What is the reason for the rise in the prices of construction materials?? Actually, 2022 has been a year marked by the outbreak of a war in Eastern Europe.
The invasion of Ukraine by Russia caused a strong volatility in the price of raw materials, which has affected inflation and forced central banks to review their monetary policies.
In this context, one may ask What can construction companies expect in 2023?
How have the prices of construction materials behaved?
According to the construction sector cost index published by the Ministry of Transport, Mobility and Urban Agenda, in January 2023 there are materials that have undergone an annual variation around 20% (such is the case of cement, concrete, lime or plaster).
It is not surprising that during the year 2022, the price of construction materials has increased. The war between Russia and Ukraine has led to a general increase in raw materials.
However, if we take the London Metal Exchange Index (LME) as a reference, we can observe the upward trend shown by the price of metals since April 2020, after the reopening of the economy after the outbreak of Covid-19.
This increase has Consequently, the decrease in the profitability of the projects and generates a scenario of uncertainty for the construction companies.
What factors influence the prices of construction materials?
exist 7 variables that directly influence the price of construction materials and that explain their behavior in recent years:
- The demand: the demand for real estate is one of the factors that has the greatest impact on the price of construction materials. The increase in population and urban expansion cause more construction of buildings. However, economic activity also influences demand. After the crisis caused by the health pandemic, the economy underwent a strong recovery, causing the market to grow and, as a consequence, the price of materials.
- The offer: Along with demand, supply is another of the main laws that set the price of construction materials. If the supply is limited, the price increases. This phenomenon usually occurs due to the scarcity of raw materials or the lack of productive capacities. The outbreak of the conflict between Russia and Ukraine affected the supply of raw materials and caused prices to rise.
- Production costs: production costs are directly related to the price of materials. For example, the costs of raw materials, energy or labor.
- Political changes: Tariffs and other fiscal policies with respect to the sector also have an impact on the price of construction materials. Similarly, tax incentives cause a price reduction.
- Technology: Technological innovations influence all economic sectors. In this way, if more efficient ways of making construction materials are developed, the price tends to go down.
- natural phenomena: weather events and natural disasters can disrupt production and thus push up material prices.
- Interest rates: The cost of financing is a fundamental factor in determining the price of any good or service. If you have access to credit under competitive conditions, construction becomes a more affordable activity and interest savings are transferred to the final price of the properties. In a time of rising interest rates, the price of construction materials tends to rise.
When will the prices of building materials drop?
One of the biggest concerns of companies in the construction sector is how the prices of materials will evolve in 2023.
According to the projections of the futures contracts of the London Metal Exchange Index (LME), it is likely that prices will moderate. Wood may decline to around 2%, but the most significant reduction is expected to be in steel (down to 23%).
In any case, the geopolitical risk, which has notably influenced the price of raw materials or commodities, still present. In addition, both the US Federal Reserve and the European Central Bank continue with their program of interest rate hikes.
For this reason, alternative financing products for construction companies are gaining competitiveness due to its advantages in terms of agility in procedures and flexibility when providing solutions.
In Alter Finance We are specialists in negotiating and processing this kind of financial alternatives for developers and construction companies. you can put yourself in contact with our staff and we will help you to get the best way of financing for your real estate initiative.