Early this year steel prices in China skyrocketed and in the course of a few months, prices have jumped to an alarming 70% – it now hovers at RM2,800 per tonne. As steel bars make up about 45% of the raw material used in the structure of most development projects, this news has put a damper on the local construction industry.
The hike is due to prices returning to normalcy after more than three years of steep global price decline caused by the excessive supply of steel from China, the largest steel producer in the world.
Analysts at IBISWorld quoted that steel prices have fallen to an average of 4.9% per year in the period of 2012 – 2015. They cite the oversupply to the slowdown of local steel demand in China coupled with the drop in the price of iron ore, a key raw material in steel production.
However, this year’s pick-up in domestic demand coupled with the Chinese authorities’ effort to curtail excess steel production through restriction of new capacity, enforcement of strict environmental laws and formulation of new industry regulations have caused steel prices to surge. Further adding fuel to the fire is the increase in the production costs of steel – prices of the required raw materials including iron ore, coke, and scrap have risen as well.
What the Experts Say
1. WHAT ARE YOUR THOUGHTS ON THE HIKE IN STEEL PRICES IN MALAYSIA?
2. IF PROLONGED, HOW WILL IT AFFECT THE HOUSING INDUSTRY?
Reinforcing bar (rebar) and BRC wire mesh are widely used in the construction of buildings, whereby steel bars or a mesh of steel wires are embedded inside cast concrete to take tensile stress.
The sudden, sharp steel price hike in recent months has caught many in the industry by surprise given the lack of major fresh demand in short term growth coming from the property and infrastructure sectors, which consume the bulk of the steel manufactured.
As the supply and demand situation dictates steel price movement, many expect the steel price to rationalize amidst an environment of overcapacity in the steel supply.
Nevertheless, property developers who call for new tenders now may experience a 2% increase in the overall contract price as steel reinforcement of super structure can cost almost 10% of the total cost of high rise building works.
In short, property developers have to manage the steel price increase to mitigate the impact of escalating costs.
Dr James Tee, CEO of Setia Awan Group and author of Malaysian Real Estate Industry – Value Creation Strategies
The low steel prices of the past few years is due to the oversupply situation in China and has in fact been hurting the local steel manufacturing industry as imported steel products are cheaper. However, the low prices cannot be sustained in the long term and industry players should be prepared for prices to return to normalcy.
Weaned on low prices for the past few years, most Malaysian companies appear to be not fully prepared for the rise in steel prices and this will hurt the construction and property industry in Malaysia until local producers can churn out enough supply of steel products to meet demand which will then allow prices to stabilise.
Contractors who have secured tenders based on old steel prices and have not locked in supply contracts may find that they will end up losing money unless they are able to find ways of reducing costs. Projects could be delayed or worse still, abandoned if the contractors are not able to shoulder the increased financial burden.
Developers whose projects are delayed may have to pay liquidated damages to house buyers if the project is completed beyond the period stipulated in the Sale & Purchase Agreement. Ultimately, the increase in steel prices would lead to a rise in construction costs which would translate to either an increase in property prices or a reduction in profits for the developers if they are not able to pass on the costs to the buyers in a weak market.
Tang Chee Meng, COO of Henry Butcher Real Estate Sdn Bhd
The increase was unprecedented in terms of amount per tonne and over a short period in time. In January 2016, prices of steel bar were at RM1,500 per tonne and it has now surged to RM2,600 – an increase of roughly 73% .
This will affect contractors and developers who are already committed to their projects. Fortunately, the increase is presently confined to steel bars while other materials are not affected. Otherwise, the repercussions will be greater.
Steel components constitute of 10-15% of the total construction cost of housing projects and when set against the total development cost, would result in an estimated cost increase of 5%. Contractors will see their margin compressed if their project tenders were initially at a lower cost. Developers who had already tendered out will be spared, but they have to consider the risk of non-delivery or delay by financially weaker contractors. Projects which are not yet tendered will have to price in this hike as well.
