The stubbornly high cost of some European building materials despite cheaper energy

The document titled “The Stubbornly High Cost of Some European Building Materials Despite Cheaper Energy” examines the persistent high prices of certain building materials in Europe, even as energy costs have decreased. The analysis highlights the complexities of the construction industry and the factors contributing to these high costs, despite a general decline in material prices.

Introduction

The European construction sector has faced significant challenges in recent years, particularly due to the impacts of the COVID-19 pandemic and subsequent economic fluctuations. While energy prices have fallen, many building materials remain expensive, raising questions about the underlying causes of this phenomenon.

Current Market Trends

The report notes that building material prices peaked during the summer of 2022 but have since declined. However, materials such as concrete, cement, and bricks have not seen corresponding price drops. This discrepancy is attributed to several factors:

• Production Levels: Construction output has decreased significantly across Europe, with production volumes down by nearly 15% in Spain and 25% in Belgium compared to early 2022. This decline is expected to continue into 2024 before a potential recovery begins.
• Demand Weakness: Sluggish economic growth and reduced construction activity have led to lower demand for new buildings, which exacerbates the pricing issues.

Factors Influencing Material Costs

Despite lower energy costs, several reasons contribute to the sustained high prices of specific building materials:

1. Fixed Costs: Many building material companies have high fixed costs due to substantial investments in machinery and facilities. These costs create a price floor that prevents significant reductions.
2. Market Dynamics: The market for heavy materials like concrete and cement is less competitive than that for lighter materials such as timber and steel. This reduced competition allows suppliers more control over pricing, resulting in slower adjustments to market changes.
3. Supply Chain Vulnerabilities: Ongoing geopolitical tensions and supply chain disruptions continue to affect material availability and pricing stability. For instance, recent attacks on merchant ships in critical trade routes have raised concerns about potential supply shortages.

Price Comparisons

While some materials have seen price reductions—timber and plastic inputs have notably fallen—many remain elevated compared to pre-pandemic levels. The report emphasizes that:

• Prices for concrete and cement have only marginally decreased despite lower energy costs.
• The cost structure for these materials is heavily influenced by raw material inputs (like clay and sand), which account for a larger share of production costs compared to energy.

Future Outlook

Looking ahead, the authors anticipate that 2024 will be a transitional year for the building materials industry. They predict that:

• As interest rates potentially decrease and wages rise, there may be renewed investment in construction projects.
• However, it will take time for these investments to translate into increased production and sales due to the long lead times associated with construction projects.

Signs of Improvement

Despite ongoing challenges, there are signs that conditions may be improving:

• Confidence indicators within the EU construction sector have shown slight improvements.
• Rising house prices in some regions may allow project developers to increase prices for new builds, making previously unprofitable projects viable again.

Conclusion

The document concludes that while energy costs are declining, the high prices of certain building materials are likely to persist due to structural factors within the industry. The interplay between fixed production costs, market dynamics, and external supply chain vulnerabilities continues to influence pricing strategies.

Further reading:
High cost of some European building materials – ING Wholesale Banking ingwb
The stubbornly high cost of some European building materials … hellenicshippingnews