Are construction input prices finally starting to fall?

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The construction industry around the world has faced a period of unprecedented price increases.

Prices started to accelerate in 2021, as activity picked up strongly in the wake of the Covid-19 crisis stretching and squeezing supply chain.

That trend accelerated in 2022, with the Ukraine war also affecting the cost of input prices like oil and gas, as well as resulting in scarcity of certain raw materials used in construction, particularly in Europe.

In the European Union alone, for example, construction producer prices for new residential building increased by 5.6% in 2021 and then by 11.9% in 2022, having previously not risen by more than 3.5% in any year since 2008.

But there are signs in multiple regions around the world that some input prices for construction companies – if not all – are starting to fall.

In the UK, the Construction Leadership Council (CLC) recently declared in its latest Product Availability Statement, that “price inflation has stabilised”.

“Whereas a year ago we were seeing increases of over 5%, if products are increasing in price, it is now at 1-2%,” said Peter Capelhorn, CEO of the Construction Products Association and John Newcomb, CEO of the Builders Merchants Federation.

They pinpointed falling demand, particularly in housebuilding, as the reason behind the stabilisation in prices. In fact, they highlighted declines in prices of some categories of timber, along with some plastic and energy intensive products.

Diesel prices drag prices back up in US

But those price declines are patchy – not all types of materials are falling in cost. And rises in other costs are offsetting falls elsewhere.

In the US market, for example, Associated General Contractors of America recorded a 1.1% increase in the price of materials and services used in non-residential construction from July to August this year.

AGC said that prices for most major construction inputs actually fell. As in the UK, prices for plastic construction products were down by 0.2%. Steel mill products also dropped by 0.5% and gypsum building materials were down by 0.4%.

But those falls in prices were offset by a substantial rise in the price of diesel fuel. Its selling price at the terminal rack or refinery jumped by 34.6% from mid-July to mid-August – the largest one-month jump since 1990.

Unfortunately, that meant that instead of dropping, construction input prices as whole saw their largest increase from July to August since January. Diesel prices have since continued to rise.

“The steep climb in diesel prices since July is a reminder that construction cost worries have not gone away”, said Ken Simonson, the associations chief economist.

‘High price increases over’ in Europe

In Europe, there are further signs that building costs are starting to decline, although once again this is because demand for construction services is moderating or falling.

A report by Dutch bank ING earlier this month declared that “high price increases are over”.

ING senior construction economist Maurice van Sante said, “Fewer contractors are increasing their sales prices due to the lower costs of some building materials.

“The reasons for these lower prices are diminished supply chain disruptions and weakening demand. Contractors no longer have to pass through their higher input prices or encounter a high level of competition – particularly in Austria and the Netherlands,” he added.

Separately, figures from the European Union’s statistics body Eurostat also show that prices are starting to stabilise.

Construction producer prices or costs in new residential buildings increased by just 0.5% in the second quarter of 2023, as compared to the previous quarter.

And while costs in the first quarter of 2023 were up 10.5% year on year, they rose by 6.4% year on year in the second quarter of 2023.

Price growth eases in Australia

Meanwhile, in Australia, input prices to housing construction rose by 0.6% in the June quarter of 2023. That was the lowest quarterly rise since December 2020.

The Australian Bureau of Statistics said that the increase was driven by energy-intensive materials such as plaster and concrete, as suppliers passed on increased energy and freight costs from recent quarters.

It added that while prices continued to rise, growth has eased for the fourth consecutive quarter as supply chains improve and demand fell.

The overall picture then, does point to a continued stabilisation in prices, in multiple markets across the world, albeit with the potential for spikes in certain goods or materials, as has been seen with the cost of diesel in the US.

Worker shortage could add costs

But the AGC did highlight one other area where construction companies could incur extra costs – recruiting skilled workers.

It warned that contractors are still experiencing widespread problems finding qualified workers.

Its annual workforce survey, conducted with Autodesk, found that 85% of respondents have job openings for hourly craft workers or salaried workers. Of those, 88% reported difficulty finding craft positions and 86% said it was hard to find salaried workers.

“Contractors in many parts of the country are struggling to find enough people to keep pace with demand,” said Stephen E. Sandherr, the AGC’s chief executive officer.