DREAMS ON HALT

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Rising building material prices HINDER real estate recovery

Although many have saved years of their income to buy a piece of land in the city, the global pandemic has brought many such dreams to a screeching halt. Due to global supply chain disruptions, the prices of building raw materials have risen dramatically in the past couple of years. Buyers are now being forced to purchase at higher prices to cover the increased costs. Prices of everything – starting from cement, rods to even floor tiles have continued to rise since last November. Let us take a detailed look into how these price hikes are affecting the real estate industry of Bangladesh.

 

 

 

Steel prices in Bangladesh are continuing to rise as the price of imported raw materials rises in the global market. The growing cost of steel, according to real estate entrepreneurs, is having a direct influence on their industry, driving up building expenses. Imported melted scrap, which is the primary raw material for steel, is currently worth around $550-$590 per ton, up from $490-$500 per ton just a few months earlier and $300-$350 per ton in October of last year. Furthermore, the price of iron retrieved from ship breaking has risen, further increasing the price of steel, according to industry sources. Md Shahidullah, General Secretary of the Bangladesh Steel Manufacturers Association (BSMA) and Managing Director of Metrocem Ispat, said that steel prices are rising in the local market as a of the global price hike of scraps.Insiders in the real estate industry estimate that the increase in mild steel (MS) prices will raise the cost of building apartments and homes by 10% to 15%. It will also have an impact on the construction prices of several big and small projects, such as bridges, culverts, and flyovers, they added. A 60-grade MS steel rod was selling for Tk 73,000-75,000 per ton at several markets in the capital, while a 40-grade MS steel rod was selling for Tk 58,000-60,000 per ton. Dealers and sellers are concerned that prices would continue to rise, with the per ton price of 60-grade MS steel reaching Tk 80,000. Steel prices in the country have risen by 38% in the previous year, according to market insiders, who are concerned that the manufacturing costs of public infrastructure projects and private residential buildings would drive prices even higher. Due to limited availability resulting from a drop in production in Japan and Europe during the pandemic, steel entrepreneurs say the price of scrap metals has risen dramatically in the worldwide market. However, as most economies returned to normal following widespread vaccination efforts, demand for scrap and steel increased. The price of bricks has also drastically increased within this time period. The price of one piece of locally produced brick has gone up by Tk 1.5, auto bricks by Tk 2.5, ceramic bricks by Tk 5, and concrete bricks by Tk 8. The president of the Real Estate and Housing Association of Bangladesh (REHAB), Alamgir Shamsul Alamin, stated that prices of practically all sorts of construction materials had increased by 20% to 30% in the last six months. Evidently, the adverse effects of such price hikes are now being borne by the customers. Mr. Ratul, who was about to finally buy a flat in Mohammadpur in February last year, had to face such an unwanted consequence. As soon as the global pandemic hit, the development company handed him a notice mentioning that he needs to pay an additional Tk. 2 lakh for the increased prices of the raw materials. As per Rehab data, the number of under-construction flats in Dhaka and Chittagong is over 50,000 and all the owners now have to pay extra money for their homes. The prices of these flats, depending on size and materials used, have increased by 10%-12%.

 

 

THE GLOBAL PERSPECTIVE
Such scenarios are not just being observed in Bangladesh; but in all parts of the globe. Despite recent price reductions in raw materials such as lumber and steel, mainly in the United States, European construction material firms continue to face greater expenses. As a result, many European manufacturers expect their output prices to rise even further. According to a European Commission poll conducted in July, 40% of concrete, cement, and brick suppliers anticipated to increase their costs even more. The percentage of enterprises expecting to boost the price of lumber and metal is considerably greater. Nonetheless, it appears that the peak for these products has passed, but labor constraints and the uncertainty of the pandemic could prolong price stabilization or downward adjustments.

GLOBALLY, CONTRACTORS ARE EXPERIENCING A DECREASE IN THEIR OVERALL MARGINS
The cost of construction materials has increased, putting pressure on profit margins. Because profit margins in the construction industry are typically between 2 and 4%, this can quickly lead to loss-making projects. Generally speaking, there is a positive correlation between input costs for building materials and output prices of construction projects. Contractor output prices climbed faster than input prices from 2018 to the end of 2020, which might have resulted in bigger profits. However, due to rising construction material costs, input prices are swiftly catching up, with the largest increase in the first quarter of 2021, since 2004, putting pressure on margins.

TIMBER AND STEEL PRICES ARE MORE SENSITIVE THAN CONCRETE, CEMENT, AND BRICK PRICES
There is a global market for steel and lumber, with a large number of buyers and sellers. This makes these marketplaces more competitive and transparent, resulting in a more direct pass-through of raw material price fluctuations in the value chain. Concrete, cement, and brick markets, on the other hand, are huge and heavy, making transportation difficult and expensive. As a result, these markets become less competitive. As a result, procurement price changes are passed on more slowly. This could also explain why steel and timber costs have risen faster than others.
INVENTORIES MUST BE IMPROVED
Suppliers must perceive an improvement in their inventory before they consider cutting sales prices because a growth in their stock raises competition and puts lower pressure on pricing. For example, during the outset of the financial crisis, building material suppliers began to detect an increase in their inventories in April 2007, but it wasn’t until August 2008 that a growing number of enterprises indicated that they expected to lower their prices.

CONCRETE AND CEMENT COSTS WILL REMAIN HIGH UNTIL AT LEAST MID-2022
According to correlation studies, sales prices of building materials such as concrete, bricks, and cement react to changes in the appraisal of their stocks six to nine months later. However, we are currently seeing no improvement in inventory for these construction supplies. In fact, the opposite is true. In July, a record number of building material suppliers complained that the value of their finished product inventory was (too) low. As a result, before the costs of these building materials stabilize, let alone decline, we need to see some stock improvement. Taking into account the six to nine-month price delay, we are not expecting concrete and cement prices to fall before the summer of 2022.

THE PRICE OF TIMBER WILL DECREASE SOONER RATHER THAN LATER
Timber and steel prices have a shorter response times. When building suppliers of these materials observe an improvement in their inventory, they almost immediately predict fewer price hikes. The improvement of stocks and price fluctuations are separated by only one or two months. Furthermore, value chains must first be established. After severely limiting it during the COVID-19 crisis, this could still take some time. For example, transportation remains a major issue. We predict lumber and steel shortages to persist until at least early 2022 as a result of value chain disruptions. As a result, elevated costs for lumber and steel for construction projects are expected to persist for the next few quarters before leveling off.

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