Energy costs undermine recovery

9 May 2006

Construction output has strengthened since the start of 2006 and looks set to grow further in the second quarter, although high energy costs continue to undermine the recovery according to the latest Construction Industry Trade Surveys, published by the Construction Products Association and the Construction Confederation. 

The rise in activity, following a disappointing 2005, supports industry forecasts of a modest recovery in 2006.  However Michael Ankers, Chief Executive of the Construction Products Association warns: “Sharp fuel and energy prices are increasing unit costs and squeezing profit margins of product manufacturers and contractors alike.”

Construction product manufacturers reported an overall improvement in activity, with light side firms leading the growth again and heavy side firms experiencing mixed success.  Commenting on the findings, Ankers said: “Light side firms seem to have benefited from Government social housing, school building and NHS investment programmes.  The fact that a significant number of heavy side firms are also reporting growth suggests that some at least are finally benefiting from the start of much delayed infrastructure projects.”

Building contractors also enjoyed a growth in output during the first quarter compared to last year in almost all sectors.  Construction Confederation Chief Executive, Stephen Ratcliffe said:  “While the overall trend is promising, particularly for large firms that have gained from an expansion in public non-housing activity,  small firms’ output has fallen back, mainly due to the continued weakness in the private new housing and housing maintenance and improvement sectors.  Once again we are seeing contractors reporting increased pressure on margins from rising material costs and a deceleration in tender price inflation.”

Despite the moderate rise in construction output, there is growing industry concern over the impact of rising energy costs.  Michael Ankers added: “Some construction product manufacturers have faced gas price rises of up to 300% over the last three years, while others anticipate energy price hikes as their fixed term contracts come to an end.  The consequences of this on the price for products are only just beginning to feed through, something contractors will need to be alert to over the coming months.”

Key survey findings are:

• Contractors reported first quarter output ahead of a year ago, with, on balance 28% of firms reporting that output was up on a year ago.
• Construction product manufacturers saw a moderate overall rise in sales volumes, with a balance of 8% of all firms reporting that sales volumes were up compared to a year ago, led by strong light side sales, where a balance of 71% of firms report that sales were higher than 2005.  The experience of heavy side firms has been mixed.  On balance 11% of those firms reported that sales volumes had decreased compared to a year earlier.  However within this, more than a quarter report that sales growth was up ‘more than 5%’. 
• The products manufacturing industry anticipates a modest overall strengthening in sales volumes over the next 12 months, mainly due to light side firms expecting to benefit from the latest Building Regulations targeted to increase the energy efficiency of buildings.
• 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.  Whilst local roads and railway infrastructure related work weakened slightly compared to the previous survey, water and sewerage related works increased. 
• Both heavy and light side manufacturers have seen widespread increases in fuel and energy costs, which they believe are the main drivers of their unit costs.  A third of firms saw unit costs rise by ‘more than 5%’.  On balance more than two thirds of all firms surveyed, indicate that unit costs were higher as a result of the cost of energy.  The rise in unit costs continues to filter through to manufacturers’ selling prices.  On balance 63% of heavy side firms and 58% of light side firms report that their selling prices have increased in the first quarter, compared to a year earlier.
• Contractors report increased pressure on margins from rising material costs and a deceleration in tender price inflation, while concerns over labour costs have eased.
• The 2006 Budget was widely seen by the industry as adding to both, regulatory and administrative and tax burdens faced by the industry, but the industry is divided as to whether the Budget will help lift overall investment in the built environment.

The full Trade Survey report is being circulated to members and can be accessed via the members’ section of the Association’s website.