Markets

Construction Uncertainty Arises From International Economic Trends

Persistent cost growth for delivering construction projects is likely to continue to challenge contractors and supply chains across North America in the coming months.
By Greg Parker
November 14, 2019
Topics
Markets

North America is one of the largest construction markets in the world. It imports huge volumes of construction materials and, over the last six months, the sector has seen rising uncertainty driven by international economic trends.

Across the country, growing demand from the property sector and the introduction of import tariffs on key construction products have put pressure on construction supply chains. As companies try to navigate a challenging market, questions remain around construction costs volatility and the industry’s ability to respond to global trends.

Can construction companies successfully face some of the challenges arising from recent global trade policy decisions pressuring supply chains? Some trends feed directly through to construction costs—such as tariffs imposed by the United States—but other events happening globally can be less predictable and their impact much harder to assess and prepare for.

To date, the introduction of the United States’ 25% tariff on steel imports, and 10% on aluminum imports, which took effect in March 2018, has had a huge impact on U.S. construction. The U.S. Geological Society estimates imports make up nearly one-quarter of U.S. steel consumption and half of total aluminum consumption.

This has already caused steel and aluminum products prices to rise, driving up construction costs and limiting profit from development activity—and that is likely to continue unless the tariffs are listed. Data from the U.S. Bureau of Economic Analysis shows the price of importing iron and steel products continued to rise through 2018, peaking at an annual rate of 20% in the first quarter.

Managing the unpredictable

Those direct impacts can be predicted, are relatively transparent and, therefore, are more manageable. Contractors can leverage long-term supply chain agreements on materials on a project basis, or they can purchase in bulk and use their storage capabilities to mitigate spikes in prices that they expect.

The indirect impacts of trade policy and global economic trends are far more difficult to identify. Unintended consequences from trade policy decisions over the past 18 months will pose serious risks to construction sector demand.

While these are not yet causing visible swings in construction prices, they have the potential to undermine investor confidence in the property market, resulting in clients who are reluctant to undertake projects and narrowing margins for contractors and consultants across the United States.

Unexpected decision making by global actors can also trigger dramatic price swings in materials, which are hard to prepare for. For example, Indonesia’s recent decision to ban all exports of nickel ore from January 2020 next year, a key input in stainless steel production, pushed global prices of the ore up by 40%.

So, what next for construction procurement in North America? On one hand, an abrupt reduction in the tariff burden could push construction materials prices down improving overall performance and encouraging more development activity.

On the other hand, metals and fuel prices are still exposed to global drivers and supply disruption in global commodities markets are likely to push prices up.

Hedging your bets

How these competing factors impact construction costs at a project level will depend on local supply and demand dynamics. At a state-level, construction companies can mitigate some of the risks brought by trade policy decisions and put strategies in place to manage the indirect impact on investor and developer confidence and demand.

To effectively manage market volatility, contractors need to be cautious and work collaboratively with their clients to specify contractual design documents and be thorough during the due diligence process prior to agreeing on a construction contract. On current projects, it will be helpful to build more collaborative relationships across clients and supply chains to ensure that reactive measures can be introduced without putting any party at undue risk.

Preventative measures like these are likely to help to avoid problems further down the line and mitigate some of the risks created by trade tensions or trade policy decisions elsewhere in the world that may unpredictably cause spikes in materials prices. However, it is impossible to prepare for every eventuality.

Persistent growth in the cost of delivering construction projects is likely to continue to challenge construction companies and supply chains across North America in the coming months. However, cautious and well informed procurement strategies can help clients, consultants and supply chain to work together to avoid disruption and continue to deliver economic growth and construction across the country.

by Greg Parker
Having managed operations in North America since 2012, Greg Parker has grown Mace’s offer across the continent, supporting global brands from LA to New York and developing a team of over 200 cost and program managers.

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