Australian construction material price outlook – Q2 2024

Overview

With “persistent” inflation remaining above the Reserve Bank's target of 2-3%, the cash rate remained unchanged at 4.35% in August 2024. The RBA noted that momentum in economic activity remains weak, evidenced by slow growth in gross domestic product, a rising unemployment rate, and reports of businesses under pressure. A near-term interest rate cut is off the agenda, and uncertainty about the overseas outlook keeps the nation’s central bank on high alert.

In June, ASIC published its insolvency figures, revealing that failing construction companies made up more than one in four of the record 11,049 corporate collapses in the previous financial year. Escalating insurance and financial service costs pile on new pressures above the cash flow issues and profitless fixed contracts that have plagued the industry in recent years.

In the latest release of Building approvals, there was a significant rise this month. However, despite the bounce in July, total dwellings approved remain 5.1% lower than the five-year average and at one of their lowest level in nearly 12 years, with just 14,497 approvals recorded over the month. To meet the national goal of 1.2 million new houses by the decade’s end, we expect to see more state and federal government intervention to incentivise capital city housing development in the months ahead.

Most material prices remain stable, although copper has risen in response to demand from the energy transition and data centre projects. Steel prices dropped to their lowest level since 2016 due to low demand, notably from China.

Altus Group’s market-watchers maintain a close eye on three unfolding stories that could have significant cost implications for the remainder of 2024:

• Chinese economic downturn: The protracted construction property crisis in China continue to ripple across the world. The value of new homes [1] from the 100 largest Chinese real estate companies dropped by 17% over the year to June. On a materials level, China is the world's biggest steel market, and prices have tumbled as domestic demand dries up. The price of rebar used in construction is at its lowest rate since 2017 [2]. The Chinese property sector – which consumes around 30% of the country’s steel – accounted for 296 million tonnes of the material in 2019, according to the RBA, but half that in 2023. Chinese steel maker Baowu, the world’s largest, is expecting a “longer, colder and more difficult” downturn. Amidst this backdrop, BlueScope reported a 20% drop in its full-year profit to $806 million. If iron ore prices continue to fall, the federal government could face reduced revenues, potentially leading to decreased spending or increased domestic taxes. Reserve Bank Governor Michele Bullock has said the RBA is watching the situation closely, given Australia’s reliance on the world’s second largest economy.

• CFMEU crackdown: The Construction, Forestry and Maritime Employees Union (CFMEU) continues to capture headlines and pose challenges for regulators. The federal government placed the CFMEU into administration on August 23rd after a series of damaging allegations of corruption and criminality. The demise of the CFMEU could drive up construction prices as other trade unions step into the void and vie for membership, with pay rises likely to be part of the pitch.

• United States election: Fears that the world's largest economy was heading for a recession, as unemployment rises, sent the stock market plunging [3] in August. The election results on 5 November will reverberate globally. A lean to the right is likely to lead to tariffs that will have cost implications for Australian construction; a lean to the left is unlikely to influence materials prices.

In the face of these economic headwinds, the construction industry is grappling with a complex cost environment. The coming months will be critical in determining how well the industry adapts to these evolving conditions.

Altus Group’s outlook on construction cost escalation

Note: These figures are general, and individual projects and asset classes may have dramatically different spreads of costs.

Source: Altus Group

Since 2022, Australia’s economy, like many others around the world, has experienced sharp cost escalation as it transitioned into the post-pandemic phase. While 2024 has seen some easing, labour and installation costs have continued to rise. In fact, a slight upward trend persists despite a slowing pipeline of housing construction.

As inflation begins to soften, we anticipate escalation rates will start to ease from 2025 onwards. However, Perth’s inflation, particularly in the housing sector, remains notably high, keeping costs elevated.

Escalation rates can vary widely depending on the project type, size and location. Materials also escalate at different rates; for instance, copper and steel prices have varied this quarter. Additionally, projects involving Enterprise Bargaining Agreements (EBA) can significantly increase project costs and escalation.

