in construction spending. Over the period 2005 to 2007, real spending on ICI construction is projected by CanaData to increase by 20.5%. By contrast, new residential construction will increase by only 2.5% over the same three years.

Recent building permit data, however, suggest that residential construction may be stronger than anticipated, while ICI construction may be weaker. Permits issued in 2004 were up 6.6% for residential projects, but down 3.0% for non-residential. In the apartment sector, which is of central importance to the cast-in-place concrete industry, CMHC anticipates that, in the GTA, starts in 2005 will be approximately the same as 2004.

The Ontario Construction Secretariat’s 2005 forecast for Ontario anticipates non-residential construction (ICI + civil) increasing, in real terms, by 3.1% in 2005 and 1.1% in 2006.

A Closer Look at the ICI Market Place:

The ICI market place comprises three sectors: industrial, commercial and institutional. There are distinct drivers behind construction demand in each of these sectors.

Industrial Sector: In the industrial sector, four factors are relevant:

capacity utilization rates, output prices, the outlook for the US economy, and the Canadian dollar.

Of these four drivers, the negative factor is the appreciation of the Canadian dollar.

75

80

85

90

1987

1988 98

919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

04

Per c

ent

Capacity Utilization – All Industries, Canada 1990(i)– 2004(iv): Statistics Canada

100.0

102.0

104.0

106.0

108.0

110.0

112.0

2000

2001

2002

2003

2004

1997

=100

Industry Product Price Index, Canada 2000 – 2004 Three-Month Moving Averages Statistics Canada

Page No. 9

For industry, as a whole, current levels of capacity utilization are at peak levels, in comparison with the past fifteen years. For the manufacturing sector, capacity utilization at the end of 2004 was 86%. In the transportation equipment industry (i.e., auto), capacity utilization at the end of 2004 was over 90%. In the computer and electronics industry, there is evidence of a significant recovery in capacity utilization which heralds the likelihood of renewed investment in that industry in new production capacity. This is particularly important for the GTA and the Ottawa region which are the centres for that industry.

Selected Indicators of Capacity Utilization – Canada 2004 (Third Quarter)

After declining in 2003, industry selling prices increased by 6.6% from January to September of 2004, before declining moderately in the last four months of the year. Overall, industry selling prices were up over 4% in 2004. This reflected the generally tightening of capacity in most industries and the growing expansion of the US economy.

For almost all industries, the plus factors currently outweigh the appreciation of the Canadian dollar.

Commercial Sector:

CanaData projects that in 2005-2007, commercial construction will increase by 27.7% in Ontario. Based on 11 months data, building permits in 2004 for commercial construction should increase more than 10% over 2003. Building permit data indicate that major projects will account for over 80% of this construction. It should be noted that for many of these projects, such as warehouses

Sector Capacity Utilization All Industries 85.7% Manufacturing 88.5% Plastic Products 92.1% Computers and Electronics 85.1% Electrical and Appliance 79.0% Transportation 90.9%

Type of Commercial Project Share of Total

Trade and services (chiefly retail) 27%

Office buildings 24%

Minor commercial projects 15%

Recreation 12%

Warehouses 11%

Hotels, restaurants 7%

Service stations 2%

Laboratories 2%

100%

Share of Various Types of Projects in Overall Commercial Sector Construction

Based on Building Permits, 2004

$0.000

$0.200

$0.400

$0.600

$0.800

$1.000

$1.200

$1.400

$1.600

1997

1998

1999

2000

2001

2002

2003

2004

$ B

illio

ns ($

1997

)

Recent Trend Line

ICI Construction Spending – Toronto 1997 – 2004 , Quarterly $ Billions ($1997)

Statistics Canada

Page No. 10

and ‘big box stores’, structural steel often has a competitive advantage for above grade structural members. Nevertheless, slab work on many of these projects will generate significant work.

