Material price inflation continued a-pace in 2014, with some contractors better positioned to absorb further cost hikes in 2015 than others. With hikes set to continue and oil prices plummetting, what can firms expect to face this year?
- Familiar refrain
- Major contractors to absorb costs
- SMEs likely to struggle
- Which materials to blame
- Oil price impact
Rising costs have always been among the biggest fears associated with industry recovery, and the price of materials lies at the heart of this.
The industry’s recovery has left some contractors far better placed to absorb further price inflation than others.
Concrete price hikes gained momentum as the year went on, growing by 1.5 per cent in Q2, 4 per cent in Q3 and 6 per cent in Q4.
Equally, prices for precast concrete have risen consistently over the past 12 months, and the indications are that this growth will continue over the course of 2015.
And while cement costs have shown signs of levelling out – government indices have been flat since July – prices are still well above 2010 levels.
These hikes are underpinned by rising demand for materials, which is likely to continue as the flow of new work steadily increases this year.
Forecasts from Mintel show sales of concrete and concrete products grew 12 per cent in 2014 and are set for a further 6 per cent rise in 2015, followed by annual growth of around 5 per cent up to 2018.
By 2018, sales will have reached £4.9bn, up from £3.4bn in 2008.
Source: Leading Edge
At the same time, new work output is forecast to increase consistently up to 2018, with projections from consultancy Leading Edge pointing to 5 per cent growth this year and 4.4 per cent in 2016.
Major contractors to absorb costs
Amid this strong recovery, construction firms are seeing mixed fortunes when it comes to costs.
At one end of the scale, larger contractors appear well positioned even if materials costs continue to grow, according to Mintel senior analyst Terry Leggett.
“We’re anticipating a buoyant construction market for the next three years – and the market is now strong enough to absorb continued growth in materials prices,” he says.
“There’s so much pent-up demand in the UK market. The bigger issues will be manpower costs, not materials costs.”
“The market is now strong enough to absorb continued growth in materials prices”
Terry Leggett, Mintel
Leading Edge director Mel Budd agrees that a strong flow of new work will help lessen the pressure of rising materials costs.
“We’re going to see a steady level of growth over the next four years in output, with commercial, industrial and private housing all big drivers,” he says.
“Growth was ahead of schedule for 2014 and, based on forecasts, 2018’s output is set to be ahead of the pre-recession peak.”
SMEs likely to struggle
But while the recovery will continue to offer opportunities for new work, not all contractors will be able to take materials cost increases in their stride.
The other end of the scale will see many SMEs feeling the pressure of rising materials costs during 2015, according to Federation of Master Builders chief executive Brian Berry.
The FMB’s latest State of Trade survey found that the net balance of contractors expecting materials price increases reached 75 per cent in Q4 2014.
“It’s clear that rising material costs is still a big issue for SME construction firms. Only a quarter [of survey respondents] believe material costs will remain the same over the coming six months and no firms think material costs will decrease,” Mr Berry says.
“There’s a lot of demand, but materials aren’t being stockpiled like they used to be”
Sarah Davidson, Gleeds
Sarah Davidson, head of R&D at cost consultants Gleeds, casts doubt on the ability of certain contractors to endure further price hikes.
“It’s difficult to say whether contractors will be able to absorb the cost of materials price increases,” she says.
“There’s still a lot of work to be made up, we’re off pre-recession peaks and we need to see more recovery for that to happen.”
Which materials to blame
Mr Berry highlights certain materials that are creating additional pressure on margins.
“Bricks are a particular issue, with some members reporting that brick prices have leapt by up to 13 per cent compared with last year,” he says.
“In some cases, prices for blocks, cement, insulation and plasterboard have increased by between 5 and 8 per cent.”
But are these pressures merely a hangover from the pace of the recovery?
A lag in stockpiling has been a contributing factor to cost pressures and shortages, Ms Davidson argues, but these issues may prove to be short term.
“At the moment we’re in an unusual situation: there’s a lot of demand, but materials aren’t being stockpiled like they used to be,” she says.
“That said, this will level itself out over time once there’s a greater degree of certainty that work will remain strong.”
Gardiner & Theobald market analyst Owen Weatherley agrees.
“We saw a lag over 2013 and 2014 as the industry struggled to keep up with the fast pace of growth,” he says.
“But as the pace of growth moderates over the next 12 months we should see supply capacity expand sufficiently. I don’t see it being a long-term problem.”
Oil price impact
Falling oil prices have made the headlines over the past month, with oil now dropping below the symbolic $50 per barrel threshold – meaning oil prices have nearly halved during 2014.
“It’s unlikely that clients will see any savings on materials from declining oil prices”
Owen Weatherley, Gardiner & Theobald
The weakness of the eurozone and the relative strength of sterling will also keep import costs down.
But it is not expected that either of these factors will have much of an impact on contractors’ bottom lines over 2015.
“Oil prices have fallen, but with demand as strong as it is, savings are unlikely to be passed up the supply chain and onto clients,” Mr Weatherley says.
Ms Davidson also believes contractors may not see any long-term benefit from tumbling oil prices.
Source: Gardiner and Theobald
“We can’t be certain this decline in oil prices is more than a blip,” she says.
“If it isn’t a blip, then we will start to see resultant falls in materials prices, but whether the reduction in cost comes back to the suppliers is another matter.”
Despite signs of continuing lag, increasing new work in the industry will outweigh cost pressures from materials, according to Mr Leggett.
“Unless there’s a significant slowdown [in output] then no, there won’t be a huge impact from material cost increases – and I don’t see that happening over the next three years.”