Besides that, there will be difficulties in tender bidding especially for contracts where there are no provisions for a “fluctuation of price” clause.
As far as buyers are concerned, the prices of houses are dependent on the market forces of supply and demand and not just on costing. With the current property market being somewhat sluggish, most developers will absorb the extra costs and thus, buyers will still be able to purchase homes at the same price.
Sr Samuel Tan, Executive Director of KGV International Property Consultants Sdn Bhd
The shortage of steel supply was a direct result of importers being hit by an oversupply situation just a few months ago, which caused these importers to incur losses.
This inconsistency will result in a volatile market that can cause the construction sector to adopt a price adjustment to the contract, based on current market value. All these will certainly affect the industry and costing.
If prolonged, the price hike will undoubtedly lead to an increase in house prices, especially for the affordable properties. This segment is very sensitive to any fluctuation in the price of raw materials due to its low-profit margin.
Datuk Anthony Adam Cho, JP, Branch Chairman of Real Estate & Housing Developers’ Association (REHDA) Malacca
The price hike will affect all segments of the property market – residential, commercial and industrial, especially when coupled with the Goods & Services Tax (GST). Some developers might pass on this cost to consumers translating to a higher price per sq ft.
The market is already in the doldrums. This will have a double whammy in an already quiet market. Developers will need to find new construction methods and creative financing schemes to continue attracting buyers.
Khalil Adis, iProperty.com’s brand ambassador (Iskandar Malaysia), property speaker and author
A Developer’s Side of the Coin
When questioned on how developers are coping with the price uptrend, Koh Sooi Meng, Deputy General Manager of S P Setia Group revealed that the group had already, in fact, anticipated the price hike in November 2015.
Prompted by its in-house trading marketing team’s advice, the developer has taken pro-active steps to mitigate the effects of the predicted price surge.
“At that time, we spoke to all of our contractors beforehand regarding each developments’ progress and forecasted the total amount of steel required. We then gave them sufficient funds to procure additional steel bars based on projected amounts,” he explained.
The developer had negotiated with local steel manufacturers to lock in future steel purchases using the current price at that time.
“I am glad to say that our pre-emptive measure has worked well as we have enough steel supply to tide us over in the next 6 months. Also, as we have urged our contractors to speed up construction end of last year, most of our projects have already completed the structural stage, thus guaranteeing that there will not be any delays in construction,” shared Koh.
According to him, a typical double storey terrace house requires roughly 3 tonnes of steel. Factoring in the price increase, it will now cost an additional RM2,500. When set against the total development cost, however, the increase in costs will not exceed 5%.
With S P Setia having taken preventative measures, there will be minimal increase in total development costs; which will be absorbed by the developer.
“Ultimately, we want to protect home buyers’ interest, especially in these challenging times,” says Koh.
He believes that most prominent developers have already locked in the prices for the essential construction raw materials early this year. In contrast, smaller developers would have a more challenging time as they possess a lower bargaining power in terms of production volume and payment abilities.
In order to help stabilize steel bar prices within the next few months, Koh said that most developers are hoping that the government will abolish the import tax on steel bars from China and/or other countries. Something must be done by the relevant authorities to help mitigate the effects of the steel price increase and price volatility for the next few months, as it is problematic for contractors when tendering prices,” he suggests. He also hopes that more will be done to promote an open market and healthier competition among local manufacturers.
Koh is certain that the steel shortage is temporary and prices will stabilize in the next 6 months. He quoted that the Malaysia Steel Association (MSA) expect steel prices to moderate within the next few months both domestically and internationally.
Furthermore, he pointed out that as the current demand for properties is not as high as compared to a few years ago, the construction industry is not at its peak, hence, the steel supply would catch up with the market demand soon enough.
This article was first published in the iProperty.com Malaysia June 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine. Better yet, order a discounted subscription by putting in your details in the form below!