- Larger contractors with more pipeline visibility weather storm better than smaller builders
- DIY boom and switch to lower-density homes have pushed up timber costs
Materials shortages slowed activity in a previously buoyant construction sector over the summer and as costs continue to spiral there are concerns about the impact supply chain stresses could have on margins and project viability.
Second-quarter gross domestic product (GDP) data published by the Office for National Statistics last week showed that although output for the sector increased by 3.8 per cent over the quarter, activity slowed in May and June as some companies reported shortages of materials including timber, steel, cement and tiles.
The sector’s output also fell by 1.6 per cent in July, back below pre-pandemic levels. The ONS's output figures for August are reported next week, but purchasing managers' index data on Wednesday showed growth in the sector slowed for the third month running, with respondents citing disruptions due to unavailable transport, a "severe" lack of materials and staff shortages. Pricing uncertainty is also causing clients to delay investment decisions, the survey found.
Materials prices have increased by 15 per cent between the start of the year and last month, but this broad figure masks spikes in specific categories. For instance, sawn timber prices jumped 23 per cent in July alone and are up 63 per cent over the past 12 months. Plywood prices are up 80 per cent over the year, structural steel prices have climbed 65 per cent and concrete reinforcing bars 60 per cent, government data show.
The decline in activity has been steepest in private housing, where output has fallen by 17 per cent since March, despite many listed housebuilders such as Barratt Developments (BDEV) and Taylor Wimpey (TW.) reporting strong forward sales.
“Construction products availability and cost inflation issues have hindered activity, particularly for small contractors working on private housing RM&I (refurbishment) projects,” said Noble Francis, economics director at the Construction Products Association.
“The larger contractors and housebuilders are less affected as they have certainty of demand and a pipeline of projects so they can plan and order well in advance,” he said. Smaller contractors often turn up at builders’ merchants on the day they need supplies, so are more affected by availability shortages.
It’s the same for materials suppliers. Nick Kelsall, chief executive of ceramic tiles and bathroom products distributor Norcros (NXR), said its scale has presented it with advantages as supply lines have tightened. Offices in China, relationships with scores of suppliers and, crucially, long-term supply contracts with shippers to make sure containers make it onto overbooked vessels are advantages that it has over smaller players in a “highly fragmented” market, he said.
“There’s lots of small players and they haven’t got the infrastructure or indeed the balance sheets to be able to cope,” he said, referring to pressures of major price fluctuations or materials shortages. He cited shipping costs as a bigger factor in price inflation than raw materials, with the cost of shipping a 40ft container from China to the UK increasing from $1,500 before the pandemic to a peak of $20,000.
Like others in the industry, Norcros has added surcharges and brought in price increases in response to higher costs.
“Largely, they’ve been successful given the fact that in today’s climate people are screaming out for availability… there is a reluctant acceptance there’s going to be price increases,” he said.
“If you take a developer that has finished 90 per cent of his house but is waiting to finish the bathroom or the tiles, it’s absolutely critical that he gets them on time.”
Demand for all kinds of materials has been robust since lockdowns sparked a DIY boom last year, which has been reinforced by changes to the residential market, Simon Rawlinson, head of strategic research and insight for building consultancy Arcadis (Ams:ARCAD), said.
Timber prices, for instance, are spiking because of the switch in demand towards lower-density housing over city centre apartments, with more wood needed for elements such as roof joists.
Arcadis warned of a “gathering storm” in a report last month, adding that driver shortages and fuel hikes are additional challenges that “are making projects even more risky”.
For instance, steel prices typically move in lockstep with iron ore rates, but have recently decoupled. Iron ore prices have almost halved since May, dropping below $120 a tonne from a peak of more than $235 a tonne.
Steel rebar prices have also fallen, but only by about 10 per cent as spiralling energy prices led British Steel to last week introduce a temporary £30-a-tonne surcharge, £25 of which was to cover energy costs and £5 transportation. Costs have reached "levels we can no longer absorb alone", the steelmaker said.
For now, the issue continues to be one of demand outstripping supply, as order books remain strong, Rawlinson argued. “There’s been a little bit of a slowdown but to be quite honest the industry is going at a pretty healthy lick,” he said.
Some costs are also easing, with copper prices down about 14 per cent from mid-May highs, while industry wage rates remain at pre-pandemic levels, despite a rise in vacancies. However, with natural gas prices now soaring to record highs across Europe as winter draws in there are concerns that continued inflation could wipe out contractors’ margins and affect project viability.
Hefty increases in steel, concrete and materials prices have not yet fed into tender prices, which have only increased by an average of about 5 to 6 per cent so far this year, said Colin Wood, co-head of cost consultancy at Colliers (Can:CIGI). “That creates real stress in the contracting market,” he said.
Contractors asked to provide fixed prices 12-18 months ago may have to absorb price increases. Given that the industry typically works on thin margins, this could mean working at a loss.
"What we’re seeing currently is that contractors are either not willing to fix their price for much longer than about 30 days without having a contract in their hand or they’re looking more for fluctuation provisions in the contract, so there’s a mechanism to share the risk," Wood said.
Developers who have bought land may also find that the cost of building projects no longer stack up. “That may have an impact on schemes over the course of the next year that might well sit dormant for a period of time,” he added.
Even if the industry can successfully maintain margins, availability of materials could remain challenging for smaller operators, Rawlinson said. He cites cement as an example, which is produced locally and has therefore been readily available for delivery by the truckload. However, there have been shortages in bagged cement used by smaller contractors because of a lack of availability of one of the polymers used in the packaging.
"It’s these complex, interlinked supply chain issues that I think are just hitting people all the time," he said. "There’s no inventory, there’s no flexibility in the supply chain."