For the union sector, the importance of commercial projects over the next 3 years raises important competitive issues, over and above the more general considerations on the economic competitiveness of cast-in-place concrete. Commercial projects have been an area of notable competitive difficulty for the union sector.

Institutional Sector (Public Sector):

Public sector building construction is projected by CanaData to increase by 6% over the next three years. Based on 2004 building permit data, approximately 50% of public sector building construction will be in the education sector. The health care sector will account for approximately 20%.

In recent years, approximately half of the province’s ICI construction has been in the GTA. In 2004, the GTA’s share of ICI construction spending ranged from 44% of institutional construction to 51% of industrial and commercial construction.

In the Toronto area, ICI construction spending declined from approximately the third quarter of 1998 through to the middle of 2002. Since the summer of 2002, ICI construction has increased by approximately 18%. The favourable provincial outlook for the ICI sector will be reflected in the GTA.

A Closer Look at the Residential Market Place:

Between 2000 and 2004, there was a province-wide increase in housing starts from 20,434 in 2000 to 37,570 in 2003, followed by a modest decline to 36,185 in 2004. CMHC is projecting total starts of 35,500 in 2005 and 34,000 in 2006. More importantly for the cast-in-place concrete industry, there was a shift in the composition of starts from low-rise to high-rise. On a province-wide basis, the high-rise share of starts increased from 41% in 2000 to 50% in 2004. The number of apartment units constructed (measured by starts) increased form 12,421 in 2000 to 18,189 in 2004.

10,114

13,503

10,288

15,314

13,640

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2000 2001 2002 2003 2004

Star

ts

Starts - Apartments – Toronto 2000 - 2004 CMHC

Page No. 11

The shift to high-rise was particularly marked in the GTA. In 2000, there were 10,114 high rise starts in the GTA. High-rise starts accounted for 26% of total GTA starts. In 2004, the number of high-rise starts increased to 13,640 (down from 15,314 the year prior). High-rise represented 32% of total starts.

CMHC projects that there will be approximately 12,500 high-rise starts in 2005. This is a fall-off of about 8%. Permit data suggest that starts in 2005 may be somewhat higher. In 2004, permits were issued for high-rise projects totalling 12,659 units. This was almost the same number of units as was approved for construction in 2003 (12,841). Developers may elect not to proceed with construction on approved units. However, on the basis of building permits, 2005 is likely to see high-rise construction approximately on par with 2004.

High Rise Starts - Ontario and GTA

(CMHC)

A less optimistic picture is offered by the Scotiabank Group. In their April 2004 commentary on the construction industry, Scotiabank advised that, on a national basis, rising vacancy rates and falling rents indicated an over-supply of rental units and a consequent weakening of demand for investor-owned condos. Apartment vacancy rates in Toronto are currently at 4.3% (October 2004). This is up from 3.8% a year earlier. CMHC estimates that rents have dropped by about 2%, as a

Apartment Starts (Units)

Ontario GTA

2000 12,421 10,114

2001 16,275 13,503

2002 13,748 10,288

2003 19,000 15,314

2004 18,189 13,640

2005 (f) 18,500 12,500

2006 (f) 17,500 n/a

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2000 2001 2002 2003 2004

Perm

its -

No.

of A

part

men

t Uni

ts

Building Permits - Apartments – Toronto 12 Month Moving Total 2000 - 2004 Statistics Canada

Vacancy Rate

Average Rent (Two Bedroom)

2000 0.6% $979

2001 0.9% $1,027

2002 2.5% $1,047

2003 3.8% $1,040

2004 f 4.5% $1,019 Toronto – Apartment Vacancy Rate and Average Rent CMHC, Toronto Housing Market Outlook (Fall 2004)

Page No. 12

result of the increment to supply.5 These signs of over-supply may lead some developers to defer construction of approved developments.

Assessment of Forecasts:

Construction spending is an integral component of capital spending. As such, construction spending shares the same economic characteristics of other types of investment spending. Construction spending is strongly influenced by expectations which are subject to abrupt upswings and equally abrupt downturns. There are no wholly reliable economic models for forecasting changes in investment spending.

