Steel yourselves

As the fate of the UK steel industry hangs in the balance, it may be time to ask some pressing questions about the implications for construction of its exposure to the high cost base of locally produced materials.

Whatever the overall outcome of the Tata steel saga, the UK is likely still to have specialist capability in high quality specialist steels needed by construction and other industries. UK steel plants specialising in long products for the construction industry such as Tata’s plant in Scunthorpe have attracted serious investment interest and are likely to be sold intact.

But the fact remains that UK is one of the most expensive places in the world to build and part of the problem is the cost of inputs. The production of commodity materials such as steel coil that are traded globally in vast volumes remain vulnerable to cost competition and point to some fundamental issues affecting the UK heavy materials cost base that have direct implications for design, manufacture and assembly in construction. UK construction’s future competitiveness depends on innovation in the manufacture and specification of materials as well as smart design and greater labour productivity.

Much of the blame for the demise of the UK steel industry has been placed at the door of China, whose industry has grown to represent over 50% of global output in 15 years. Critics of UK steel industrial policy have pointed out that high energy costs and business rates are some of the factors which have combined to make the sector uncompetitive on a global stage and that special measures are needed to protect the industry from global competition. These cost burdens apply equally to other heavy construction material industries based in the UK which are less vulnerable to import substitution due to the costs of transport. These costs are picked up in turn by contractors and by the clients of construction.

Cheap imports have made a significant contribution to low inflation in the UK over the past 15 years. Even before the financial crisis, the UK had enjoyed the NICE decade of “non-inflationary constant expansion”. The UK’s ability to source low-cost consumer goods and consumables from emerging markets has fuelled the continuing growth of the UK’s consumer and services sectors and has kept background inflation under control. By contrast, price trends in construction have been anything but non-inflationary – the long-term inflation trend is in the range of 4-5%.

A greater focus on management of materials as an avoidable cost should be a key part of the industry’s agenda

The UK construction materials sector is under huge cost pressure at the moment – according to government, data prices charged to the industry are down by over 1% in 2015 compared to a long-term inflation trend of 3%. This is unsustainable. Commodity prices are unlikely to remain at current historic low levels and other costs including labour, transport and other business costs such as the apprentice levy will also increase. Addressing cost in the materials supply chain – through innovation in design, procurement and delivery will be critical to mitigate another source of unwelcome inflation between now and 2020.

The industry set itself the challenge to reduce costs by 35% by 2025. The government has set out to drive £1.7bn of efficiency savings from its programme over the next four years despite the high levels of price inflation affecting all parts of the industry. The construction materials sector is playing its part – investing in new, more efficient capacity and streamlining distribution. However, it also needs to be recognised that some industry innovations such as modular construction may initially be more material intensive than conventional construction – increasing industry exposure to potentially higher costs associated with locally sourced and manufactured materials.

Construction will never be seen as a strategic industry but it is exposed to many of the cost pressures that have brought down the UK steel industry and which are picked up by the industry’s clients. Substitution using low-cost imports is often not an option so the solution needs to be found at home. Similarly, the application of tariffs would bake-in the high costs of domestic production. As an industry we collectively need to pay even greater attention to making best use of scarce, expensive materials, reducing waste, redundancy and over-specification. Innovation in off-site construction, additive manufacture and the promotion of a circular construction economy could all help to reduce waste and streamline the use of materials, potentially following the example of car manufacture where the weight of vehicles has been reduced by around 40% through the use of lightweight, recycled materials and smart design focused on using materials efficiently. However, the industry has a very long tail of simpler, less high tech projects and a greater focus on management of materials as an avoidable cost should be a key part of the industry’s value and sustainability agenda.

The steel crisis has brought into sharp focus the challenges faced by heavy industries in high-cost economies like the UK. Construction is highly reliant on these industries and so is likely to remain exposed to long term upward inflationary trends. By focusing closely on innovation, specification and use of materials across the industry, rather than simply relying on market forces to reduce price, construction’s exposure to a high domestic cost base can be mitigated.

Simon Rawlinson is head of strategic research and insight at Arcadis UK