FABRICATED STRUCTURAL STEEL (Jul 18 – Jul 19)
CONCRETE REINFORCING BARS (STEEL) (Jul 18 – Jul 19)
READY MIXED CONCRETE (Jul 18 – Jul 19)
OIL PRICES (BRENT CRUDE) (24 Sep 2019)
CONSTRUCTION INDUSTRY Average Weekly Earnings (Annual Growth to July 2019)
UK MANUFACTURING OUTPUT (Jul 18 – Jul 19)
Corresponding with a slowing construction industry and reduced demand, construction material price inflation has softened in recent months.
The latest ONS data shows that the ‘All Work’ construction material price index increased by 2.2% in the year to July 2019 – the slowest annual growth rate since 2015. Since the EU referendum in June 2016, construction material prices have increased by approximately 13%, largely due to a weaker Pound raising import cost inflation.
The easing of material price inflation in the past few months can, in part, be attributed to a fall in commodity prices such as oil and increased global steel supplies adding downward cost pressure. Material prices may have also been affected by lower demand as some construction firms unwound their stockpiles that were built up in the run-up to the original Brexit deadline in March 2019.
Looking at the inflation of specific materials, prices for imported sawn or planed wood have continued to decline since our last TPI report. Since their high in December 2018, prices have fallen by -7%. Over the same period prices for imported plywood fell even further, declining by -13.1%. With limited domestic production, the UK relies heavily on imported wood but softer demand has, after a period of very strong inflationary price growth, put downward pressure on prices. Another material that has seen a notable drop in prices since our last TPI is concrete reinforcing bars (steel). Prices have dipped 2% since April, reflecting global declining steel prices.
Mounting Brexit and global uncertainty have reduced demand for UK construction projects. This is clear from the most recent new order figures. As a result, demand for construction materials has fallen, putting downward pressure on prices. Subdued domestic demand will likely dampen inflationary growth for the remainder of the year but there are numerous factors that could affect material prices depending on how Brexit is resolved.
Average weekly earnings (AWE) in the construction industry increased by 6.7% in the year to July 2019 to £653 per week – a growth rate that was stronger than AWE for the whole economy, where earnings rose by 4.1% over the same period. Once again AWE growth in the construction sector was well ahead of annual consumer price inflation growth and continues to put upward pressure on costs.
Since 2000, the AWE annual growth rate in the construction industry has been 3.2%. In only three of the last 19 years has annual AWE growth exceeded 6.7%. Despite the backdrop of falling new orders and sluggish output growth, there is a strong demand for skilled construction labour. The exacerbating skills shortage continues to put upwards price pressure on costs.
Bricklayers (masonry) and finishing trades have been particularly affected by a shortage of labour supply. According to our survey results this quarter, the proportion of respondents who anticipate a skilled labour shortage in London over the next six months remains broadly on par with our previous survey (around 63%). A lower proportion (29.3%) has taken a more neutral view on labour supply in the Q3 2019 compared to the previous quarter’s survey (32%). It’s clear that the perception of skilled labour supply hasn’t changed substantially over the past three months and concerns still exist. Several respondents commented that labour is becoming increasingly difficult to find and costing more to procure, but that it’s not a major issue yet.
Somewhat unsurprisingly, construction job vacancies have fallen by 24.1% since Q4 2018, corresponding with the drop in new orders and construction output. However, construction vacancies in the UK are still significantly higher than they were during and shortly after the financial crisis. If construction activity does slowdown further and vacancies fall, we’re likely to see AWE growth slow.
The UK (particularly London) remains exposed to the risk of skilled labour moving further afield to more attractive markets in order to increase their earnings potential. If we see a no-deal Brexit and Sterling drops further, this phenomenon could be very damaging to UK construction, reducing capacity and putting further upward pressure on wages.
PROFITABILITY AND SUPPLY CHAIN
G&T has seen no evidence of any significant changes to OH&P and preliminaries from tender returns in the past three months. Average OH&P remained stagnant at around 5-6% and preliminaries around 15%.
Over the next 12 months, a growing number (25%) of survey respondents are expecting OH&P to fall from current levels, but most (63%) expect OH&P to remain unchanged. With less work around competition could tighten. However, margins are already thin so contractors’ ability to reduce OH&P is very limited.
Relatively few survey respondents (16%) believe that preliminaries will fall over the next 12 months. A greater proportion (21%) think that preliminaries could rise with some attributing this to higher labour costs and having to adopt new construction technologies. Others thought that there could be supply issues with unitised facades (particularly for residential towers) which could push preliminaries up. However, the vast majority (63%) expect preliminaries to remain unchanged, suggesting that if contractors did have to cut margins to secure work, that they would need to at least maintain preliminaries at current levels.
G&T continue to see new enquiries come in but most tend to be focused within a few key sectors (E.g. hotels, senior living and PRS). Projects are progressing to the market over the back-end of 2019 and 2020 but thereafter the pipeline is a little less certain. Tier 2 main contractors appear to have more availability on their order books so the supply chain is starting to look for more work.
We continue to see a two-tier tendering market with smaller, low-risk schemes being competitively tendered and often coming in below our pre-tender estimates (PTE). Conversely, the larger and more complex projects are being less competitively tendered, partly because there is a smaller pool of tier 1 contractors that have the capability to take on the larger projects and also because these larger and more complex schemes are generally procured under a two-stage procurement route, resulting in higher tender returns.
Whilst the outcome of Brexit could have a significant impact on the construction sector in the medium to long-term, for the remainder of 2019 we do not expect any major changes to construction activity. New orders and output are expected to remain subdued and tender price inflation low. Whilst input costs such as labour are still putting upward pressure on tender pricing, the recent easing of materials prices has provided some respite to contractors.