Rising prices for construction materials – the main factors?

The prices of construction materials have risen steadily for years. The main reasons for this are rising general inflation, international tariffs, and rising heating prices. In addition, rising import costs from Asian countries and a general shortage of raw materials. In the last six months, however, the prices of construction materials have grown dizzyingly. Different wood materials such as plywood or OSB boards, in addition to rock wool, metal, etc. – prices have increased by 10-50 +% in recent months. This, in turn, slows down but also adjusts the general construction market and its activity. But why have prices risen so fast and what to expect in the near future?

The main reason for the price increase is the decrease in production and the increase in demand. When the corona crisis hit the world, the demand for construction materials fell very sharply. While private demand even increased slightly at first, commercial establishments such as restaurants, hotels, spas, etc. closed their doors for months and larger developments were suspended in uncertain conditions. There was initially no reason for innovation and renovation, and thus manufacturers of building materials reduced their activities. Many factories were forced to stop production altogether.

In Estonia, the number of building permits decreased by 20% last year. Although a major recovery of the construction market took place at the beginning of 2021, the increase in the prices of construction materials has become a dampening force.

At some point, it became clear that the crisis was not going away and those general constraints had created an environment where renovation or construction could proceed without interruption. It can be said that this was accompanied by a construction boom and the producers of building materials, which have almost come to a standstill, have not been able to fulfill the orders.

Of course, this is accompanied by the phenomenon where, in the event of high demand, producers in turn raise prices. Despite this, demand has only increased, as the spring and summer months are the fastest in the Nordic countries due to the climate. This has led to a situation where delivery times for some metals, wood, and also insulation materials reach even the end of the year.

Factors influencing price increases

General inflation

Simply put, when money is constantly printed on, its purchasing power and value are constantly declining compared to real products such as minerals or real estate, or even gold. This will lead to a small but permanent price increase of 1.5-3% anyway.

International tariffs

Depending on international agreements, the price of construction materials is also affected by international tariffs, in addition to export-import VAT, etc.

Increase in oil prices

As oil is not a renewable resource, the price of petrol and diesel used by most transport vehicles can be expected to increase as the resource decreases. This is accompanied by constant price increases in logistics, which in turn make imported goods more and more expensive. The current rise in prices has also been directly affected by the decline in oil production and its rise in prices.

Productivity in Asian countries

Inevitably, a large part of building materials comes from Asia, where general labor and production costs are lower than in Western society. The pandemic has led to the downsizing or even closure of many raw material producers and factories. In addition to the decline in demand, this has also been caused by large restrictions on movement.

Shortage of raw materials

With the sharp increase in demand, producers of raw materials and construction materials are not catching up fast enough. Factories do not receive raw materials and therefore production has slowed down.

Logistics

Delivery times are also slightly disrupted by transport. It is also quite common for the driver to be quarantined as a corona positive and the delivery of the material is delayed again.

Suez Canal crisis

You’ve probably heard of the Suez Canal cargo ship accident. The large cargo ship that blocked the Suez Canal in March exacerbated all the failures. Namely, the Suez Canal connects Europe with Asia. Nearly a thousand cargo ships were trapped behind it, which in turn increased the general shortage of construction materials and accessories.

Although the problem was resolved a few months ago, its consequences are still being felt. It may even seem that there is a conspiracy behind the situation, but rather it is simply a coincidence of many bad circumstances.

Situation in Estonia

The price of construction materials produced in Estonia is likely to remain quite similar. The largest price increase has come from materials imported from abroad – metal, several wood products, and various insulation materials such as stone wool. There is also the biggest shortage of these materials. Last year’s crisis forced several producers to suspend operations. When suddenly construction continued, there was almost no supply. This aftermath is still being felt. Stone wool is not produced in Estonia. It is produced in neighboring countries Poland, Lithuania, and Finland. As the demand in Central Europe, Germany and Poland has increased, it is simply not enough or very little is sent to Estonia. While there is a high demand for building materials in Poland, they may not even reach the Baltics – mainly if no previous agreements have been concluded.

Estonia is greatly affected by this situation, as priority is given to production going to other European countries, where more is paid for and larger quantities are bought. Large price margins are again added to the small part that reaches the Estonian construction landscape, as demand is very high.

The consumption habits of private individuals have also changed. If, for example, clothing prices have fallen due to a lack of demand and people did not go out due to restrictions related to the viral crisis, the focus was on improving the living and living conditions of one’s home. When staying at home, it is good to renovate or make long-delayed repairs. Private individuals find the necessary building materials and accessories in the chains of construction stores, where perhaps the direct deficit is not so noticeable.

If the demand for private individuals is quite small, it is the developers who suffer the most. Due to the corona crisis, many feared that there would be insufficient work, leading to cheaper bids. Large developers receive materials directly from importers, but resellers are preferred. Because delivery times are so long, it is very likely that many constructions will be postponed.

Due to the shortage of raw materials, delivery times have lengthened and prices have sometimes risen by more than 50%. Also, some price offers are only valid for 24 hours. Prices for general construction materials are 20-30% more expensive than last year. Pricing and delivery are semi-auctioned, ie the one who offers the most will receive it. It is worth mentioning that in some countries the price of wooden building materials has even risen by up to 350%. The main reason is once again either a stagnant industry and a shortage of raw materials.

Longer-term agreements on quantities and prices do not apply and no such agreements are currently in place. Although production and raw material uptake have been restored, it will take time for the market and prices to fully stabilize. As mentioned, delivery times for certain materials already reach the end of the year.

What next?

Despite high prices and long waiting times, individuals and developers are not discouraged by the situation – the planned work needs to be done. Life and construction continue and the agreements made must be adhered to. Owners of their homes have more money in their new situation, which was previously spent on, for example, traveling or going out, therefore also more opportunities and time to manage their real estate.

Light at the end of the tunnel

Experts predict that the situation where prices will change by the day and delivery times will be extended will continue at least until the autumn. However, the expected stabilization of the market and prices is expected in the winter at the latest. Manufacturers and distributors are also expected to adapt to the new situation as quickly as before the price increase.

However, no large decline in prices is expected in the near future and it can be assumed that the pre-crisis price level is unlikely to be reached. This will, of course, lead to an overall rise in construction prices. The coming years will only show what this situation entails and what really lies ahead both in construction and in the economy in general.