A key difference in forecasts is how they balance the negative effect of the high dollar on manufactured exports and tourism with the positive effect of higher resource prices and the upturn of the US economy.

The pessimistic forecasts anticipate a deterioration in Canada’s export performance. This downturn will cause a deferral or cancellation of investment decisions, including construction projects, in the industrial sector. The effects of the downturn in industrial investment will permeate through the economy. As a result, commercial and public sector construction spending will also taper off. Rising interest rates in the US will prompt higher rates in Canada. The resulting increase in mortgage rates will cause the boom in residential construction to taper off. For construction, the net effect will be a considerable slowing down, as new projects are deferred.

The more optimistic forecasts expect that the upturn in the US economy will largely offset the increase in the Canadian dollar. Net exports will decline, but the decline will not be severe. Industrial investment will continue apace, including construction investment. The high dollar also will allow continued low interest rates which will support the residential sector, though perhaps at a somewhat reduced pace. Overall, economic growth will continue. Construction activity will carry on at levels approximately the same as we have witnessed in the last 2-3 years, though perhaps with some changes in composition .

5 tabulated by Toronto Real Estate Board; reported by CMHC, Toronto – Housing Market Outlook (Fall

2004)

2004 2005 2006

CIBC 2.7% 2.6% 3.1% TD 2.6% 2.9% 3.4% Royal Bank 2.7% 3.0% 3.2% Scotia Bank 2.7% 2.5% 2.4% Bank of Montreal 2.7% 2.7% 3.1% Average 2.7% 2.7% 3.0% Major Banks’ Forecasts of Real Growth in GDP (Canada)

Page No. 13

Thus far, the optimistic forecasts have proven to be the better founded: The consensus outlook is that the Canadian economy will continue to expand, although its rate of growth will be somewhat lower than we have seen in previous years. The consensus, as reported by the Economist magazine, is for growth of be around 2.7% in 2005 and 3.0% in 2006. At these levels of overall growth, it is unlikely that demand for construction will turn down.

Implications for the Cast-in-Place Concrete Industry:

1. Informed sources differ on their outlook for the construction industry. Nevertheless, the balance of current evidence favours an optimistic outlook, although the risks to that outlook have increased.

2. In Ontario, and in the GTA in particular, the demand in 2005 for cast-in-place concrete should be equal to 2004, if not greater. Demand will be supported by an increase in construction spending in the ICI sector and by condo construction that is approximately equal to the 2004 level.

3. The anticipated increase in ICI spending will create new market opportunities for the cast-in-place concrete sector. However, many of the buildings encompassed by this increased spending are structures for which structural steel is often a competitive alternative to concrete for above-grade structural supports. For the union sector, the commercial and institutional segments of the ICI sector are highly competitive and may require additional strategies to achieve a satisfactory market share.

C. Portland Cement and Ready-Mix Concrete Shipments Consumption of portland cement by Ontario construction has held steady for the past four years, averaging around 3.2 million metric tonnes. Ontario generally accounts for around 40% of total consumption in Canad. From the perspective the cast-in-place concrete industry, the ICI sector is of particular importance as it tends to be more concrete-intensive relative to its share of construction spending. This is especially the case with industrial and commercial projects.

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1997 1998 1999 2000 2001 2002 2003 2004

Met

ric T

onne

s (M

illio

ns)

December 2004 Estimate

Estimated Consumption of Portland Cement in Construction - Ontario (metric tonnes) 1983 – 2004 Portland Cement Association – Research

Page No. 14

Comparison of Sectoral Share of Consumption of Portland Cement and Total Construction Spending, 1999-2002

Sector 1999-2002: Canada

Share of Portland

Cement Consumption Share of Construction

Spending Residential 31% 41%

ICI 32% 22%

Civil 36% 37%

Other 1%

Portland Cement Association and Statistics Canada

In Ontario, shipments of ready-mix have closely tracked changes in construction spending. Ontario shipments of ready-mix were approximately 10.4 million cubic metres in 2004. This was an increase of approximately 4%, which was 1% greater than the increase in overall real construction spending, as estimated by Statistics Canada.

