ºÃÉ«ÏÈÉúTV

01 Key trends

(up) Construction cost increases are rising at faster rate

(up) ºÃÉ«ÏÈÉúTV costs have risen more than mechanical or electrical costs over the past year but the pattern is set to reverse

(no change) Metal commodity prices have eased back from record highs but the effect of large price rises over the last three years is now reflected in component costs

(no change) Heating and ventilating wage agreement expires at beginning of October but no agreement yet

(no change) Site wages being restrained by influx of overseas labour.

Over the entire six-year period, all the construction inflation measures have risen at a much faster rate than the Consumer Prices Index. Over the year to the second quarter 2006, the CPI rose 2.2% while the Electrical Cost Index rose 4.4%, the Mechanical Cost Index 6.8% and the ºÃÉ«ÏÈÉúTV Cost Index 7.4%.

The ºÃÉ«ÏÈÉúTV Cost Index over this period still includes the 2005 wage award for building operatives worth 9.5% on basic rates. The 2006 wage award which came into effect at the end of June saw rates rise by just 3.5%. Although materials prices are on an upward trend, the year-on-year increase to the third quarter 2006 is forecast to reduce to 4.4%.

The Mechanical Services Index is forecast to remain at a level of about 7% per annum, with materials price increases rising at record levels (see below).

The Electrical Cost Index is also on a rising trend as electrical materials prices are now beginning to reflect the worldwide increase in copper.

02 Price adjustment formulae for construction

Price Adjustment Formulae indices, compiled by the DTI and ONS, are designed for the calculation of increased costs on fluctuating price contracts. They provide useful guidance on cost changes in various trades and industry sectors and on the differential movement of work sections in Spon’s Price Books.

Over the past 12 months between July 2005 and July 2006, three work categories have registered slight falls over this period:

Piling: steel -1.0
Metal: decking -0.6
Windows & doors: steel -0.6

These still reflect the fall in steel prices that occurred in 2005. Since the beginning of this year, steel prices have begun to rise again.

The work categories showing the largest increases over the last year are:

Pipes & accessories: copper 47.6
Cladding & covering: copper 45.5
Cladding & covering: zinc 23.4
Windows & doors: aluminium 17.0
Waterproofing: asphalt 11.0
Waterproofing: built-up felt roofing 9.2
Pipes & accessories: aluminium 8.9

Most of these figures relate to the worldwide rise in non-ferrous metals prices, now finding their way into construction component costs. Copper prices have doubled in 12 months and more than quadrupled over the past three years. But the impact on installed copper pipework and copper cladding has been felt most abruptly in the past three months as long contract prices are renewed and price rises can no longer be absorbed.

Zinc prices have more than quadrupled in three years but have seen the steepest rise over the past 12 months, rising three-fold to peak in May before falling back over the summer. Commodity prices are not expected to fall dramatically over the next year or so. so end-user zinc prices may continue to rise.

Materials

The latest look at materials and energy costs reveals that metal prices – particularly copper – have soared to near record levels

03 Key trends

(up) Consumer price inflation remains above government targets and is expected to remain volatile over the short-term

(up) Manufacturers’ input prices stabilised in the first half of 2006 but rose again in July

(up) Industrial electricity and gas prices fell in the first half of the year but are expected to rise sharply again in the second half

(up) Manufacturers’ output prices have risen as some input costs are passed on

(up) Construction materials prices are up sharply in first half of year

(up) Metal prices, particularly copper, underpin many of the price movements identified.

04 Key indicators

_{(In the following section, the number indicates the percentage change over past 12 months [July 05 – July 06] and follows with the direction of movement)}

Consumer Prices Index +2.4 (up)

The annual percentage change in the Consumer Prices Index has been higher than the chancellor’s target figure of 2% for the past three months. Rising fuel and power costs have been the biggest upward driver. Domestic gas prices have risen 36% over the past 12 months and electricity prices by 26%. UK inflation is now back in line with the EU average after being lower than the average for most of the past seven years. Rising inflation led to the Monetary Policy Committee increasing base rates 0.25% in August.

