With raw materials still in short supply and prices elevated, coupled with a shortage of workers across the construction sector, many companies have put their construction projects on hold. In many cases, the design and planning work has been completed and funding is in place, but the project has been put on the sidelines until conditions improve. When’s the right time to come off the sidelines?
Materials and Labor
COVID wreaked havoc on the global supply chain, and construction materials were among those products facing the most delays. Some steel trusses and beams were backordered more than a year. Plumbing materials and stainless-steel products, aluminum, copper, and other construction materials were either out of stock or significantly higher in price.
In March of this year, stainless steel wire was 44% higher than it was in the year prior and producer prices for the metal hit their all-time peak in August 2022. Prices for copper products used in construction hit their all-time peak in April 2022 and steel prices were 105% higher in December 2021 from the prior year.
Labor shortages have also been an issue. Job openings in the national construction sector have run as high as 440,000 in April 2022, nearly 220,000 more than the average from 2015 and 2020 (prior to the pandemic). In the most recent data available (through August) they were still a blistering 12.4% higher than a year ago and 25% higher than August 2019 just prior to the pandemic.
2023 Timing for Projects
In conversation with construction firms, there are tens of millions (if not billions) of dollars in projects that are waiting for the right timing to come out of hibernation and to get underway. Some public sources of funding have deadlines on those funds, and projects need to get underway before the summer of 2023. And that could help predict when many of these projects would start to be released.
Many sources are predicting that the first half of 2023 is likely to be hit with sluggish economic activity, and demand for products and raw materials would be at their lowest since the lockdown in 2020. That could spell the right timing for some of these projects to get underway, especially if they are “shovel ready.”
The one challenge with this strategy is that material inventories are still very low, and despite prices softening in the past few months, low inventories could spell trouble as soon as demand increases for those products. Global aluminum inventories for instance are sitting near decade lows according to Kitco, which shows them 50% lower than they were just prior to the pandemic and 66% lower than they were at the beginning of 2021. Similar stories can be found across lead, nickel, and zinc.
With China still opting for a zero-COVID policy and lockdowns taking place sporadically, it is difficult to keep global supply chains and sourcing in rhythm. These disruptions make it difficult to predict when products will be available and that places construction firms in a difficult position of trying to give their clients good counsel on the best time to start a project, knowing that they will be responsible for cost overruns and delays on the project.
Despite the massive delays and shortages of the past two years, the current situation is improving, and the timing will be right for many projects to get underway. Construction spending in manufacturing is up 23% year-over-year through August and commercial project spending is up 19.1%.
Looking at the trends in spending, material costs, and labor and how they will impact the financial health of your firm can be a lot to navigate. The construction experts at MarksNelson can help you weather the financial challenges. Reach out to us today to learn more.