D. Concrete Intensity of Construction The most straight forward measure of the concrete intensiveness of construction is the consumption of portland cement in relation to total construction spending, measured in constant dollars. This measure shows a long-term declining trend. In 1997, for each $1 million of spending on construction, approximately 83 metric tonnes of portland cement were consumed. By 2004, this ratio (using constant $) had declined to 75. Trend analysis suggests a decline in concrete intensity of about 1.3% per year. The concrete intensity of construction is affected by the sectoral mix of construction, changes in technology which reduce the amount of concrete required, and the use of substitute materials. The sectoral composition of construction changes over time. There is no long-term pattern. Changes in technology have only a moderate impact on usage requirements and are not of the order of magnitude

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Mill

ions

cub

ic m

etre

s

Shipments of Ready-Mix: - Ontario (Millions of Cubic Metres) 1983 – 2004 RMCAO

60.0

65.0

70.0

75.0

80.0

85.0

90.0

1997 1998 1999 2000 2001 2002 2003Met

ric T

onne

s of

Por

tland

Cem

ent p

er $

1,00

0 ($

1997

) of C

onst

ruct

ion

Spen

ding

Trend Line

Portland Cement Consumption in Metric Tonnes per $1 million (in $1997) of Construction Spending 1997 - 2004 Portland Cement Association Statistics Canada

Page No. 15

necessary to explain a long-term trends away from concrete. Moreover, these changes push in both directions. For example, high performance concrete (HPC) reduces the volume of concrete required, though not the dollar value. Also, the greater durability of HPC reduces run repair and replacement work on installed work. On the plus side of the ledger, concrete has made inroads into road construction as an alternative to asphalt. By far the most important long-term trend is the use of structural steel and pre-cast concrete in place of poured concrete for above-grade structural members. The next section of this report discusses the relative cost position of concrete and structural steel in various building types. In general, structural steel has an advantage in lower height buildings. These are particularly common in the industrial sector and in the commercial sector. Structural steel may also be improving its competitive position in medium-height buildings. Poured concrete walls, which once were a widespread alternative to masonry, are now uncommon, having been displaced by other building envelope materials, such as glass, sheet metal, and pre-cast concrete. Ontario data on shipments of ready-mix suggest that factors that are positive for concrete (i.e., the sectoral composition of construction and the height of buildings) have offset other competitive disadvantages. Over the last decade, shipments of ready-mix closely tracked changes in construction spending, as would be expected. Indeed, ready-mix shipments showed a moderate tendency over the period 1994 to 2004 to increase relative to construction spending. In the residential sector, there has been a generally stable relationship between cement consumption and construction spending. Variations in cement intensiveness in the residential sector are largely explained by changes in the high-rise share of housing construction. In the industrial sector, there was a noticeable decline in the cement intensity of construction. This may have reflected changes in engineering design and technology which entailed a shift away from concrete. However, a large portion of the change was also attributable to the greater prominence of mechanically-intensive projects in the oil and gas sector. These projects raise the cost of mechanical installation relative to structural costs. In the civil sector, there has been a modest decline in cement consumption –

80

90

100

110

120

130

140

150

160

170

180

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Inde

x: 1

994

= 10

0

Index ofShipments of Ready-Mix

Index of Real Total Construction Spending

Comparison of Ready-Mix Shipments to Construction Spending Ontario, 1994 – 2004 Indices: 1994 = 100 RMCAO Statistics Canada

Page No. 16

about 1½ % per year. This may reflect the greater long run durability of concrete installations and a consequent reduction of replacement work. E. Prices and Costs Prices and costs can be examined from four perspectives:

1. materials prices 2. estimators’ costs for installation 3. trade work costs 4. relative costs of concrete and structural steel or pre-cast

Materials Prices (Statistics Canada): Over the past 15 years, ready-mix prices in Ontario have been comparatively stable. Since 1991, 75% of the time, prices have been within 3% of the average for the period 1991-2004. This is in sharp contrast with other building materials and commodities which are subject to much sharper price swings. In particular, ready-mix prices in Ontario have been much less volatile than in other parts of Canada. In Western Canada, the major oil and gas projects have put considerable pressure on ready-mix capacity and ready-mix prices.

