FABRICATED STRUCTURAL STEEL
CONCRETE REINFORCEMENT BARS (STEEL)
READY MIXED CONCRETE
OIL PRICES (BRENT CRUDE)
The latest ONS data show that the ‘All Work’ construction material price index increased by 3.1% in the year to February 2019. Material price growth accelerated in the first three months of 2019, but between March and May prices fell by 0.6%. The rapid rise in material prices in Q1 can most likely be attributed to construction firms stockpiling materials ahead of the original Brexit deadline at the end of March 2019.
In our previous TPI report, imported sawn or planed wood saw the largest annual rise in price, rising by 8.7% in the 12 months to February 2019. However, over the past few months the price of imported sawn or planed wood has fallen substantially. In the year to May 2019, it is insulating materials (11.9%), pre-cast concrete products (4.9%) and cement (4.3%) that have seen the largest cost increases.
Since the EU referendum vote in June 2016, average material price inflation for ‘All Work’ has increased by 4.3% annually. Although rising commodity prices are partly responsible for this upward trend in material price inflation, it is likely to have been exacerbated by Sterling’s weakness.
The cost of fabricated structured steel has increased by nearly 30% since the EU referendum which, according to the ONS, is the highest percentage increase of all the construction materials over the period. Materials such as steel, for which the UK relies heavily on imports to meet domestic demand, have clearly been the most affected by the weakness of the pound since the referendum. Such materials are also the most exposed to further price increases in the event of a no-deal Brexit.
We anticipate material price inflation to continue throughout the rest of the year, but at a slower rate than the annual average of 4.3% we’ve seen over the past three years.
Average weekly earnings (AWE) in the construction industry increased by 4.8% in the year to April 2019 to £638 per week – a growth rate that was stronger than AWE for the whole economy, where earnings rose by 3.3% over the same period. Once again AWE growth in the construction sector was well ahead of annual consumer price inflation growth and continue to put pressure or preliminary costs.
Difficulty in securing site trades remains according to the Construction Products Association (CPA), particularly for plasterers, carpenters and bricklayers. Relatively high workloads have resulted in consistently high demand for labour but there are signs that workload has softened in recent months. If this trend continues, upward pressure on AWE in the sector may subside but the underlying shortage of labour is likely to remain in the longer term, pushing labour costs higher.
Our latest TPI survey results indicate that respondents continue to perceive a shortage in the supply of skilled labour over the next six months. In the longer term we anticipate the labour market to continue to tighten as the skills shortage becomes more pronounced, adding significant upward pressure to input costs that could eat further into contractor margins.
Whilst the UK regions are not as exposed as London is to an exodus of European construction workers, the regions face demographic pressure in the form of an ageing workforce. For example, although the North East only has a migrant workforce of 6%, 53% of workers are aged over 45.
PROFITABILITY AND SUPPLY CHAIN
G&T have seen no evidence of any significant changes to OH&P and preliminaries from tender returns in the past three to six months. OH&P remains around 5-6% and preliminaries around 15%.
Over the next 12 months a greater proportion of survey respondents anticipate that main contractor preliminaries will marginally increase as wage inflation continues to put preliminaries under pressure. Most respondents (72%) also anticipated that lower market activity was likely to keep OH&P under control with preliminaries remaining unchanged. However, some noted that with more contractors beginning to chase work and a restricted ability to pass increasing input costs on, that there was likely to be a squeeze on OH&P. As suggested in our previous TPI report however, profit margins are already low and it is unlikely that contractors will opt to buy work at negative margins.
The spike in new orders in Q1 2019 corresponds with our latest TPI survey results, which found that new enquiries are still being received and previously shelved jobs are now starting. The pipeline of future projects remains positive but is very sector specific. We have observed that a number of developers are moving away from the residential sector and are converting sites into commercial office developments. Other sectors, such as retail, continue to struggle. With more retail chains going into administration, large units around town centres and retail parks are being vacated. Developers and land owners are offering very competitive rents to fill this empty space, making it difficult to get new retail schemes off the ground.
Although Q1 2019 provided some respite in terms of increased new orders, this may transpire to be just a brief spike. Contractor pipelines are still reported to be strong in the short term but more Tier 1 contractors are looking to fill their order books in 2020. Because of this tender returns remain competitive – especially for smaller, low-risk schemes. Larger and more complex projects however, are seeing less competitive tension and are attracting higher tender returns.
Construction output is likely to stagnate for the remainder of 2019 as many backlog schemes will not progress until there is some level of clarity on Brexit. Some analysts expect Pound-to-Euro rate to fall to parity in the event of a no deal (or WTO) Brexit. Equally, there is significant upside in the event of an orderly EU exit. This creates a very binary potential upside and downside for the construction supply chain. Accordingly, currency-led input costs could swing in either direction. In conclusion, it remains very difficult to predict how the evolving economic and political climate will impact demand, input costs and ultimately tender pricing.