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Materials supply to the UK construction industry is under severe pressure resulting in rising costs.
The BCIS Materials Cost Index shows that, provisionally, materials prices rose by 2.7% in 1st quarter 2021 compared with the previous quarter, and by 5.6% compared with a year earlier. The forecast for 2nd quarter 2021 shows an increase of 2.6% compared with 1st quarter 2021, and a 7.2% annual increase.
Anecdotally, there has been a lot of concern about materials shortages this year, which is likely to be reflected in longer lead time, higher prices and price volatility. Materials shortages are said to be the result of a number of compound factors: Covid-19 has affected supply from mills and factories; supply chain bottlenecks due to global demand shocks, container shortages and port delays; construction demand rose quite sharply in the second half of 2020 after initial lockdown; increased administration at UK ports affecting imports and exports due to UK EU Trade and Cooperation Agreement; sharp rises in shipping costs and temporary surcharges.
Shipping lanes have been extremely busy due to the world demand for manufactured goods during the pandemic. In the major ports of the world, ships have had to wait to dock and some have been diverted, and unloading and reloading times have risen 200%, also exacerbated by the blockage of the Suez earlier in the year. Ports in Asian countries, in particular, have been affected by the pandemic, both in terms of loss of labour and social distancing. Container freight rates have quadrupled since the beginning of the year which, combined with global container shortages reported in early 2021, has resulted in bottlenecks. As restrictions ease worldwide, it is anticipated that there will be a shift in consumer spending from manufactured goods to services such as eating out, and visiting attractions, which may in turn result in reduced demand and therefore lower shipping and freight costs. However, initially there may be pent up demand for manufactured goods such as new cars, as Covid-19 restrictions ease.
The price of some imported materials is expected to rise quite sharply as a result of increased administration costs and delays at UK ports. The delays at ports are currently easing and are expected to improve over the first half of 2021.
Steel products, timber and aggregate have already had large cost increases in January/February 2021 measured by the BCIS Price Adjustment Formulae Indices, but aggregates prices fell back in March 2021.
According to the Construction Leadership Council, plastics, cement, timber, roof tiles, bricks and imported materials such as plumbing and electrical products are in short supply. It should also be noted that the £1.6 billion funding for re-cladding unsafe blocks of flats could lead to a shortage of cladding generally. The HS2 project is also being a drain on materials supplies.
Since the beginning of the year the IHSMarkit/CIPS UK Construction PMI has shown shortages of over sixty different construction materials including bricks, timber, roof tiles, insulation and kitchen appliances in every month of this year so far. Overall, the number of construction materials experiencing shortages and price increases is trending upward.
As steel producers start to ramp up production following the worldwide pandemic, the price of reinforcement could fall later in 2021, and BCIS have currently allowed for falling prices in the second half of 2021. As a result, the price of steel reinforcement is expected to fall by 9% in the year to 1st quarter 2022.
Most timber is imported for use in the construction industry, and world demand is exceeding supply. The Timber Trade Federation currently suggests that UK demand will outweigh supply in 2021.
The cost of European Brent crude oil stood at US$44 a barrel in 4th quarter 2020. The outturn cost for 1st quarter 2021 was US$61, representing a quarterly increase of 37%, and a 19% increase on a year earlier. At a meeting of OPEC+ earlier in the year, it was decided to keep oil production fairly steady, although Saudi Arabia would continue to cut production in April. At the OPEC+ meeting in April, it was decided to reduce oil production in May, June and July. Monthly meetings are to continue to observe the effects on the market. This partially led to the jump in prices in early March. At current prices, US output is expected to increase significantly in the second half of 2021, with a consequential fall in prices during this period.
The U.S. Energy Information Administration (EIA) revised their forecast for the price of Brent crude to US$62 for 2021.