Increase in Ready-Mix Prices December 1999 to December 2005

Statistics Canada, CANSIM

Percent Increase in Ready-Mix Prices

December 1999 to December 2004

Atlantic 3.4% Quebec 9.7% Ontario -1.1% ³ Prairies 17.5% B.C. 27.4%

86889092949698

100102104106

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Ready-Mix Price – Ontario Index: 1997 = 100 CANSIM Statistics Canada

80

90

100

110

120

130

140

2000 2001 2002 2003 2004

Lumber

Plyw ood

Lumber and Plywood Price Index: 1997 = 100 CANSIM Statistics Canada

Page No. 17

Ready-mix prices can be contrasted with lumber and plywood prices, which are also relevant to the forming industry. Lumber and plywood prices are significantly more volatile. Plywood prices increased by more than 30% in 2003 alone. In road and highway projects, asphalt is the competitive alternative to ready-mix. As a carbon-based product, asphalt prices are strongly influenced by fluctuations in the price of petroleum. Since approximately 1993, there has been a strong upward trend in the price of asphalt. Over the past five years, the price of asphalt, on a national average basis, has increased by over 30%, compared to an increase of approximately 10% in the price of ready-mix. Given the outlook for petroleum prices, this comparative advantage is likely to further improve over the next several years. In the ICI sector, for above grade structural members, the competitive alternative to concrete is structural steel. The price of structural steel is significantly more volatile than the price of ready-mix. As well, on average, the price of structural steel increased more rapidly than the price of ready-mix. Over the period 1992 (when the data series commences) to 2005, the price of ready-mix increased by an average of 1.6% per year. By contrast, the price of structural steel increased by an average of 3.4% per year. In 2005, the selling price of structural steel increased sharply, rising by more than 15% over prices at the beginning of 2004. A useful way to understand comparative cost advantage is to track the ratio of the ready-mix price to the price of structural steel. This indicates a swing of approximately 13% in favour of concrete over the past three years. In foreign markets, structural steel has displaced concrete in the major share of the structural market. In the UK, for example, concrete held 70% of the structural market in the 1980’s. Today, 70% of the structural market is held by structural steel. (Internal Study New Zealand Cement Association).

70.0

80.0

90.0

100.0

110.0

120.0

130.0

19921993

19941995

19961997

19981999

20002001

20022003

20042005

Ready-Mix Structural Steel

Price Indices: Ready Mix and Structural Steel Indices: 1997 = 100 CANSIM Statistics Canada

0.90

0.95

1.00

1.05

1.10

2000

2001

2002

2003

2004

Ratio of Ready-Mix Price to Structural Steel Price 2000-2004 CANSIM Statistics Canada

Page No. 18

Estimators’ Costs Estimators’ Costs differ from prices tracked by Statistics Canada. Statistics Canada prices are based on average ex-factory gate listed prices. Estimators’ costs are based on survey’s of suppliers to the trade and include, in many cases, the installation or delivery cost. Estimators costs are also published in units that are commonly used by the industry. One of the most commonly used Canadian sources of estimators’ costs is the Hanscomb Yardsticks for Costing, published by R. S. Means. The following table shows the increase in costs from 1999 to 2004, as estimated by Hanscomb for representative tasks related to above grade structural work. This is a key area of competition with structural steel. As can be seen from the table below, estimators’ costs for above grade work increased by 66.2% for multi-use forming and by 60.8% for single use forming. If contractors’ quoted costs differed from this pattern, the industry would have a serious issue with the procedures used to estimate costs in the Hanscomb publication.

