High prices hit construction boom

By Morris Aron

Construction costs are set to shoot up as producers of building materials hike prices to reflect the rising cost of doing business.

Makers of corrugated sheets, paints and steel products — who have seen the cost of their inputs rise significantly due to surge in commodity prices worldwide and rise in demand of the same in Brazil, China and India — are passing the cost to local consumers.

Steel makers, who were first to feel the effects of the rising cost of metals worldwide, have already increased the prices of construction bars, galvanised sheets and steel tanks.

Major players in the steel industry, namely Devki Steel Mills, Kalu Works, and Insteel, have, since the beginning of the year, raised prices of steel rods by up to 21 per cent.

The average cost of a kilogramme of steel rod in Nairobi is now Sh85. Last month it was Sh78.

The unusually harsh winter witnessed towards the end of last year and at the beginning this year has upped demand for iron ore and coal, which are key ingredients in the making of steel and steel products.

Coking coal and iron ore are the two main raw materials required in steel manufacturing. Coking coal, after being converted into coke, is poured into a blast furnace, along with iron ore, where it is burnt to produce heat, which melts the iron ore and refines it.

Analysts say that due to the impact of high prices of both raw materials, producers are expected to be under pressure to either pass on the cost or take a hit on their margins.

In the past two months, for example, the price of basic steel has risen 33 per cent in tandem with those of iron ore and coal prices.

As a result of the increase in the cost of steel rods, the cost of window frames, door panels and reinforcement steel, among other items are set to go up resulting in higher costs of construction, higher house prices and eventually, higher rents.

The cost of decorative paint is set to go up by six per cent from today, according to a leading local player, Basco Paints.

"Effective February 15, the cost of paint on our premium products will go up by six per cent, said Mr Kamlesh Shah, managing director of Basco Paints Kenya.

"This is going to be the first increment in three years."

Other paint makers are also said to be preparing to make similar announcements in the coming weeks.

"The price of our main raw materials is increasing," said Rakesh Rao, Crown Berger managing director in an earlier interview.

Paint — apart from being dictated by trends of petroleum pricing — uses iron oxide as one of the ingredients.

Analysts say that the current surge in prices of steel and paint has been a result of the world economy picking up from the effects of the global credit crunch.

"Locally, one can argue that with the housing price index going up, the cost of the basic construction materials also follows the trend," said James Karanja, head of project finance at mortgage company Housing Finance.

"Then look East and see how demand for steel from China, a world economic powerhouse, is influencing the current price surge and demand of the same from South Sudan."

Before the current rally, the global recession that started in mid-2008 brought about by the sub-prime mortgage in the US before spreading to the rest of the world ended a five-year global commodity price boom of metals, fuels and food.

Year of steel

But as a raft of economies pick up from the worst depression since 1930, analysts led by the International Monetary Fund (IMF) are forecasting that the current rise in commodity prices is expected to hold throughout this year.

After next year, the reverse is bound to happen.

Ramesh Iyer vice president - product development, National Commodity and Derivatives Exchange of India, a key player in steel and its trends was recently quoted in an international daily saying: "If we talk about the calendar year 2010, steel had underperformed other commodities, many of which scaled an all-time high. So, it is going to be the year of steel".

The International Monetary Fund has also forecast the same for this year.

Forecasts into the future trends in the course of the year also lie in a limbo and will be dictated by international pricing trends as Kenya neither produces steel nor petroleum.

Local producers of building materials are showing a bias towards increasing prices to offset the rising cost of raw materials.

They are citing costs associated with sourcing raw materials that are becoming more stringent and tying up capital.

"We have been forced to maintain close contact with our suppliers and sometimes even order way in advance, a move that ties up capital and increases the cost of doing business," said Mr Shah.

set to rise

The development means the cost of corrugated sheets and metal reinforcement and paint that account for about 15 per cent of the construction costs, are set for an increase of anything between of between 10 and 20 per cent in the first quarter of this year.

The unfolding scenario is a major cause of concern in the real estate sector.

The outlook is seeing property developers warn that the rising prices could slow down the construction sector as it may reduce the activity of retail investors who tend to react fast to price increments.

In that way, the surge in prices could dim demand for the building materials.

Financiers on their side say that the development is bound to affect property developers and buyers as projections — some of which have been fully funded and closed — may need to be revised upwards.

"If the cost of construction surpasses the budget, what it means is that the owner may be forced to dig deeper into their pockets or get additional funding," said Mr Karanja.

Such a development is bound to increase the cost of affordable homes and slow down business in the real estate sector that has been one of the best performing sectors of the economy in the last ten years.

In a recent survey, real estate delivered more stable returns compared to the stock market and was inflation proof.

But even as consumers digest the current and impending scenarios, reprieve may come in the form of cement pricing.

For the last two years, cement prices have been relatively stable at around Sh700 per bag.

However, there is fear cement prices could go up because energy costs, which account 40 per cent of the cost, could edge upwards.

International trends are pointing to the negative as oil prices worldwide continue on an upward trend as forecasts indicate that a barrel of oil might hit record prices next year as the world economy comes out of recession. Demand for oil from the BRIC countries - Brazil, China and India - is forecast to drive the price of oil to record breaking levels this year. Oil prices have risen to the around $100 (Sh8,000) a barrel mark since the start of the year. In September, a barrel of oil was around $75 (Sh6,000).

Such a development may see local cement manufacturers adjust the cost of cement upwards to reflect the cost of doing business.

Energy — which is mainly derived from oil — accounts to close 50 per cent of the cost of manufacturing steel.