Price hike impact on construction likely to linger

The Star 26/04/2004 By ANGIE NG

THE recent price hike in most building materials, except for cement, is expected to impact the construction and property development sectors at least until the third quarter of this year.

The shortage is particularly severe in steel bars as a result of a 50% jump in the price of imported steel scrap to about US$300 a tonne.

However, other materials including wire mesh, fine and coarse sand, aluminium, copper wire and cable, PVC pipes, plywood and timber have also not been spared and have increased in price by between 5% and 57% since late last year. Along with these, anything made of steel such as stainless steel lock set were now pricier by between 5%. and 10%..

Industry players said this event had translated into an overall increase in construction cost to about 8% .

The situation is a result of structural changes in the world demand and supply scene and this was further escalated by the frenzy building activities ongoing in China.

Some industry observers said following China's entry into the World Trade Organisation, the country could be liken to a sponge that absorbs substantial commodities and building materials from the world market for its nation building.

Despite moves by the government to alleviate the shortage in steel bars in the domestic market by raising the ceiling price of steel bars and billets by between 27% and 47%, the problem of both availability and having to purchase at black market price remained unresolved.

The new ceiling price for a tonne of 10mm mild steel round bar is now RM1,635 compared with RM1,279 previously.

It is believed that steel millers are not keen to sell in the local market as they claimed the new ceiling price did not justify the steep increase in steel scrap price in the international market and their margin had been considerably eroded.

The Malaysian Iron and Steel Industry Federation (Misif) had proposed for a RM650 per tonne rise in the ceiling price of steel bars but the approved increase was about half of the proposed.

“Despite the new market price, steel bars are simply not available and we have to buy from the grey market at about RM2,000 or more per tonne. Even at that price, supply is still not assured and this has hampered construction work,” a contractor for a building project said.

It is understood that distributors are asking for between RM300 and RM350 above the new ceiling price.

Some main contractors are said to be reeling under this latest hiccup in the industry as private sector contracts are awarded based on fixed cost basis unlike government contracts, which have an exceptional clause to provide for any price over-run due to unforeseen circumstances.

It looks like the latest spate of cost over-run has to be borne by the main contractors unless their request for an adjustment to the tender value is heeded.

It is understood the margin for main contractors is usually between 5% and 15% of the total contract quotes.

As for the property sector, delays have been reported in certain projects as a result of the cost hike and difficulties in sourcing for materials, especially steel bar. Developers are still reviewing the overall impact of this price hike to their operation and bottom line. As far as their earnings are concerned, they should be covered for all the projects that have been awarded as the responsibility to complete the projects at the stipulated cost now rest with the main contractors.

If the situation drags on further, developers might have to adjust their sales price upwards in their new project launch. The industry consensus is for a price adjustment of around 2% to 3% in order to meet developers' margin.

Analysts said if the land cost is low and the product offering comprises mainly high-end properties the profit margin can easily come up to 30% to 40% of the property sales price. As for high-rise luxurious condominiums, margins could be even higher. The industry norm is usually between 25% and 30%.

According to Master Builders Association of Malaysia (MBAM) president Lau Mun Cheong, contractors who have a wider spread of projects including building and civil projects would be better insulated.

“The bigger boys who are more financially sound should be in a better position to navigate this stormy weather but the medium sized to smaller ones who are undertaking private tender projects are more vulnerable,” Lau told StarBiz.

He said most contractors maintained a margin of less than 10% and the latest development might put them in the red.

Since January 2003, there had been a 10% to 15% increase in the overall construction cost and as such the tender price had also risen accordingly.

Of the total RM48bil worth of contracts awarded last year, about 53% was from the private sector and the balance were government contracts.

However, in the first quarter this year, the value of contracts awarded was estimated to have dropped by 10% to 15% over the same period last year.