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Drop in oil prices leads to easing of materials/equipment components costs

Hydrocarbon Engineering,

According to IHS and the Procurement Executives Group (PEG), current construction costs increased for the 3rd consecutive month in October. The headline current IHS PEG Engineering and Construction Cost Index (ECCI)* was 54.5% in October, down from 57.8% in September.

The materials/equipment component of the ECCI registered 5.0 in October, down 6.0% from last month, but still showing higher prices on balance. However, there was a noticeable change in sentiment in October, with all 12 components easing relative to the robust September reading. Four components showed falling prices in October, the most since December 2013, with the weakest reading coming in the copper based wire and cable index.

John Mothersole, research director for IHS pricing and Purchasing Service, commented: “The weakness in commodity prices since the start of September reflects a general softness in demand and, in particular, the lackluster performance of the big emerging markets, which have been the source of demand growth for the past decade. These declines are just starting to push downstream into fabricated material and equipment prices with a further easing of the materials/ equipment ECCI quite likely in the months ahead”.

Strong expectations for hydrocarbon projects

The six month headline expectations index eased to 70.8% in October, down 1.6% from last month. The sub indexes were split, with the materials/equipment portion downshifting and the subcontractor labour component strengthening. The materials/equipment portion registered 68.3%, with readings softening across the board, albeit still well above the neutral threshold and thus indicating higher expected prices. The regional detail conveyed strong expectations in the US South for projects in the hydrocarbon sector to accelerate during 2015.

*The IHS PEG ECCI is based on data independently obtained and compiled by IHS from the procurement executives of leading engineering, procurement and construction firms. Each survey response is weighted equally for every US$ 2 billion in spending in North America. Respondents are asked whether prices, either actual paid transactions or company informed transactions, during the current month for individual materials, equipment, and regional subcontractor rates, were higher, lower or the same as the prior months. Respondents are then asked for their six month pricing expectations among these same subcategories. The results are compiled into diffusion indexes, in which a reading greater than 50 represents upward pricing strength and a reading below 50 represents downward pricing strength.

Adapted from a press release by Emma McAleavey.

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