[+] Much-Needed Win for Construction as Cheap Steel Floods the Market

Bluescope provoked panic this month when it warned of the dangers of cheap steel arriving in large volumes. The Australian steelmaker was explaining its $203.5-million, 20 per cent decrease in full-year net profit after tax, after experiencing bumper years during Covid. Bluescope blamed “low Asian steel spreads” and “lower despatch volumes” from China for the decline and set the mainstream media abuzz with concerns over whether China’s crackdown on its domestic property market—and therefore demand for Australian iron ore to fuel its previously insatiable appetite for steel—would adversely impact Australia. ▲ Bluescope delivered an underlying EBIT of $376.9 million, 30 per cent lower than FY2023, it told the markets this month. While declining demand for Australian steel and iron ore is obviously bad news for the mining sector, as well as Bluescope and other domestic manufacturers, it could provide a small reprieve for the hard-pressed construction industry. Steel pricing ramped up again following the Covid lull, says Slattery executive director for Western Australia and Queensland Richard Kemp. “We saw rampant inflation, so everything got very expensive in the building world, including steel,” Kemp says. “It’s sector and steel-type dependent, but say steel went from $10,000 a tonne to $25,000 a tonne, a massive ramp up during Covid. In the last six months, now that supply and demand has equalised out, steel pricing has come right back down again to more like $15,000 a tonne.” Bouncing back? This offers some positive news for the construction sector, which has faced a much-discussed 30 per cent rise in construction costs that has made thousands of projects across the country unfeasible. “The wheels falling off the Chinese property market means that, in terms of steel prices here, it will be cheaper,” Kemp says. “Yes, they will be buying less iron ore but the lack of demand by the Chinese property industry means they will also be selling cheaper steel into the export market, [for example] down to Australia, for lower prices. “You don ’ t just turn steel manufacturing on and off—to turn operations off fully, it takes months, so they will be making just enough to keep them going. “And every now and again they will send it offshore below cost to move it off the shop floor to make room.” While costs are still stinging the construction sector, small gains in materials prices can help. ▲ The China Real Estate Information Corporation reported new home sales dropped 17 per cent in June, to 439 billion yuan ($A90.7 billion) after falling 34 per cent in May. According to the Australian Bureau of Statistics, input prices to house construction specifically rose 1.1 per cent over the year to June, as prices for electrical equipment and cement products rose as raw materials correspondingly increased. However, “offsetting these rises, falls in input costs for steel are allowing suppliers to discount products as overall demand for new house construction continues to ease”, the ABS said. “Reinforcing steel and steel beams have also fallen due to weak demand for steel globally.” As a result, Slattery said in its latest market update that we are slowly reverting to the historical annual escalation of around 3-4 per cent. “[Steel price declines] should make material costs cheaper, but the drivers around increased costs are related to labour and resourcing shortage, so we see that continuing in the near to mid term in particular,” Kemp says. So there is still a long way to go. Macroeconomic impacts Australia’s isolation of course makes it susceptible to macroeconomic and geopolitical shifts, from piracy and war, to a downturn in major, symbiotic markets. “With products coming from offshore, everything had settled down but this year piracy is affecting ships in the Red Sea and that’s having an effect on shipping,” Kemp says. In fact, according to the International Monetary Fund, in the first two months of 2024, Suez Canal trade dropped by 50 per cent. ▲ Trade through the Panama Canal fell by 32 per cent compared to a year earlier, according to the IMF. “Anything that was coming down from Australia that takes three months is now taking four to five months, especially as Panama is restricted and boats tend to not go through there,” Kemp says. “So we’ve got a boat traffic jam in Singapore harbour and another in China, where their major port is. We have all these containers in boats going places but it’s all out of whack, and builders and developers need to be factoring this in.” According to the latest Drewry World Container Index data released this week, it costs $5319 per 40ft container, which is 49 per cent below the previous pandemic peak of $10,377 in September 2021, but it is 274 per cent more than the average 2019 (pre-pandemic) rate of $1420. Real world impacts While the decline in steel price might be welcome for the construction and development industry, the fact is that Slattery is still predicting an average of 4-6 per cent cost escalation a year for the remainder of 2024. This is compounded with increasing infrastructure spending, which has led the likes of developer Tim Gurner to suggest that labour and materials are being funneled from much-needed private residential development. A report by ANZ suggested that the major project pipeline backed by the public sector will peak in 2025-26, so there would be a reprieve on the way, although, the bank said, building approvals were near decade lows due to the higher costs of funding, labour and materials. ▲ IBISWorld predicted that the domestic price of concrete, cement and sand would dip 1.7 per cent in 2023-24, “While not all labour or material resources are relevant for both private residential construction and government-led major projects, the flow-on effects are sufficient for governments to include this in their assessments of future projects and reviews of projects already in the pipeline,” according to the ANZ report. The labour issue is certainly a massive pressure on construction that won’t be alleviated with a slight reprieve in material costs, however. “Workers are not necessarily going to infrastructure in droves, but those projects can pay, and stadiums for the Olympics aren ’ t going to wait. Stadiums and hospitals have to get built and the government will always pay,” Kemp says. “Builders now have options. But either way, they will be forced to pay the same amount of money as the big infrastructure projects.” These major projects will only be aided by the decline in steel prices. But macroeconomic issues will continue to have an impact on Australian construction. “These factors will continue to drive inflation in and around construction costs, coupled with the ongoing resourcing issues, and in some ways it is a profitless boom.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Much-Needed Win for Construction as Cheap Steel Floods the Market

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