To date it has been the likes of steel and timber that have seen the big price rises over the past year. Bricks, cement and concrete have not yet been so affected. But this is about to change, predicts Maurice van Sante, senior economist at ING Research, as natural gas shortages filter through the chain.
While construction contractors do not use much natural gas, their suppliers do. The production of heavy building materials is very energy intensive – gas can easily account for one-third of the cost of a brick factory, as heating is an essential part of the production process.
Maurice van Sante says that the 'price through' of procurement prices in the markets for concrete, cement and bricks is comparatively slow as there is relatively low competition. As they difficult and costly to transport, these materials are primarily traded on local markets.
“This gives the suppliers of these products more market power, which generally results in relatively higher prices but consequently also in lower price volatility. As a result, output prices of these industries decrease but also increase at a slower pace compared to timber and plastics,” the economist explains. “This is one of the reasons why we haven’t seen strong price hikes in cement, concrete and bricks, yet.”
However, it is coming…
“Despite the slower pass-through of procurement prices (including gas prices) for concrete, cement and bricks, the boom in gas prices will eventually make its way through these markets, which are very energy intensive. Therefore, contractors will have to prepare themselves for a phase of rising prices for building materials. The only ‘positive’ thing for them is that the increase will probably be slower compared to plastics and timber.”
The latest building materials and components release from the Department for Business, Energy and Industrial Strategy (BEIS) shows that the cost of building materials for all work in August 2021 increased by 2.8% compared with July 2021 and 23.5% compared with August 2020. Specific construction materials with the greatest annual price increase in August 2021 compared with August 2020 were imported plywood (78.4%), fabricated structural steel (74.8%), and imported sawn or planed wood (74.0%).
Maurice van Sante warns that contractors’ profit margins are in jeopardy.
“Output prices of construction projects and input prices of building materials are, in general, closely related,” he says. “However, from 2018 until the end of 2020, contractors' output prices increased faster than input prices, which could have resulted in higher profits. Now, input prices are catching up quickly, having seen the biggest increase in the first half of 2021 since 2004.”
See also: How construction companies can cope with procurement price risks
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