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Hard hit construction industry must steel itself for worse times

OPINION
By Nashon Okowa | Apr 24th 2022 | 4 min read
By Nashon Okowa | April 24th 2022
OPINION
Market under construction in Sichirai center, Kakamega. [Mumo Munuve, Standard]

We have just completed the first quarter of this year and it already feels like ages. The worst seems to have happened in the construction industry already. Yet on the horizon, more seems to be in sight; dark clouds are still gathering.

However sanguine one can be, it is not a stretch of imagination to say that it is going to be a difficult year in the construction industry.

This is because of the ever-rising cost of construction materials, especially steel. What is going on? Recently, I inquired about the cost of steel from one of the leading steel manufacturers and the manager sarcastically told me that there was no need of giving a price quotation since it would be ‘history’ the next day. Steel prices are ridiculously rising on daily basis. How will the industry cope?

Granted, the rising steel price is not bespoke to us: This is a global issue. The price of iron ore, a key ingredient of steel, has been on an unprecedented rise.

Then there is the China factor; China is the largest steel producer in the world followed by India. At its peak, China exported more steel than India produced. Unless China recede its decision to cut steel exports, things will continue to look gloomy.

The Russia- Ukraine war is also playing a role in driving the steel prices up. Russia is the fourth-largest supplier of steel globally. It in fact it supplies about 150 countries and territories. Together with Ukraine, they supply about 20 per cent of global steel. The panic brought about by the Western sanctions has resulted in the distortion of the global steel market, especially in Europe.

It is said that the global steel prices have risen by about 14 per cent since Russia invaded Ukraine on February 24, 2022. The construction industry globally consumes half - 50 per cent - of the global steel demand, any disruption in supply as is the case has serious ramifications. With these factors, there seems to be no reprieve in sight for our industry. Buckle up, folks! 

In one of the projects we manage, the price of steel at the beginning of the project was Sh110 per kilogramme, today it is Sh190 per kilogramme and still rising almost on a daily basis.

And it is not just steel, the price of cement has also been rising which is by large being attributed to the global rise of the clinker price. Clinker is the key ingredient for the manufacture of cement.

An aerial view of Nairobi's Kangemi area. [Davdi Njaaga, Standard]

The price of cement has risen by about Sh200 per bag. When we started one of our projects, we used to buy a bag of cement at Sh520 per bag, now it costs Sh720 per bag. The contractor will be looking at about Sh3 million loss if they complete the remaining concrete works on the projects.

Paint and aluminium manufacturers have also expressed intention to raise prices. Surely, there is nothing to raise a glass for at the moment.

The elections are also here with us – the season of silly politics when everything literally grinds to a halt because of our primitive political behaviours.

Nearly every project now is planned with the worst-case scenario of our political outcomes, and rightfully so considering our history. It is a wait-and-see approach already that will likely go all the way to August and that is if we do not have a run-off. We need to fix this!

The recent increase of fuel prices, too, is going to further aggravate this situation. The construction industry relies heavily on the transportation of its materials such as sand and aggregates which are mostly transported over long distances. Not to mention the construction machinery that is involved in excavations and earthworks. The fuel price increase is definitely going to have a direct effect on all these materials and activities.

The rising cost of construction materials has caught the industry flat-footed. In most construction projects that are undertaken using our industry-standard contracts, the first clause that is usually cancelled is the fluctuation clause; usually to the joy of contractors.

In most contracts, there is no contractual remedy for the rising material costs due to the deletion of the fluctuation clause during the contract signing.

Most contracts will rely on ex-gratia settlements and in cases where the clients are unable to accommodate the rising costs, the suspension of projects will prevail. In other cases, we will undoubtedly have disputes due to the rising costs. All these scenarios are already in play. I am aware of projects that are already being suspended.

I don’t see the steel prices dropping in the near future. I cannot see any light, even a dim one, on the horizon. If the government, in its wisdom, does not intervene in any way, we shall have a very difficult year in this sector.

We must, however, pick valuable lessons on how better to deal with all these contractually in the future.

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