Increase in Estimated Costs, 1999 – 2004 for Above Grade Structural Work Hanscomb Yardsticks (Toronto Costs)

Formwork - Above Grade Structure

Formwork - Multiple Uses (Minimum 4) 8 floors or more Formwork - Single Use Flat Slab with drops - concealed finish 38.9% Flat Slab with drops - concealed finish 43.8% Flat Slab with drops - exposed finish 43.9% Flat Slab with drops - exposed finish 43.7% Wall (1200mm to 2400mm) - concealed finish 82.2% Wall (1200mm to 2400mm) - concealed finish 79.2% Wall (1200mm to 2400mm) - exposed finish 81.3% Wall (1200mm to 2400mm) - exposed finish 67.2% Column - concealed finish 64.6% Column - concealed finish 38.5% Column - exposed finish 61.4% Column - exposed finish 64.0% Beam - concealed finish 82.8% Beam - concealed finish 81.8% Beam - exposed finish 74.3% Beam - exposed finish 68.0%

Average Increase for Multiple Use 66.2% Average Increase for Single Use 60.8%

Page No. 19

These reported cost increases cannot be attributed, in the main, to higher materials costs. Hanscomb estimates that over the period 1999 to 2004, ready-mix prices increased by less than 10% in the Toronto market. Increase in Estimated Costs, 1999 – 2004 for Standard Ready-Mix Products Hanscomb Yardsticks (Toronto Costs)

Portland Cement - Standard Local Aggregate 25 Mpa - supply only 8.0% Portland Cement - Standard Local Aggregate 30 Mpa - supply only 5.8%

These reported cost increases for cast-in-place formwork should be compared to the reported increases in costs for both structural steel and pre-cast. The following table summarizes cost increases over the same period for structural steel and pre-cast, as reported in Hanscomb.

Increase in Estimated Costs, 1999 – 2004 for Pre-Cast and Structural Steel Work Hanscomb Yardsticks (Toronto Costs) Pre-Cast Beams: 1000 mm deep 9.8% Columns: 600 x 600 multi-storey 36.5% Slabs: pre-stressed, hollow core 204 mm 17.1% Slabs: pre-stressed, hollow core 305 mm 17.1% Average Increase for Pre-Cast 20.1%

Page No. 20

As can be seen from the above table, the reported estimator cost increases for both pre-cast and structural steel were significantly less than the reported increases for cast-in-place formwork. The implication of this comparison is that relative costs, as estimated by Hanscomb, may have moved significantly against the cast-in-place industry over the past several years. Trade Costs: Statistics Canada tracks construction costs by trade. These costs include labour, materials and contractors’ mark-up. The data show that the costs of structural trade work, which includes the cast-in-place industry increased by substantially more than the costs of architectural trade work (i.e., interior finishing and decorating), mechanical trade work (plumbing, HVAC, other pipe work), and electrical trade work. Over the five years ending in 2004, structural trade work increased in cost in the Toronto market by approximately 40.8%.

Structural Steel Beams: light not exceeding 50 kg/m 8.9% Beams: wide flange between 50 and 240 kg/m 19.7% Beams: welded wide flange 9.3% Columns: light beam not exceeding 50 kg/m 10.3% Columns: wide flange, over 50 kg/m up to 285 kg/m 19.7% Columns: welded wide flange 9.3% Open Steel Web Joist 380 Mpa prime coated 1.1% Average Increase for Steel 11.2%

40.8%

28.5%

21.5%

11.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Structural Architectural Mechanical Electrical

Increases in Construction Costs by Trade Work Group (Labour, Materials, Contractors’ Mark-up) 2000-2004 - Toronto CANSIM Statistics Canada

