Construction: The Importance of High Value, Resilient Relationships in Fast Moving Uncertain Times.
We are creatures of habit that like routine and certainty. Rewind 12 months to a time where we would enjoy a morning coffee in the canteen with a colleague, a Team huddle in the office to discuss targets, the monthly meeting in a busy boardroom to review strategy… If there is one thing that the last year has forced us to do, it is to step out of our comfort zones, change our routines, adapt, and react more rapidly than ever before.
Support networks are increasingly important, at Home, at Work, and indeed across Industry. Challenges that we face as Individuals, as Families, as Teams and as Organisations, are being faced by others the length and breadth of the Country.
As an industry, Construction has been relatively fortunate in being able to operate to some degree throughout most of the Pandemic, however, it has not been without great challenges. At the end of January 2021 there were 244,100 construction workers furloughed according to Government statistics[i]. Short to Medium term uncertainty remains in the industry, particularly in supply and demand of raw materials.
Resilience is a buzzword for the uncertain times we live in, but rightly so. Seemingly gone are the days in Construction where long term fixed periods at bargain basement prices can be offered or should be offered. Instead, emphasis must be placed on guaranteed supply, product quality, high levels of service and fast-moving processes that deliver efficiencies throughout rapid build programmes.
We have all had the calls about ‘price increases’ and ‘double digit rises’, and whilst we do not necessarily dispute the empirical evidence, it is an easier pill to swallow when backed up with scientific data and context.
According to the latest Government Construction statistics, Timber, Bricks and Steel prices are on the up. Imported timber is currently 44.4% higher than the base level in 2015, and almost 10% higher than late 2019[ii]. The price rises are currently showing no signs of slowing.
So what is currently driving the cost of some raw materials up to levels previously unseen? One fact is that Global construction output is buoyant.
In the US market, the average selling price of a house rose by 14% in January 2021 year on year whilst pending house sales were up 35%[iii]. At the same time, the supply of new housing decreased by 33% with construction activity low in Spring / Summer 2020 due to lockdowns and new health measures. Pent up demand remained high and resulted in a sustained rush of timber purchases against low inventory levels. Despite this, housing starts reached an annualised figure of 1.6 million, and demand is expected to remain high throughout 2021, although supply is expected to catch up and find an even keel.
The US currently buys 65% of all Canadian softwood for housebuilding, whilst also importing a smaller percentage from Northern and Central Europe. The Canadians have recently also seen increased demand from Asian markets, which has pushed pricing levels upwards. Demand in Japan is high, and the market has recently agreed to a $100m3 increase with Canada to secure volumes of up to 6% of Canadian supply. Construction levels in China are also on the rise, which will increase demand on already busy markets including Canada, Nordic and Central European.
More locally, recent demand for C24 in the UK and Ireland remains high (up 46% from Q3 2020 to Q4 2020), whilst supply remains low as suppliers play catch up. C24 prices have risen month on month since May last year, driven by large merchant groups being willing to pay high price to keep yards stocked. Felling licence issues in Ireland have compounded low supply and meant that overseas demand from Irish sawmills has increased[iv]. This has a knock-on effect with TR26 Truss timber and CLS prices, especially when manufacturing firms look to buy at quarterly secured rates, against increasing monthly rates elsewhere in the market.
Government price indices show the general cost of raw materials supplied to the New Housing Market continuing to rise at the sharpest levels seen over the last five years, currently sitting at 20% above the lowest rate in January 2016, and 7% higher than in January 2020.
At the same time as supply and demand forces are pushing prices upwards, global container shipping rates have surged to record heights, according to Reuters. This has been driven by ‘restocking demand in the United States and Europe, container scarcity at export hubs, and changes in freight flows because of the coronavirus pandemic.’ The global cost of shipping a container has risen from $1,461 in January 2020 to $4,302 in February 2021[v], with Asian to Northern European routes having particularly sharp increases of up to $8,000.
One final consideration is the strength of the pound. Despite showing recent signs of recovery due to fresh Brexit optimism, the pound remains weaker against the Scandinavian currencies compared to early 2020 and has only recently stabilised against the Euro. One British Pound would buy 12.49 Kr of goods in April 2020, compared to 11.28 Kr at year end[vi]. A 10% drop. Unfortunately for Timber and Steel coming from Europe, the cost of imported goods increases as the pound becomes weaker, so despite a slight recovery in recent times, the full effect on landed inventory will not filter through until latter quarters.
So with raw material prices rapidly on the rise due to high demand and low supply, a relatively weak and unstable pound, and uncertainty surrounding shipping costs, it becomes very difficult for manufacturers to offer long term pricing stability to consumers. The only way to guarantee rates for the long term would be to fix high, which could well mean that the consumer would risk margin erosion once supply, currency and shipping stabilised.
In such volatile and unprecedented times, new methods of pricing need to be considered. A quick look at financial institutions offers an insight into the potential of dynamic and scientific purchasing agreements. Wouldn’t it be refreshing to have a conversation with a supplier about what different packages are on offer, rather than the traditional back and forth negotiations towards a (not always) mutually beneficial agreement?
At Robinson Manufacturing Ltd we see huge potential for new and dynamic supply partnerships that deliver efficiency, quality, and value throughout the chain, and where Purchasing Teams have the chance to choose what is most important to them.
- Variable deals tracked quarterly against a £m3 base rate on timber.
- Fixed prices rebated in either direction dependent on material fluctuations.
- Regular indices updates, for distribution to regional Purchasing Teams.
- Indices linked short to medium fixed price periods, covering risk throughout the chain.
As an example, a £100’000 order could be rebated by £5’000 if the cost of TR26 timber decreases by 5% across the lifetime of the site.
It is our strong belief that as an industry we should buck the trend, change the way we work to the benefit of all, analyse the data and have the conversations. We should continue to strive to support each other’s best interests, engage and mitigate risk, and provide a reliable and efficient supply chain to the end user with added value every step of the way.