Strong Dollar Holds Back Construction Material Costs

Monday, August 25th, 2014
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Despite the strong rebound in home building, construction material prices in Australia are being held back by a combination of the strong Australian dollar and an absence of wage inflation in the manufacturing sector, new figures show.

In total, aggregate construction material prices rose by 1.56 per cent in the June quarter but were up just 2.36 per cent on the same time last year, according to the Producer Price Index figures published by the Australian Bureau of Statistics.

Sheet metal and sanitary ware are leading the way, with prices up 10.44 per cent year-on-year, followed by stoves (installed) (8.2 per cent), timber windows (6.66 per cent) structural timber (6.64 per cent) and timber doors (6.43 per cent).

At the other end of the scale, prices for copper pipes have plummeted 21.8 per cent over the past 12 months, while those of steel beams and reinforcing steel are down 3.81 per cent and 1.48 per cent respectively.

The latest figures come as the construction industry looks to rebuild margins in the wake of the previous building downturn in which cutthroat competition saw tender prices decline in some markets even though costs rose at a modest pace.

In the commercial and civil construction markets, for example, Quantity Surveying firm WT Partnership expects tender price rises of around four per cent per annum across most of the eastern seaboard over the next three years – a level which, given the aforementioned subdued nature of price increases and current building industry annualised wage growth of around three per cent, implies a slight margin recovery.

In the home building sector, a degree of margin recovery is also likely – especially in extremely strong markets such as New South Wales.

Housing Industry Association senior economist Shane Garrett said upward pressure on prices was being muted by low interest rates, subdued wage pressures in the manufacturing sector and continued strength of the Australian dollar – which despite previous expectations to the contrary has generally traded above $US0.90 throughout most of the past few months.

Going forward, Garrett expects downward pressure on the dollar, but says the impact of this on building materials prices may be muted to a degree by a lack of manufacturing industry wage pressures amid continued soft labour market in this sector and acknowledges the extent and timing of any currency depreciation remains uncertain.

“I’ve always been expecting the exchange rate to take a tumble but it hasn’t done so yet,” Garrett said. “I still think it’s going to happen because the current rate (around $US0.92) is probably overvalued and the dollar probably needs to settle in to a value of probably between $US0.75 and $US 0.80.”

“Once that happens, that will certainly put upward pressure on construction material prices.

“But it’s anyone’s guess as to when that will happen. I thought it would happen over a year ago but it hasn’t happened.”

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