The Increasing Cost of Construction Materials

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Paul Heming

October 14th, 2022
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The increasing cost of construction materials has plagued construction throughout 2021 and 2022.

I don’t think this is news, but in short, the picture is not good.

According to the Office of National Statistics (ONS), the cost of UK construction materials in July 2022 was 24% higher than a year. The previous year was not much better, with a similar level of inflation in the order of over 20%.

In total, the cost of construction materials here in the UK was over 46% higher in July 2022 than pre-pandemic in January 2020. Moreover, some energy-intensive construction product manufacturers are still finishing contracts and are yet to move on to new, higher energy contracts. From Q4 2022 onwards, things may get worse.

The fastest price rises in the 12 months running up to July 2022 were in the energy-intensive material, Aggregates (63%), concrete reinforcing bars (38%), insulation (30%) and doors and windows too (25%).

What has the history of construction costs been?

The construction industry has been in 24 months of hyper-construction inflation. The sector has seen shocks in the past, but these typically lasted up to 6 or 7 months at a maximum. Never have we seen the industry affected in such a way as the current run.

Data for construction material costs in the US and UK started being gathered after World War 2; we have circa 80 years’ worth of data. Research by JLL[1] showed that between 1940 and 2020, the cost of raw construction materials such as steel and lumber (timber) was almost always in a 0 – 20% price deviation decade to decade, with only a few decades where increases were over 40%.

I labour the point of decades. In the last 18 months alone, spanning January 2020 to July 2022, steel has seen a 123% rise and lumber 111%.

The recent year-on-year increase is equivalent to the rise in construction material costs across the previous 12 years.

Plainly, we are in a wild moment for construction material costs.

Why are we seeing increasing costs of construction materials?

The increasing cost of construction materials is impacting the global construction industry; in this regard, the UK is not alone. The pandemic and war in Ukraine have affected the global sector; however, here in the UK, when you factor into the equation Brexit and the weakening value of the Sterling, it has been the perfect storm.

[1]First and foremost, Covid-19 squeezed supply from mills and factories across the globe and caused massive supply chain bottlenecks due to huge short-term demand as the world played catch up.

The War in Ukraine has also led to much of the 2022 increase. The war has seen a dramatic rise in the cost of fuels and energy, but Ukraine was also a primary construction material supplier. If we look at steel, for example, Ukraine is historically one of Europe’s largest providers at circa 13%. Since the start of the war, Ukraine has closed its mills, withdrawing this supply from the market. One Ukrainian mill alone produces over 1.5 million tonnes of steel slab into the market annually. Without this, overall supply is down, pushing the price of what is available up.

When you throw Brexit on top of the pandemic and war in Ukraine, you start to get a feel for why we have such a significant problem.

Brexit is a politically sensitive subject to broach. In the short term, however, there is no doubt it has impacted the cost of construction materials. The UK materials industry feels the effects of the European Union’s tariff-free agreement with the US reached in October 2021, which reduces the cost of trade between the two, while the UK is subject to tariffs. Further, Brexit has impacted the labour market too. A lack of lorry drivers and a sharp rise in shipping costs and temporary surcharges lead to higher delivery costs and material costs.

The final nail in the coffin

In 2022, the Sterling weakened against the US Dollar, with a particularly sharp plummet following the Government’s mini-budget in September.

According to the Construction Products Association, 25% of construction materials are imported. Therefore, all these products will be impacted by the depreciation of the Sterling. Moreover, while this 25% of materials are directly impacted by a weakening pound, the remaining 75% are indirectly affected, too, as we use fuel, energy or other materials produced abroad, which are priced in dollars.

In short, if the pound weakens, our buying power wanes, and everything costs more.

How’s the industry feeling about the increasing cost of construction materials?

The FMB’s Q2 2022 State of Trade Survey [2] revealed that 49% of builders reported negatively impacted profit margins due to the current economic climate. Moreover, these same builders explained that 71% had delays in their projects because of a lack of materials.

It goes without saying that, as a sector, we feel the impact of the increased cost of construction materials.

C-Link is a procurement platform with over £1 billion worth of construction work currently going through it. We get to see a lot of procurement and strategies different from how developers and main contractors are pursuing. The last 18 months have been somewhat unusual, as you can imagine.

We have seen multiple streams of advice, almost always correctly given, from material suppliers strongly advising contractors to be proactive in their procurement to avoid any possible price or availability issues.

Much like in the retail sector, when the pandemic led to panic-buying groceries and household items (remember all the empty shelves in your local supermarket!), we have witnessed similar behaviours in procurement.

There is a de-risk strategy that some are taking to ‘buy now, buy early’. An example is a C-Link client who is currently in the ground on a project but has already placed orders for dry-lining, tiling, painting, and decorating materials.

I understand this behaviour, and in fact, it is one that material suppliers are advocating. However, it is ironic that this behaviour only exacerbates the problem. Among many other things, one of the drivers for the increasing cost of construction materials is that we are behind with supply while demand is going unchallenged. Buying early is likely only to drive up prices in the short term.

While I don’t blame contractors, perhaps this de-risk strategy has been part of the problem since the easing of the lockdown.

So, how will 2023 and beyond?

There is some positive(ish) news. The shortage of primary materials such as steel, lumber (timber), and plaster suffered post-pandemic, meaning product availability has improved across most categories in 2022.

History also shows steep construction cost increases are often followed by similar periods of lower construction costs.

Why is that true?

It is almost always ascribed to the reality that higher construction costs stall projects, reducing demand and increasing supply.

In the summer of 2022, various official data sources suggested housebuilding activity is now slowing in the face of cost inflation. ONS numbers show that orders for housebuilding fell back 8% in Q1 2022 compared to the final quarter of 2021 and are now 11% below the peak seen in 2021.

Moreover, the Bank of England is forecasting a recession in the UK. In August 2022, it was indicated that economic output would fall in Q4 2022 and then decline each quarter through to the end of 2024.

So will the increase in construction material costs continue?

The key drivers for the global inflation of construction materials were the pandemic and the War in Ukraine. With the pandemic’s effects starting to dissipate, the primary issue is energy and the War in Ukraine. The hope is that the most significant jump in fuel price is confirmed and therefore priced in. In short, the hope is that this should result in a global deflation in material costs.

For the UK, this should bring some benefits. Still, suppose the ongoing challenges of Brexit, its impact on tariffs and labour, and the weakening of the Sterling continue. In that case, we will continue to struggle as a nation compared to those around us.

Hopefully, however, the perfect storm of Brexit, followed by the pandemic, the War in Ukraine, and then a run-on Sterling, is behind us, as is the drastic increase in the cost of construction materials.

 

[1] Source: JLL Research, U.S. Bureau of Labor Statistics
[2] https://www.fmb.org.uk/resource/state-of-trade-survey-q2-2022.html

 

Photo by Jungwoo Hong on Unsplash

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.

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