Large energy and construction material price increases, due to the recovery from COVID-19 and more recently with the problems in Ukraine, are still the main issues affecting our industry. To provide some perspective, the Flat Cost forward baseload price of electricity has moved from circa £65 / Mgwh in April 2021 to £216 / Mgwh in April 2022, with prices breaking the £340/ Mgwh barrier at the beginning of the war in Ukraine. And, we have now seen steel price rise announcements totalling circa £800/tonne since the beginning of 2021. I can remember the days when a MD of a steelwork contractor would have had to have a lie down if the price of steel had risen by £8/tonne without ample warning.
When the price of all construction materials, including steelwork, increases rapidly without notice, cost plans are blown to smithereens. There is either a mad panic to procure materials before the price rises take effect, leading to high demand and supply problems, or the reverse with clients and Principal Contractors leaving the market. Whichever way it goes, life becomes harder for Tier 2 steelwork contractors.
So, where is all this heading? Large steelwork contractors are now seeing a number of projects being put on hold, with the QS convinced that the project will be more feasible a year or two down the road. Historically, they are probably right to think this, as soon as the market tightens, steel and other construction material prices will drop rapidly and the QS may be proven correct.
However, I’ve looked at the price of steel from the BCIS and compared the increase over time with house prices from the ONS. Steel prices have gone up on average 6.08% per year over 51 years, whereas house prices have increased by 8.25% over the same period. Index benchmarking of historic housing prices suggests they are more than double the index price of steel in the year 2021. OK, you could argue that it isn’t a fair comparison, house prices versus steel prices, after all “they’ve stopped making land” and that represents a large chunk of a house price. But, they have also stopped making iron ore and although structural steel at end of life is in the order of 99% recycled, there also isn’t enough scrap to go around either.
There is no doubt that the price of construction materials needed to rise, the index price of steel in 2020 was lower than it was in 2008. The problem is the exponential rise over the last two years. Most people felt steel prices had to rise, more stable rises would have been preferred, but they still wouldn’t have been welcomed in such a fiercely competitive market. Steel prices are now more sustainable for the long-term survival of the steelmaking industry here in the UK, but If clients turn off the tap of new orders, the steel construction industry will seriously retract. It’s very much a case of it’s a lot easier to turn the tap off and reduce production, than turning the tap back on and returning to full production. What we need is long-term thinking and a period of stability.