Oil and steel price fluctuations cast a shadow over the industry

Volatile oil and steel prices will continue to dog the construction industry for the remainder of 2005, according to QSs and economists.

After the price of oil hit over $67 (£40) a barrel last week, Simon Rawlinson, head of Davis Langdon’s specialist cost research team, warned that, “fuel costs affect everything from transport to raw material costs and increases tend to be felt quickly”.

Another QS agreed that recent jumps in fuel costs would be passed on quickly to contractors. He said: “Material costs went up by 6.6% during the last quarter, which is a lot. The increase is most definitely due to rising energy costs.”

The QS also said Corus (the steel provider) was likely to test the water later in the year with a price increase following a cutback in production. He said: “Corus will simply see if the market will bear an increase in price, if not, it would then have to reduce it again.”

In its 2005 interim results, Corus predicted that steel prices would fall slightly in the third quarter and then rise towards the end of the year. This fluctuation follows a dramatic rise in steel prices last year, which went up by around a half.

Andrew Thompson, general manager at the Building Cost Information Service, said Corus’ predictions of a price slide tallied with steel industry analyst reports.

Thompson said: “The DTI’s Formula Fluctuations Index for the cost of steelwork materials shows that steel prices rose 1.9% in the first quarter 2005 compared to the previous quarter. This indicates a significant slowing in the quarterly increase, with steel work materials prices having risen by 20% in the third quarter 2004. Over the coming months our provisional estimates suggest the quarterly rises have continued to decrease and by September steel prices will start to fall.”

Davis Langdon’s Rawlinson said the fall in the rate of steel price increases had already made a small, but apparent difference to tender prices. He said Davis Langdon’s tender price index had dropped by 0.5% in the second quarter of 2005, which was due “to a limited extent” to the fall in steel prices. He said:

“The softening in the price of steel has been felt, although the fall in the tender price index is also attributable to other factors such as some loosening in the labour market, which could be a consequence of an increase in labour from Eastern Europe.”

Milan Khatri, economist at the RICS, said steel prices might also be affected by the Chinese government’s attempt to reign back investment spending. He said: “The Chinese are cutting back on investment spending, which is releasing even more steel into the market, remembering that China is now a net exporter of steel anyway. In the short term, this would help to reduce steel prices. However, longer term it is difficult to predict as China’s investment spending could shoot up again in the medium term.”