Mixed outlook for construction contractors in wake of market slump, U.S. debt downgrade

The recent drop in investor confidence in the wake of Standard & Poor's downgrade of the United States government’s credit rating may affect the ability of owners to proceed with construction projects, but several factors work in the industry’s favour, according to the president of the Council of Ontario Construction Associations.

“I don’t think we should be smug, but we should take some comfort in the fact that we have a very strong banking system” and Canada has good economic indicators, including employment and a better debt to GDP ratio than some other countries, COCA president Ian Cunningham said.

On Monday, the S&P/TSX composite index dropped four per cent, or 491.21 points, while the Dow Jones Industrial Average dropped 5.6 per cent. This came the first trading day after Standard & Poor’s reduced its rating on the U.S. government debt after markets closed Friday, August 5.

“Ontario has a much more sound fiscal position,” Cunningham said. “Our economic performance over the last 12 months in terms of job creation is quite good.

“However there are a number of things we have to factor in with regard to the future of construction over the next six, eight and 12 months.“

One of those factors is the confidence of owners, Cunningham said. The second factor is the availability of credit, which affects the ability of owners to finance projects.

The third factor is the ability of the U.S. economy to turn itself around, given that about 75 per cent of Canada’s exports are to the U.S., he said.

The events of the past week will probably not have a significant impact on non-residential construction in Canada, according to the Canadian Construction Association. CCA president Michael Atkinson said in an e-mail to The Daily Commercial News that public infrastructure spending and demand for commodities, including oil, minerals and potash, are driving demand for non-residential construction.

“We do not anticipate these events having a significant impact on the overall rather buoyant non-residential construction forecast for Canada based primarily on what is driving that demand forecast, i.e. public infrastructure spending … and commodities/resources,” Atkinson wrote. “Obviously, regions or sectors of the industry that depend upon clients who depend upon U.S. and European exports may well feel a negative impact but overall the industry is riding high due to government investments in infrastructure and industrial demand.”

In public infrastructure spending, Atkinson cited as examples, subways, highways, roads, light rapid transit, electrical power generation and water treatment and distribution. Cunningham said the 10-year infrastructure plan unveiled June 24 by the Ontario government “should give comfort” to those in the construction industry. “While it didn’t identify specific projects to build, it creates a commitment for a reasonable amount of infrastructure spending,” Cunningham said of the province’s plan.

Citing a report from Global Construction Perspectives of London, England, Atkinson said it is anticipated that Canada’s construction market will be the fifth largest in the world by 2020, next to China, India, the U.S. and Japan.

This is attributable to several factors, including oil sands projects in Alberta, major hydro projects in Ontario and Quebec, expanding transportation needs in urban centres and the demands of the Toronto 2015 Pan/Parapan Am Games.

For the 2015 games, construction projects planned for Toronto include an Aquatics Centre, field house and the Canadian Sport Institute Ontario facility.

In early August, Infrastructure Ontario announced a short list of three consortia, which have been invited to submit bids.

The games will also require an athletes' village to accommodate more than 10,000, plus a media centre, dining hall and health care clinic. A separate RFP to design, build and finance the village was issued in June.

The Pan-Am Games were also cited by Alex Carrick, chief economist of Reed Construction Data Canada, as an example of one hot area of construction, in his article Counting on mega projects in five sub-categories of construction, published last month.

Carrick wrote that although commercial construction starts from January through May, 2011 were 35 per cent lower (in square footage) compared to the same period in 2010, there will be a number of major projects in Canada in the near future.

Carrick cited as examples the Hebron and Hibernia offshore oil projects, the clean coal project at Boundary Dam near Estevan, Saskatchewan, Vale’s Voisey’s Bay operations in Newfoundland and Labrador. He also cited the Sheppard and Eglinton subway lines in Toronto, plus rapid transit projects in Waterloo Region, Ottawa, Vancouver and Victoria.

Source: GREG MECKBACH, Daily Commercial News and Construction Record