Page No. 21

Share of Above Grade Structural Work in Total Construction Costs While engineers, architects and owner-developers seek to reduce costs in every component of construction, components that represent a large share of total costs inevitably attract more cost-cutting attention and encourage a more intense search for technological innovations. The following table indicates the approximate share of above grade structural work in the total construction costs for various types of buildings, based on the use of either concrete or structural steel:

Structure Type

Share of Above Grade Costs in Total Costs

Multi-Level Parking Garage - re-inforced concrete 42.4%

Commercial Office - 7 Stories 22.6%

Condo - 6 Stories 20.7%

Elementary School - 4 Stories - steel frame 17.2%

Public Administration - 6 Stories 16.6%

Secondary School - 3 Stories 13.8%

Condo - > 18 stories 13.8%

High Rise Hospital - 16 Stories - concrete frame 12.2% In general these ratios suggest that for most structure types there is some scope for higher costs relative to structural steel and pre-cast, but only if the engineering properties or other marketed advantages of concrete outweigh those structural steel. The ratios also suggest that the parking garage market, which has been almost entirely held by concrete, could be vulnerable to a focused marketing strategy by competing materials.

Page No. 22

F. Relative Construction Costs R. S. Means publishes construction cost guides that permit an approximate comparison of costs using concrete or structural steel for above grade structural components. The costs are approximate. They are also based on American construction practices and assume American levels of crew productivity. Nevertheless, the R. S. Means comparisons do provide a rough indication of changes in comparative advantage with respect to various types of structures. Apartments In apartment construction, the R. S. Means tables indicate, since 1983, a deterioration in the competitive position of concrete in mid-height structures (4 – 7 stories). Concrete’s cost disadvantage is 6.2% - an increase over 3.9% in 1983. In higher structures (12-24 stories), the R. S. Means data suggests the emergence of a cost advantage around 1991, but some erosion of that advantage since. Nevertheless, concrete retains a cost advantage of approximately 5.1% Office Buildings The R. S. Means data indicate that concrete had a modest advantage over steel in high rise buildings (11 to 20 stories) in the 1980’s, but subsequently lost that advantage. In lower height structures (5 to 10 stories), steel consistently enjoyed a cost advantage, albeit slight. It should be noted that the current cost advantage of steel, as estimated by R. S. Means is under 2% in lower heights and negligible (0.2%) in high rise structures. These cost advantages are well within a margin of estimating error and are also reversible through local cost conditions and local productivity advantages. The office building market is clearly a market that is accessible to the cast-in-place industry. Single Story Industrial The single story industrial market has been largely lost to the cast-in-place industry. The cost advantage of structural steel was estimated by R. S. Means as being consistently above 25% until recently. R. S. Means now estimates that the structural steel advantage has shrunk to approximately 6%. While this still puts most of this market out of the reach of the cast-in-place industry, the radical change in cost advantage nevertheless shows how variable the market can be.

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

1 2 3 4

Cos

t Adv

anta

ge (+

) / D

isad

vant

age

(-)

4 to 7 Stories

12 to 24 Stories

1985 1991 1997 2003

Cost Advantage (+) or Disadvantage (-) Concrete vs. Structural Steel Apartment Buildings R. S. Means, Square Foot Costs

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

Cos

t Adv

anta

ge (+

) / D

isad

vant

age

(-)

5 to 10 Stories

11 to 20 Stories

1985 1991 1997 2003

Cost Advantage (+) or Disadvantage (-) Concrete vs. Structural Steel Office Buildings R. S. Means, Square Foot Costs

Page No. 23

Parking Garages Concrete has historically enjoyed a cost advantage in the construction or parking garages. The R. S. Means data suggest that that advantage is approximately 17% and has been in that range for the past decade. The data also suggest a widening of the advantage since the 1980’s. Schools, Colleges/Universities and Hospitals In the education sector, concrete’s advantage for higher storied structures becomes evident in college and university buildings, whereas in school construction, the advantage rests with structural steel.