Industry generally

Materials and fuels purchased by manufacturing industry +9.7 (down)
Materials and fuels purchased by manufacturing industry excluding food, beverages, tobacco and petroleum industries +7.8 (down)
Output prices of manufactured products +2.8 (up)
Output prices of manufactured products excluding food, beverages, tobacco and petroleum +2.5 (up)

The annualised rate of inflation in industry’s input costs has fallen from 15.2% in April to 9.7% in July. In the first five months of 2006, input costs were virtually flat as increases in materials costs were offset by a fall in fuel costs. But costs jumped 1.7% in July as crude oil prices rose 6% to a new record level and metal prices rose 2.3%, including a 6.7% rise in copper prices. Fuel costs have fallen since the beginning of the year but are expected to rise sharply again later in the year.

The principal commodities driving the input price rises over the past year have been

Electricity +32%
Gas +25%
Crude oils +18.5%
Imported non-ferrous metals +51%

By contrast with input costs, industry’s output prices have increased steadily since the beginning of the year, rising 3% over the six months to July, as some of industry’s 18% rise in input costs during 2005 is passed on. Output prices of products excluding food, beverages, tobacco and petroleum have risen less at 1.3% in line with lower input cost rises.

Construction industry (June 2005 – June 2006)

Construction materials generally

Non-housing new work +4.5 (up)
New housing +5.1 (up)
Repair and maintenance +5.5 (up)

Mechanical services materials

Non-housing +12.6 (up)
Housing only +17.5 (up)
Electrical services materials +3.9 (up)

All the measures of construction materials price inflation show markedly higher figures. The sharpest rise has occurred in mechanical services materials, for which prices have risen 12.4% for housing materials and 9% for non-housing materials since the turn of the year. The biggest driver has been the doubling of worldwide copper prices over the past 12 months. The knock-on effect has seen the price of copper tube rise up to two-thirds. Copper prices have fallen from their peak in May of $8500 a tonne to about $7600 a tonne but remain more than twice as high as a year ago. With stocks low and a strike ongoing at the world’s largest copper mine, the outlook suggests further short-term falls in prices are unlikely.

The most significant price changes recorded by official sources over the past year include:

_{(number illustrates % change between July 2005–July 2006)}

Copper tubes and fittings 66.2
Insulated wire and cables 36.5
Recovered secondary raw materials (e.g. scrap metal) 34.2
Lead, zinc and tin 30.8
Aluminium bars, rods and profiles 28.0
Asphalt products 25.3
Gas oil 18.4
Bituminous mixtures 16.5
Imported hardwood 10.5*
Concrete reinforcing bars 10.1*
Plastic floorcoverings 9.2
Clay bricks and tiles 8.2
Cement 8.0
Coated roadstone 7.8
Non-domestic cooling and ventilation equipment 7.7
Ceramic tiles 7.6
Fabricated structural steel -5.1*
Steel sheet piling -5.3*

_{* June 2005 to June 2006
(Data sources: ONS and DTI)
(June/July 2006 figures provisional)}

The table is driven by the commodity market prices of non-ferrous metals, copper, lead, zinc and aluminium, which all remain near record high prices. Commentators generally expect metal prices to remain high for most of this year before modifying a little in 2007.

Steel prices have begun to move up again since spring but still remain slightly below their level of 12 months ago. However, further price rises have been announced.

Labour

Average earnings are only 1.3% up on last year for the period from April to June - which may have something to do with the recent influx of workers from the EU accession countries

05 Executive summary

DTI figures show that employment in the construction industry rose 3.8% between the beginning of this year and last and 10% over the past two years. At the same time surveys suggest that difficulties in securing labour have eased over the past year or so.

Figures from the Office for National Statistics show that average earnings in the construction industry over the latest three months (April to June 2006) were only 1.3% higher than the same period of 2005. Over the same period average earnings (including bonuses) throughout Great Britain rose 4.3%. These figures can be volatile owing to sampling errors but the annual increase in earnings in the construction industry does appear to be minimal based on the past few months’ figures.

An official report released towards the end of August revealed that 447,000 people from the eight accession countries that joined the EU in May 2004 had applied to join the Worker Registration Scheme by the end of June 2006. Of this figure just 16,670 were working in the construction sector. But the figures exclude self-employed workers and it is admitted that the total is likely to be nearer 600,000 with more than 100,000 working in the construction industry.

The trades in which most construction registered workers are employed are:

Labourer 10525
Carpenter/joiner 2355
Bricklayer/mason 945
Painter and decorator 770
Skilled machine operator (construction) 675
Constructor, steel 505
Electrician 390
Plasterer 195
Plumbers, heating and ventilating engineer 190