Rising material costs put brake on sector demand

Rising material costs and price increases across the board ate into the construction sector’s growth in April, according to the Purchasing Managers’ Index (PMI).

The index said the ongoing price hikes had “started to act as a brake on demand”. Business activity did continue to grow, but at its slowest pace since January. It follows a warning in March that the material cost rises could soon have an effect on the sector as they reached their highest level for six months.

The index, compiled by IHS Markit and the Chartered Institute of Procurement & Supply (CIPS), measures construction output across commercial, civils and residential sectors. Each sector is given a score: above 50 indicates that activity is expanding and below 50 suggests it is slowing.

Overall, the index registered a score of 58.2 in April, down from 59.1 in March. The commercial sector led the way at 60.5, slightly down on the 60.8 reading in March, but still benefiting from pent-up demand for sector-related projects and spending related to coronavirus recovery plans.

An increase in pace at HS2 was key for the civil engineering sector, which had the second-biggest growth of 56.2 (56.3 in March). As in March, residential work recorded the lowest growth across construction and further lost momentum, coming in with a reading of 53.8, compared with 54.9 in March.

The index also reported that orders across the sector felt the brunt of uncertainty, with the value of total new orders expanding at their slowest rate in four months.

“Escalating raw material prices and, in some cases, hesitancy due to higher borrowing costs and geopolitical uncertainty, were reported as headwinds to demand,” the release said.

Price inflation also ramped up in March, with respondents to the survey laying the blame on higher energy, fuel and material prices. The survey also highlighted the ban on red diesel at the beginning of April as a reason for the increase, which was at its fastest since September 2021.

Despite a last-minute letter from the industry to government, requesting a one-year delay to the ban on red diesel, it went ahead as planned. Weeks before the ban, Construction News spoke to small contractors, who warned they could be pushed out of business by the removal of the rebate.

Lead times for materials also worsened over the course of the month, with 45 per cent of responders warning it had got worse since March. Only 2 per cent said it had got better.

Scape group chief executive Mark Robinson said a slowdown in output “felt almost inevitable” after the strong first quarter.

“Coupled with interest rates creeping up, firms across the supply chain are likely to see margins further reduced in the coming months without careful project management and engaged clients,” he warned, adding that any support detailed in the Queen’s Speech later this month was “unlikely” to offer immediate respite to the sector.

“Open dialogue between all parties will continue to be vital for the rest of the year at least.”

Lloyds Bank infrastructure and construction team leader Max Jones said the industry is facing a “twin-track inflationary challenge” of inflation and rising salaries across the sector.

“The transition to net zero, and how that is financed, is high on the agenda for contractors, but they know it will be hard to execute while inflation remains such a pressing issue,” he added.

“There’s been a marked shift in contractors’ approach to ESG, with ambitious targets now seen more as a licence to operate on big projects, rather than a nice-to-have, and the positions taken by the tier-one contractors have encouraged smaller players to set out their own plans to be more sustainable, diverse and better governed.”

CIPS group director Duncan Brock said: “With the Bank of England confirming the interest rate as the highest for 13 years, the squeeze on business lending also led to a relatively gloomy outlook amongst builders for the year ahead, with sentiment the lowest since September 2020.”

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