In past recessions the US and Europe were the drivers of the world economy, but this time it is very different. China and other emerging economies are rapidly growing, and a result of this is they’re buying up all the raw materials. So what does this mean for the UK construction industry?
In July 2010 the price of copper was just over $6.5k per tonne. Fast forward less than six months to January 2011 and the price had risen dramatically by more than 45% to almost $10k per tonne (Reuters). Raw materials represent a large chunk of construction firms' costs. If working on tight margins of, say, 3% on a £1million project, an inflation rise to as little as 5% would result in a potential loss of £200k.
With experts believing that India and China will account for a doubling in demand for raw materials over the next two decades, commodity prices of copper, steel, platinum and high-grade components will continue to be driven up as demand outstrips supply. The challenge for the UK construction industry is to manage the pricing on future projects against a rising cost base. It is important to protect against risk with forward planning.
One way to do this is the large-scale buying of commodities, but this is only a realistic option for major companies. For SMEs the trick is to protect against excessive inflation by using indexation and having this built into the contract, this will help maintain purchasing power after inflation. There are many types of price index, so it’s best to choose the one most suited to your market.
Another effect of rising commodity prices is the drop in labourers’ day rates. In the last eighteen months I’ve noticed quotes have dropped by as much as 50%. This vast reduction in price is being driven by high rates of unemployment, which has forced labouring firms into these pricing measures in order to get a foothold in an ever more competitive marketplace.
Worryingly, with increased unemployment and less work available, many of the leading lights in UK construction are taking their skills abroad, migrating to Australia, Canada and the Far East. This migration of knowledge overseas will continue for as long as these economies keep growing.
For the moment, however, the increasing cost of raw materials is being balanced out by general labour becoming cheaper. Construction in the UK has an uneasy stability, but it is also restricting the scope of projects present and future and, as far as I can see, will continue to do so for some time.