Type of Structure

Concrete Advantage (+) Disadvantage (-) over Steel (2003)

High School (2-3 Stories) -4.88% College / University Dormitory (2-3 Stories) +3.96% College / University Building (4-8 Stories) +6.76%

R. S. Means, Square Foot Costs In hospital construction, both low-height (2-3 stories) and medium-height (4-8 stories) concrete is at a cost disadvantage. In 2003, this disadvantage was approximately 5% on low-height projects and 7% on medium-height projects. Foot Print (Square Footage) Regardless of use, concrete enjoys an increasing cost advantage over structural steel as the square footage of a structure increases. R. S. Means compares costs per square foot for a building in the 11-20 height range. In structures with a square footage of less than 170,000 sq. ft., the advantage is marginally with structural steel. For buildings with a greater square footage, the cost advantage of concrete increases progressively.

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Cos

t Adv

anta

ge (+

) / D

isad

vant

age

(-)

1985 1991 1997 2003

Cost Advantage (+) or Disadvantage (-) Concrete vs. Structural Steel Parking Garages R. S. Means, Square Foot Costs

$110

$120

$130

$140

$150

$160

$170

120,0

0014

5,000

170,0

0020

0,000

230,0

0026

0,000

400,0

0060

0,000

800,0

00

Square Footage (11-20 Story)

Est.

Cos

t per

Sq.

Ft.

Steel Frame

Concrete

Cost Advantage (+) or Disadvantage (-) Concrete vs. Structural Steel Parking Garages R. S. Means, Square Foot Costs

Page No. 24

Summary Overall concrete’s advantage increases with both height and square footage. Parking garages represent the one building type in which concrete’s advantage is decisive. In all other building types, concrete’s advantage is moderate and could be eroded by changes in materials or installation costs or by changes in technology which enhance the engineering advantages of structural steel or pre-cast. In low rise structures, and especially in single story structures, structural steel has a clear cost advantage. The building type comparisons suggest a modest decline in the cost attractiveness of concrete across a broad range of structures. This is consistent with the evidence of a decline in the concrete intensiveness of construction.

G. Implications for Cast-in-Place Industry 1. The medium-term outlook for the cast-in place industry is positive, but less positive than for

the construction industry as a whole. High-rise residential construction, which is an important source of demand for the industry, is likely to taper off in 2006 and thereafter, given rising vacancy rates, declining rents, and the likelihood of an increase in mortgage rates. In the ICI sector, where growth will compensate for the moderate decline in residential activity, the composition of growth poses competitive challenges to the unionized cast-in-place industry. Absent productivity gains, or other sources of cost reduction, concrete is not cost attractive for above grade work in low to medium height buildings. In the institutional sector, the prevalence of low bid policies represents an additional hurdle to unionized contractors.

2. The long-run trend has been towards less concrete intensiveness in construction. This partly reflects a cyclical shift in the sectoral composition of construction. However, the more fundamental factor is an increasing cost advantage for both structural steel and pre-cast as preferred materials for above grade structural work. New uses for concrete, e.g., in road construction, have not offset this trend to structural steel.

Page No. 25

3. Recent movements in materials prices have favoured concrete over both asphalt (for road projects) and structural steel (for above grade work). This potentially opens segments of the ICI market where structural steel had a cost advantage. Materials prices, however, are only one component of installation costs.

4. Estimators’ costing manuals, such as the Hanscomb Yardsticks and R. S. Means Square Foot Construction Costs play an important role in cost estimations. These manuals do not present concrete in a favourable light across a range of low to medium height structures. If these manuals are consistent with industry experience, it would be useful to track more thoroughly the loss of competitive advantage. If, on the other hand, these cost manuals are not consistent with industry experience, the industry has a major marketing task to correct the impression of these cost manuals. It should be noted that the trend depicted by the cost manuals is consistent with the trend towards less concrete intensiveness in construction.

5. In light of its competitive environment, the industry faces significant productivity, cost and marketing challenges.

Prism Economics and Analysis

December 2004

Page No. 26