1.5 - 2.5%
Fabricated Structural Bars (Steel) (Nov 18 - Nov 19)
Concrete Reinforcing Bars (Steel) (Nov 18 - Nov 19)
Oil Prices (Brent Crude) (15 Jan 2020)
Ready Mixed Concrete
Construction Industry Average Weekly Earnings (Annual Growth to Oct 2019)
UK Manufacturing Output
Corresponding with a slowing of new orders, construction material price inflation has softened in the last quarter.
The latest ONS data show that the ‘All Work’ construction material price index fell by 0.6% in the year to November 2019 – the slowest annual growth rate since 2015. In the month of November alone construction material prices fell by 1.5%.
The Pound has strengthened significantly since our last TPI. Trading at around 1.10 at the end of July 2019, the Pound has risen by 6.4% to around 1.17 to the Euro at the time of writing. Reduced inflationary pressure for imported construction materials will provide some relief to contractors who are experiencing rising labour costs and downward margin pressure.
Looking at the inflation of specific materials, prices for fabricated structural and steel and rebar fell by 4.1% and 9.3% respectively in the three months to November 2019. The cost of imported sawn or planed wood also fell over the period prices are now 10.4% lower than they were in November 2018. Falling demand, lower key commodity prices and the appreciation of the Pound, have all factored into the recent declines in material prices and will help offset other rising input costs.
Average weekly earnings (AWE) in the construction industry continue on their long-term upward trend, and have increased by 4.1% in the year to October 2019. In the three months to October 2019 AWE in the construction sector were £651 per week – up from £620 per week (or 5%) in the same three month period a year earlier. This significantly outstrips wage growth for the economy as a whole, which rose by 3.2% over the same period.
Rising earnings are putting significant upward pressure on labour costs but the number of job vacancies are falling and our TPI data indicates that some contractors are pausing hiring plans. With low demand and new orders in decline it would be fair to assume that we’ll see less upward pressure on pay growth in 2020.
The longer-term trend will continue to be one of rising labour costs due to a chronic undersupply of skilled labour. To get through this period of lower demand, contractors are increasingly recruiting fewer permanent staff and are relying more on temporary workers. In fact KPMG recently found that permanent staff vacancies in the UK construction industry have now declined for nine successive months whilst demand for temporary staff rose in December 2019 for the first time since June 2019. This trend is likely to continue until the sector reaches a period of sustained stability.
Our TPI survey indicates little has changed in terms of the expected supply of skilled labour over the next six months. The vast majority of those responding (57%) expect a shortage of skilled labour, with 28% taking a more neutral view on labour supply. Several noted they were seeing shortages in finishing trade packages such as drylining but also in MEP. Bricklayers were also reportedly becoming scarcer as national house builders take up more of the available supply.
PROFITABILITY AND SUPPLY CHAIN
There were no 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 14-15%.
Over the next 12 months, a significant proportion (23%) of survey respondents are expecting OH&P to fall from current levels, but most (57%) still expect OH&P to remain unchanged. Until the suppress demand from the months leading up to the GE is unblocked, competition could tighten further and lead to supressed profit margins. For now, contractors continue to chase work which is likely to keep OH&P in check.
Despite the majority expecting little change to preliminaries in 2020 (63%), a higher ratio of respondents (23%) now believes that preliminaries will increase this year compared to our previous TPI report. Rising wage costs are thought to be the key driver of these higher preliminaries.
The ONS’s Construction Output Prices Index (OPI) – an industry-wide estimate of input cost inflation using materials, labour and plant costs (as well as a profit mark-up) on projects at the point they are delivered – rose by 3% in the year to September 2019 for ‘all construction’ work in the UK.
Although the OPI is a measure of inflation at the point a project is delivered rather than at the point it is tendered, it can still act as a useful gauge for changes to input cost inflation. The OPI suggests a higher inflationary growth rate for input costs than G&T’s UK average tender price inflation forecast of 1% in 2019. However, the difference can largely be explained by the existing market and supply chain conditions. In the more competitive market that we saw in 2019 (and are experiencing currently), rising input cost inflation was not fully feeding through into tenders. Tender prices have generally been found to be more reactive to demand-pull than input cost-push inflation, which partly explains the discrepancy between G&T’s 1% TPI forecast and the OPI reading of 3%.
Another factor that could explain the discrepancy relates to the fluctuation provisions included in construction contracts which allow contractors to pass on increases in input costs encountered in the period between the date of tender and the date on which the work was carried out.
Now that a portion of the political uncertainty has been removed in the wake of the GE result, it is unlikely that tender price inflation will fall in 2020. We anticipate a modest rebound in construction demand to pull tender price inflation upwards in 2020, but the picture will become significantly clearer as the year progresses. Contractors’ workloads are likely to improve in the second half of the year as investment conditions become more favourable and more details are provided on the Government’s infrastructure agenda. Consequently, G&T would expect most upward inflationary cost pressure to surface in Q3 and Q4 2020 as competition for work lessens.