The price of a number of construction materials has skyrocketed over the last year, with the value of certain categories of timber and steel products in particular recording increases in the magnitude of 25% to 30% over the last six months.
The surge in price is being underpinned by tighter supplies globally, with the coronavirus pandemic greatly limiting the mining and harvesting of raw materials while processing plants have also been hit hard in many of the countries responsible for world market supplies.
This fall in production has occurred against numerous stimulus packages being released worldwide to support and speed up the recovery from the economic and health effects of the pandemic. The most noteworthy of these are a 3.6 trillion yuan ($500bn) fiscal stimulus released in China in mid-2020 and a massive $1.9 trillion economic stimulus bill signed into law by US President Joe Biden in March of this year.
These stimulus packages and steady demand elsewhere are putting pressure on an already heavily disrupted global transport network where the cost of shipping materials has also increased sharply in the last 12 months.
Ireland is at the mercy of global trade for much of the steel-related inputs used in the construction sector, be that in agricultural, industrial or residential construction. In recent times we have also become more exposed to fluctuations in the value of timber globally. This is due primarily to the sector being stifled by what has often been referred to as the national tree felling licensing fiasco.
This has curtailed the volume of domestic timber supplies available and has left key markets such as the UK also looking and competing for tight supplies of timber across Europe and further afield. The increase in timber costs is now starting to hit home but a worrying factor for many merchants is not just about price, it is sustaining adequate flow in supply channels. The same can be said of steel and processed steel products.
As detailed on page 49, the price of steel has increased twice since the start of the year, which is described as being unheard of in agricultural construction. Furthermore, the nature of these increases is another factor worrying businesses in Ireland and the UK, with no prior warning of a spike in price.
Products such as cladding, which had a typical turnaround time of two to three weeks from ordering to delivery, have now been pushed out for a number of months and the timeline of orders has become more uncertain.
The surge in costs has resulted in suppliers and shed manufacturers becoming much more cautious in their approach to quoting for construction materials or construction jobs. Some suppliers and manufacturers of materials have reduced the period for which quotes will remain open to just a couple of weeks or even shorter in cases. This is a significant change from quotes remaining open for a number of months and is putting pressure on to get contracts signed.
The increase in costs has not as yet had a major effect on reducing investment at farm level, with many businesses reporting they are at their busiest level since the ending of the Farm Waste Management Scheme in 2008.
Investment is being underpinned by continued expansion in the dairy sector but there is also significant investment taking place in other sectors, with some reports suggesting the coronavirus pandemic is actually supporting greater investment among part-time farmers who have more time on their hands and are willing to invest to make their enterprises more efficient.
Spending is being helped at present by a period of improved farm output prices.
Figure 1 details the latest price trends contained in the CSO Wholesale Price Index (WPI) statistical release published on 21 May 2021. The year 2015 is taken as the baseline for the price of the selected materials, with changes benchmarked against it.
The WPI statistical release also analysed shorter-term price trends. Timber experienced the greatest annual increase, with the categories of rough timber (including plain sawn) and other timber increasing in price by 30% and 33.7%, respectively.
Structural steel increased by up to 25% on the corresponding period in 2020. Again, it should be noted that these increases are up to the end of April, with many merchants reporting further lifts in May. Reinforcing metal, meanwhile, increased by 14.4%. This is having a significant influence on the price of reinforced concrete products such as tanks and slats, precast walls, silage slabs etc.
Case study: Insatiable US demand for timber
Reports indicate demand for new houses in the US is almost at the levels seen in 1999 before the recession of the early 2000s hit. US timber demand has also been influenced by reduced availability of Canadian timber, which is the main supplier to the US market.
Canadian timber output has been hit on a number of fronts. Coronavirus has hampered production but the main contributor is a spike in infestations of the mountain pine beetle decimating large swaths of the country’s high-value forests.
The increased infestation is said to be supported by climate change and increased winter temperatures in recent years that would normally keep the rate of infestation at bay.
The US timber market has been in a state of fluctuation in recent weeks. Bloomberg report that timber prices have fallen by up to 30% since 10 May with the price on this date more than four times higher than May 2020. The fall in price is said to be due partly to fears of the market overheating and some projects being cancelled on the back of tighter supplies and increased construction costs.
Futures markets predict a steady medium-term outlook and a significant reduction in the value of timber towards the end of 2021 and in to 2022 on the basis of a recovery in global supplies.
Case study: COVID-19 hampers Brazil and India iron ore production
Australia has the world’s largest resource of iron ore and is by far the greatest producer, with production estimated in excess of 900m tonnes in 2020 or over 38% of world output. Brazil produces in the region of 15% to 17% of world output, with China not far behind at 13% to 14%. India is also a major player, producing in excess of 200m tonnes on average or in the region of 9% of world production.
Iron ore production, which is the primary component of steel, was generally unaffected by coronavirus in Australia in 2020, with output growing and in excess of 60% of production exported to China. The main contributors to tighter supplies globally were lower production in Brazil and India due to coronavirus while production was also thought to be reduced in China.
This, along with curtailed further processing, led to much tighter supplies available globally and a significant increase in the price of steel while the economic stimulus packages mentioned above have carried these price increases forward in to 2021. Many industry reports had expected steel prices to rise irrespective of coronavirus but nowhere near the level of what has been experienced. Data analysis groups expect prices to remain high for much of 2021 before possibly easing back on the back of higher production forecasts.
Analytics specialists GlobalData forecast iron ore production to recover in 2021 with production predicted to increase in Brazil and India. This of course is provided the recent escalation of the coronavirus pandemic in India is brought under control.
Production is also forecast to increase in China, with numerous reports suggesting China will mine more of its own resource and also insert pressure on input prices to keep inflation in check. In the longer term, production is expected to continue to grow but for those dealing with the immediate price fluctuation it is a situation which looks likely to remain for at least the immediate future until global reserves improve and the supply-demand balance comes back in line.