International costs: 2005

China and steel: The global effects of an unprecedented boom

After years of hype, the reality of the huge Chinese economy started to have a global effect in 2004; China became the main driver of international construction costs – a role previously played by the US and Western Europe. China’s economic engine helped reverse years of deflation for construction costs in neighbouring Asian markets and its huge appetite for raw materials sparked worldwide inflation for a broad range of construction materials. The US market, where construction costs rose at a double-digit pace, was the hardest hit but inflation also posted large gains in many other countries, according to a survey by London-based international project and cost management firm Gardiner & Theobald, Levett & Bailey and Rider Hunt.

In its 13th annual survey of international construction costs conducted, G&T reports that construction inflation increased on average 5.2% in 23 nations in Europe, Asia and the Middle East. This is up from a 3% rate reported for the same group of countries in 2003 and 2.3% in 2002. In the US, the survey shows construction costs in New York climbing from 2.4% in 2004 to 12% this year. In Western Europe, construction inflation rose from 2.5 to 3.7% during the same period.

Contractors in Australia and New Zealand also struggled with rising material costs in 2004. The report notes that construction costs in New Zealand jumped 14% this year, after averaging annual increases of less that 2% for the previous seven years. In Australia, construction inflation rose from 4% in 2003 to 7% this year, according to the survey.

Some of the largest cost increases surveyed were in Eastern Europe, where construction inflation nearly doubled to 6% in 2004. This excludes Romania, which is coming back into line with inflation rates in other European countries after suffering cost increases of 34% in 2002 and 40% in 2001. G&T estimates that construction inflation in Romania will drop to 9% this year.

“Bucharest is booming,” says Doug Nobel in the local G&T office. Prices are edging up but remain as much as 40% lower than in Western Europe, he says. But the gap is narrowing – “only in the sense that international companies are becoming more competitive,” Nobel adds.

In South America, Argentina is back in the grips of double-digit inflation after minimal cost increases in 1997-2001. This year G&T expects costs in Argentina to increase 25%, following annual gains of 20% in 2003 and 68% in 2002.

Overall, G&T expects the international inflation rate for construction to begin to ease next year. The 17 countries providing forecasts for 2005 predict building costs will increase 5% next year. The same group of countries reported a 7% increase in 2004.

Struggling with steel

Higher steel prices had less of an impact on contractors in Europe than in the US because concrete is the material choice for much of Europe, and the share of steelwork in a project’s cost is still small, according to a number of sources. But firms in Europe still had to cope with the global phenomenon of higher prices.

In Poland, rebar also went up 40-50%, says Jan Holyst of G&T’s Warsaw office. Some construction companies on fixed prices were “caught in the cold” as owners were held rigidly to contract, he adds.

Construction in Poland – Eastern Europe’s largest market – is “not as competitive as it was,” says Holyst. As construction demand picks up after a long depression, “this year there has been a noticeable increase in prices,” he adds.

In Slovakia, Bratislava is also booming and helping to push up bid prices about 10% this year, says Levente Varga, of G&T’s Bratislava office. The most dramatic single event was this year’s hike of VAT from 10 to 19%, “For contractors, it was a huge, huge increase,” he says. With end users unable to recover the tax, the residential market felt it most, he adds.

In the UK, where the use of structural steel is more widespread, the popularity of the material for building frames has not abated, says Paul Ridout, a London partner of G&T. Though the price hike was large, steel costs account for only a few percent of total investment, he says.

The UK “is benefiting from a return in business confidence with early signs of revival of the commercial building market,” says Ridout. Public sector spending in the UK is also due to remain strong. As a result, “tender prices are just slightly on the up,” he adds. The firm calculates that this year’s national average rise in bid tender prices has been 4.5% and is forecasting 4% in 2005.

In Spain, construction prices are not creating “any surprises,” says Cecilia Espinosa de los Monteros, managing director of Madrid-based cost consultant CEM Management S.A. While the retail and residential sectors are still active, commercial construction is now quiet. But since the Socialist Party won this year’s government elections, investment in public works has slowed.

Costs in France have risen fractionally over last year to about 4% overall, says Peter Lewis, in G&T’s Paris office. Demand for construction is hottest in the Paris region. Construction costs can be between 5 to 10% lower in areas outside of the capital, he says.