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Rising steel costs to hamper construction targets

Source from: New Straits Times, Original Article

KUALA LUMPUR: Rising material cost environment, slowdown in project rollout due to Covid-19, potential prolonging of lockdown measures and political overhang hampering domestic construction sector are likely to delay implementation targets, CGS-CIMB said today.

Its analyst Sharizan Rosely said the 48 per cent increase in steel prices has put additional pressure on many contractors still reeling from revenue losses due to the Covid-19 pandemic and restrictions under the Movement Control Order (MCO).

According to Master Builders Association Malaysia (MBAM), steel price increased from RM2,100 per tonne to RM3,100 per tonne in the third quarter (Q3) of 2020 and contractors are on the losing end as the value of the contract tendered is already fixed.

MBAM said this is a challenge as tenders normally take into account current prices of building materials, including steel, which is the main component in the construction industry, and unlike private sector projects, selected public or government projects would include price variations in the event of an escalation in cost.

As at January 2021, average steel bar prices had retreated to RM2,890 per tonne due to, among other factors, weaker industry demand.

“Steel and cement, which are the two main raw material components of input cost, typically constitute 30-40 per cent of total project cost, depending on the type of construction particularly residential, high-rise, commercial, infrastructure.

“Firstly, the steep 48 per cent rise in steel prices would be negative for ongoing contracts with less than 50 per cent completion as the contract margin for the balance of works may be eroded due to the higher steel cost.

“Secondly, expected project margin for new submissions of contract tenders would be lower as project costing did not take into account the price hike.

“The negative impact is likely to be more severe for smaller contractors that participated in competitive tenders in the past three to six months, particularly so for those with highly depleted order books,” Sharizan said.

Cost risks aside, CGS-CIMB has reiterated its “Neutral” call on the construction sector.

“Overall potential negative earnings impact from rising steel prices may further weigh on the earnings recovery of contractors as contract awards slow,” Sharizan added.

He said contractors with property development divisions should be able to mitigate this risk as the higher construction cost may be fully or partially passed on over time via property selling prices.

“We therefore expect larger or diversified contractors to be more insulated from steep fluctuations in building material cost; diversified contractors under our coverage include IJM Corp Bhd, Sunway Bhd, WCT Holdings Bhd, Malaysian Resources Corp Bhd and YTL Corp Bhd,” he said.

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