Recovery Marred by High Energy Prices

27 October 2006

Construction output continued to recover during the third quarter of 2006, according to the latest joint Trade Survey Report from the Construction Products Association and the Construction Confederation, but despite a recent reduction in the spot price of energy, product manufacturers and contractors are still experiencing high energy prices which are reducing margins and pushing up tender prices.
 
The rise in output has been driven by higher commercial and industrial sector output combined with an increase in civil engineering work. Disappointingly, however,  the earlier recovery in Government funded projects, such as new public housing and non-residential work and non-housing repair and maintenance work appears to have petered out.
 
Construction product manufacturers have enjoyed an overall rise in sales. Heavy side firms in particular report firm sales, benefiting from the increase in civil engineering work as well as the upturn in industrial and commercial activity. Light side firms have also seen an overall increase in sales volumes, partly due to a strengthening in export sales. Looking ahead manufacturers are relatively cautious about fourth quarter prospects, but anticipate broadly based if subdued growth over the coming 12 months.
 
Speaking about the latest report, Allan Wilén, Economics Director for the Construction Products Association, said; ‘The construction continued to grow during the third quarter thanks to higher commercial and industrial sector output and a strengthening in civil engineering work. Strength in these areas helped offset a disappointing performance in Government funded areas that has heightened concerns that increasingly cash-strapped public sector clients are deferring planned projects. Unfortunately higher fuel and energy prices are exerting increased pressures upon industry costs. The Association estimates that higher energy costs are set to add £1.6 billion to product prices.  Building contractors are now reporting that higher materials’ prices are increasing their cost base and pushing up tender prices’.
 
Stephen Ratcliffe, Chief Executive of the Construction Confederation, added. “The continued growth of the sector, and particularly the rise in civil engineering work, is very welcome. However, it does look as though government spending has lost momentum and local authorities, schools and health trusts are tightening their belts and deferring maintenance work. Not only are these perceived savings on repair and maintenance work a false economy, the importance of sustained public sector investment cannot be over-stated.
 
“It is key to the delivery of the government’s public sector services programme that the planned investment in infrastructure is not blown off course. Our industry needs continuity, consistency and the security of long-term planned investment to maintain improvements in the training and development of its people as well as the improvements in the quality of life for the nation as a whole.”
 
Key survey findings are:

• Contractors report third quarter output was ahead on a year ago, with on balance 24% of firms reporting that output was up on a year earlier.
• Overall construction product sales strengthened during third quarter with on balance a third of firms reporting higher sales than a year ago.  On balance 43% of heavy side firms report that sales volumes had increased on a year earlier, although nearly a fifth of firms report that sales were down by over 5%. On balance 17% of light side firms reported that sales were up on a year ago.
• The products manufacturing industry anticipates a modest overall strengthening in sales volumes over the next 12 months. Light side firms are especially positive, with the latest Building Regulations changes, directed at increasing the energy efficiency of buildings, expected to help boost sales.
• Civil Engineering contractors reported a further rise in total civil engineering workload, increased employment of both operatives and staff, and order books fuller than a year ago.   
• Both heavy and light side manufacturers have seen widespread increases in fuel and energy costs, which they believe are the main drivers behind increased unit costs.  Sixty percent of firms saw unit costs rise by ‘more than 5%’.  On balance two-thirds of all firms surveyed indicate that unit costs were higher as a result of higher energy prices.  The rise in unit costs continues to filter through to manufacturers’ selling prices.  On balance 83% of both heavy side and light side firms report that their selling prices increased in the third quarter, compared to a year earlier.
• Contractors report rising material costs have increased pressure on margins and contributed to an acceleration in tender price inflation.
• In contrast, contractors concerns over labour availability and costs have eased. The sourcing of many specific site trades has improved. However, contactors reported increase difficulty in recruiting plasterers and bricklayers, which along with plumbers and carpenters, remain the most difficult to fill vacancies.