The price of raw materials is constantly increasing, and they have already reached pre-pandemic levels. This is forcing an increase in the construction final price due to inflation, and we have not hit the top yet.
At the end of September this year, the CPI rate rose to 4%, the highest since 2008. This rate will increase even more as the prices of certain goods and services are still on the increase. Amongst others, the cost of electricity is stifling both individuals and businesses. Raw materials have also increased in price. The construction sector is one of the most affected.
Why have the prices of constructions materials increased so much?
The construction costs have increased in the last few months since there is a higher demand for products after the global economic recovery.
On the one hand, we have the fact that there is a shortage of raw materials as well as a delay in the delivery. This is the result of the recovery in the demand for these products to pre-pandemic levels, especially from the United States. There is higher liquidity in the market, and people are buying more, and, as a result, there is a greater need for materials.
As previously mentioned, one of the most affected sectors is construction. There are registered increases in the cost of basic materials such as steel or copper of more than 78%. Raw materials are more expensive, but contracts and deadlines have not changed. Consequently, 7 out of 10 works are coming to a halt or slowed down.
However,
What could the effects be of a prolonged increase of construction costs in the evolution of new buildings in our country?
The prices of construction material are going through the roof: “If this carries on, the price of new buildings will increase even more.” Thus it was highlighted in an article in the newspaper elDiario.es. Cement, concrete, steel, copper, aluminium, wood, plastics…, the economic recovery has affected the construction sector, threatens the viability of new-build projects, and puts upwards pressure on house prices.
This increase in the cost of construction materials has been going up for months all over the world. It has two immediate effects: the first one is that developers will earn less with flats that have already been sold; the second is that any new project from now on could be more expensive.
The same is happening with refurbishment companies, which are enjoying a golden period post-confinement: Either they absorb the increase or modify the estimates upwards. In Spain, the increased costs can already be seen in the official data from the Ministry of Transport. The following chart shows the evolution of prices since 2006, which considers only materials and not labour.
The prices of materials have peaked
Materials consumption cost index in the construction sector. Base January 2015=100
This situation is not completely unheard of. This type of inflation, as happened previously in the 2006 steel crisis or the 70s petrol crisis, has been caused by the increase in the demand brought by the economic recovery, the slow enhancement of production capacity globally and the significant rise in the cost of the maritime transport, as we mentioned previously.
The recovery got strong in the construction sector and has met a shortage problem in the offer. Analysts believe that this is a temporary situation, and it will improve as we go back to normality.
Wood triples in price in a year, steel doubles it
Some information concerning this to take into consideration:
- Corrugated Steel, used in the construction of concrete structures, accumulated an increase of 92% since September last year, according to the index from the National Association of Industrial Metal (ANIFER). The rise in the price of steel has also an impact on ironmonger’s materials, which have increased between 17% and 38%.
- Wood is one of the raw materials that have increased in price the most. The shortage of this product, used for beams or boards in construction, has meant that its price is at the moment 74% more expensive. Why is it so expensive? The reason for its shortage is mainly the growth in the housing market and the construction market in many parts of the world, especially in the United States, which depends on imports from Scandinavia. The same is happening in China, which has again increased purchases from the Nordic countries. Suffice it to say that the stocks in the Scandinavian sawmills are the lowest in the last 20 years. And many have been the factors that have created the perfect storm.
More information regarding other raw materials:
- The rapid global economic recovery has also caused an increase in the cost of petrol. This increase has affected all products that use it in their composition.
- The bituminous mixes that are used in road works are now 85% more expensive than the low registered in 2020.
- Since the beginning of the COVID-19 crisis, the price of copper has risen by 102% and aluminium by 53%, according to data from SEOPAN (Association of Construction Companies and Infrastructures Dealers).
This evolution of prices has shelved many projects that were about to start in order waiting for lower prices.
Delivery deadlines are jeopardized and reflected in the housing prices
These are some of the headlines that can be read nowadays:
“The rocketing prices of materials are making construction works 10% more expensive.”
“Construction is also halting: 40% of its companies have stopped or cancelled building works due to the increase of raw material prices.”
Up to this moment, the most affected have been building companies, new developments and public works. The review of prices in public works contracts is not compulsory, and it has to be justified in every document. However, refurbishment companies and companies that deal with private works pay in advance in order to obtain materials at current prices before any further increases.
This upward trend is expected to extend into the beginning of 2022, which could result in the loss of the expected profits of many of the companies that work in the development of residential new buildings. Experts in the construction sector admit that it is complicated to make predictions about the cost of materials over this period.
This might affect the increase in the costs of construction of the final product. This trend would change the price of new building, although a drop in sales is not expected as there is high demand interested in purchasing.
European Development Funds, Next Generation EU
What is indeed worrying many companies is what could happen in the following years regarding the arrival of 70,000 million from the European Funds. Fernández Alén, Chairman of the National Confederation of Construction (CNC) claimed that seven out of ten euros that Spain will receive from the Next Generation Funds will be managed by the construction sector. He fears that with the increase of prices and the delay in the delivery of raw materials, “there is a danger of indigestion as the delay in the management and execution, together with this increase and the lack of labour will create a bottle neck that could end up slowing down the pace of the recovery,”
Although the World Trade Organization (WTO) claims that the situation with the raw materials is returning to normality and that the stock is being replenished, the construction sector does not have the same perception. It does not seem that the prices of materials are easing or that materials are being delivered by the deadlines. For this reason, months ago, they asked the Government as a key measure that an automated system for the rebalancing of prices to be established in order to be able to cope with the cost overrun and that takes into consideration the alteration of prices after the submission of an offer, both upwards and downwards, and offering contracts more stability. This is a measure that was revoked with the Law of the Deindexation of prices and that the CNC considers vital currently in order to be able to fulfil the contracts, which is what companies wish, has assured Fernández Alén. However, they are still waiting for a response from the administration.
“The viability of many contracts is being questioned because the overspend that many building companies are suffering cannot be sustained over time.”
At GRUPO PAGÈS BCN we remain vigilant to the latest developments and news in the sector regarding the increase of construction materials prices. If you have any further questions, do not hesitate to contact us through our social media or email.
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