Consulting with professional quantity surveyors is essential to accurately assess project costs and escalation on a case-by-case basis.

Material price snapshot

Figure 1 - A snapshot of Australian construction material price trends

| | Figure 2 - Altus Materials Escalation Index (Australia)

Material price movements

Structural steel and rebar: Global steel trading prices have fallen to their lowest levels since 2016, reflecting softening demand globally, especially in the world’s biggest steel market of China. The ongoing domestic property slump has decimated China’s billion-tonne steel industry [4], and we expect prices to stay flat for some time. While this may benefit the budgets of certain projects like industrial developments, it signals broader economic challenges for Australia.

Concrete: Concrete prices increased slightly over the quarter, influenced by energy price upticks in the previous quarter. Given a forecasted decrease in demand, we anticipate concrete prices to remain stable for the remainder of 2024. Of note this quarter, Kerry Stokes-controlled Seven Group spent $1.9 billion to purchase cement and asphalt group Boral.

Structural timber: Prices are falling due to sluggish market demand, and this downward trend is likely to persist in the near term. The production of native hardwood will be prohibited in state-owned forests in South-East Queensland [5] from January 2025. Native logging was banned in Victoria and Western Australia in 2024, and other states are likely to follow. This is expected to affect domestic supply, and we are seeing hardwood replaced with more expensive composite wood alternatives.

Plasterboard: Plasterboard supply prices have, again, increased significantly this quarter on the back of increased labour costs during manufacturing and from finishing trades. Coupled with rising energy costs, we expect plasterboard costs to continue to climb. A market movement of note was French multinational Saint-Gobain securing shareholder approval [6] for a $4.5 billion buyout of Australia’s largest plasterboard supplier CSR.

Bricks: Prices rose further over the quarter due to heightened demand for materials used in the later stages of construction, coupled with the ongoing impact of previous energy price hikes.

Copper: The price of copper reached a near record high in the second quarter of 2024. Although there has since been some softening, prices remain elevated. In the near term, metal prices are expected to rise driven by ongoing investment in renewable energy and electricity generation, as well as in the growth of data centres.

Diesel: Global fuel prices have fluctuated with escalating tensions in the Middle East. Diesel prices, in particular, hinge on the unfolding situation in the region.

Macro economic review

| | Figure 3 - All groups Consumer Price Index (CPI), Australia, quarterly and annual movement (%)

The Consumer Price Index (CPI) rose 1.0% in the second quarter of 2024. Housing increased 1.1% while furnishings, household equipment and services decreased by 0.8%.

Over the 12 months to June 2024, the CPI rose 3.8%. Housing increased 5.2% whereas furnishings, household equipment and services decreased by -1.1%.

Insurance and financial services continued to exhibit strong growth, with a 6.4% year-over-year increase. This indicates a rise in preliminary costs for construction projects, and contrasts with softening trends observed in other CPI sectors.

Taking a state-by-state view, Perth posted a significant uptick compared to other cities, with a quarterly increase of 2.1% and a year-over-year increase of 4.6%. Notably, Perth’s housing sector surged by 6.2% for the quarter. We expect this to translate to higher costs for materials in Perth.

Producer Price Indices – Input

| | Figure 4 - Producer Price Indexes (PPI) – Input, Australia

Input prices for housing construction – which includes land, materials, fees, permits, professional services and equipment, and the expenses associated with hiring construction workers – increased by 0.4%. This represents a softening and a return to pre-pandemic levels. Decreased demand for new construction has led to suppliers discounting products used in the initial stages of construction, like structural timber. These discounts have partially offset price increases in other areas. Over the past 12 months, input prices for house construction have risen by 1.1%. A stark divide in prices between regional and city projects is emerging. Prices in the bush have escalated notably as project owners are forced to factor in labour, transport and accommodation costs.

Producer Price Indices – Output

| | Figure 5 - PPI – Output, Australia

Output prices refer to the rates or charges set by construction companies or contractors for their services, including labour, profit margin and contingency costs. Construction costs continue to rise, marking this the fourth consecutive quarter of increasing prices. Building construction prices rose by 1.3% over the last quarter, contributing to a 6.3% increase over the past 12 months. Despite material input prices remaining flat, the overall growth in construction costs is primarily driven by ongoing labour shortages for skilled tradespeople, with high demand continuing to push output costs upward. Wage Price Index

The seasonally adjusted Wage Price Index (WPI) increased by 0.8% for the June quarter and 4.1% annually. Construction wages increased by 0.8% for the quarter and 3.9% over the year, marginally surpassing the overall average.

The seasonally adjusted Wage Price Index (WPI) increased by 0.8% for the June quarter and 4.1% annually. Construction wages increased by 0.8% for the quarter and 3.9% over the year, marginally surpassing the overall average.

Wage Price Index

| | Figure 6 - Wage Price Index (WPI), Australia

Building approvals

| | Figure 7 - Building Approvals, Australia

The number of dwellings approved fell by -6.5% monthly and -3.7% annually in June 2024. Last year, the federal government set an aspirational target of building 1.2 million well-located homes in the five years from July 2024. To achieve this target, 240,000 new homes will need to be built annually. However, only 163,317 homes were signed off for construction over the previous 12 months.

Summary

Australia's construction sector is at a pivotal moment. Overall, material prices have largely stabilised, although labour shortages continue to place upward pressure on costs. The potential demise of the CFMEU poses cost risks if a power struggle among remaining trade unions ensues.

Regional disparities are becoming more pronounced. Escalating prices in areas like Perth and South-East Queensland follow ambitious infrastructure spending. Rural areas are also seeing costs rise sharply.

Nationally, chronically low levels of housing approvals will only be addressed with government incentives or intervention. Once they start to flow, we anticipate a surge in activity and developers will begin to direct their efforts towards large-scale housing developments.

Notably, the largest cost pressures are outside Australia’s control. Ongoing economic and geopolitical uncertainties in China and the United States are likely to be the major factors influencing construction costs for the remainder of 2024.

Methodology

Market research into the supply cost of core materials is conducted on a quarterly basis with manufacturers and suppliers. Our market assessment also involves a thorough analysis of secondary sources of market data on materials and labour prices. These sources include the Australian Bureau of Statistics (ABS), the Australian Institute of Quantity Surveyors (AIQS), Fuel Price Index, Metal and Raw Material Price, and proprietary cost data from Altus Group.

Disclaimer

This article is being provided for informational purposes only. No information included in this article constitutes, nor can it be relied upon as, legal, tax, investment, or other advice. Recipients should consult their independent advisors. The views and opinions expressed in this article are those of the authors themselves and do not necessarily reflect the views or positions of Altus Group Limited or its subsidiaries or affiliates (collectively, “Altus Group”). The article, the information contained therein, and any links to other sites are provided “as is” without any representations, warranties, or conditions of any kind, express or implied, including, without limitation, implied warranties, or conditions of fitness for a particular purpose or use, non-infringement or that any information is accurate, current, or complete. Altus Group has not independently verified any third-party information and makes no representation as to the accuracy or completeness of any such information. Altus Group and its advisors, directors, officers, and employees (collectively, its “Representatives”) are not liable or responsible to any person for any injury, loss, or damage of any nature whatsoever arising from or incurred by the use of, reliance on or interpretation of the information contained in the article or sites that are linked in the article. The foregoing limitation shall apply even if Altus Group or its Representatives have been advised or should have known of the possibility of such injury, loss, or damage. Any unauthorized use of the information is strictly prohibited. A user is not authorized to copy, circulate, disclose, disseminate, or distribute the information, either whole, or in part, to any third party unless first explicitly agreed by Altus Group.

Resources:

[1] AFR

[2] AFR

[3] News Week

[4] AFR

[5] ABC

[6] Saint-Gobain

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