REALTY SECTOR DEALING WITH SKYROCKETING STEEL & CEMENT COSTS

REALTY SECTOR DEALING WITH SKYROCKETING STEEL & CEMENT COSTS

DURING THE PANDEMIC WE HAD NOTICED BUYERS MOTIVATED TO BUY THEIR OWN HOME. ON THE OTHER SIDE THERE WAS SPIKE IN CONSTRUCTION MATERIALS COST WHICH CREATED DIFFICULT ENVIRONMENT FOR BUILDERS AND PEOPLE WHO ARE DEVELOPING THEIR HOMES INDEPENDENTLY.

By: Dolly Singh

The unprecedented time of pandemic came with its positive and negative impact on construction and real estate. Real estate saw strong trend of investing in property by consumers. On the other hand the rise in basic construction materials created chaos amongst builders which resulted in halt of ongoing projects. If construction materials cost will increase it will automatically affect the under construction project, builders profit and resulting in higher asset value which will be paid by the end user. Some of the reasons behind hike in construction materials price were spike in production costs and transportation. For instance, input cost has been frequently rising as the cost of input materials are high. High Cost emerged due to increase in coal prices in recent months which was majorly driven by higher demand from China and other Asian countries. Also truck owners in certain states are demanding a 12% hike in charges to carry cement from factories due to sudden hike in diesel prices.

HOME PRICES TO GO UP

Developers say rising steel and cement prices are making construction more expensive this year, which will eat into the benefits of lower premiums in new projects.

“The real estate sector has been working on wafer thin margins and is battling unsold inventory on one hand and unfinished projects due to lack of funds on the other. With a stagnant demand, developers have not increased the prices and are selling projects at affordable rates. Indian real estate sector plays an important role in strengthening the economy. Besides employing more than 40 Million workers the sector also is a key partner in many Central Government schemes like Affordable Housing, Housing for All by 2022 and supports more than 250 ancillary industries. But the sector feels ignored because of lack of support from the Government on various issues. There is an urgent need to control the spiraling cement, steel & other raw material prices and I urge the Government to take necessary steps at the earliest” said Jaxay Shah, Chairman, CREDAI.

According to a recent report by JLL India. The cost of construction in Mumbai is on average 10% higher than other metros, and across asset classes. Hyderabad and Chennai, on the other hand, have the lowest average construction costs where costs are about 14% lesser than Mumbai. The higher costs in Mumbai are largely attributable to corresponding higher prices of key construction materials like cement, reinforcement steel, structural steel, stones, etc.

“Going ahead, we see cost is one of the key drivers in real estate decisions. Many firms today are relooking at their real estate choices to optimise spend. While the true impact of pandemic on construction costs is still being discussed and debated, the general trend is obvious – construction costs is on the rise. Understanding and managing costs are average pan-India cement prices rose 4-5% MoM (Rs16/ bag or Rs320/ton) in Mar’21. Dealers indicated that companies attempted a second round of price hike (Rs10-20/ bag across regions mainly to ensure sustainability of the earlier hike, given year-end pressure to achieve volume targets. Cement demand is mainly led by North, East and Central regions key to keep budgets under control and deliver an economic and quality product,” said MV Harish, Managing Director, Project & Development Services, JLL India.

 

CEMENT PRICE TRENDS

South – The Cement industry in South has exhibited a strong production discipline in the past year in the face of weak volumes. Prices in South were up ~INR58/bag, or 17% YoY, to INR383/bag in 3QFY21. Prices were up 39%/11%/14%/11% YoY in Andhra Pradesh / Tamil Nadu / Karnataka / Kerala. On a QoQ basis, prices were down 1% QoQ as hikes in Nov were offset by decline of 6% MoM in Dec in Kerala and 1–2% in other states.

North & Central – Demand is North and Central was strong, particularly in October, when some states saw >20% YoY volume growth. While the ongoing farmer agitation in North caused some logistical issues in November, this has now been resolved. Prices in North have risen by 3%/7% QoQ/YoY to INR383/bag, led by sharp hikes seen in October (as demand was strong). Prices in Central have also risen by 2%/6% QoQ/YoY to INR351/bag, led by hikes in both Uttar Pradesh and Madhya Pradesh.

West – Cement demand in Maharashtra has been among the most impacted in the country due to the COVID-19 pandemic. The state has continued to see some decline in demand, although lower than the ~20% YoY decline in 2QFY21. Demand in Gujarat has been good, with volume growth of 5–10% YoY. Price was up 1%/11% QoQ/YoY to INR351/bag in Maharashtra in 3QFY21, but declined 1% QoQ (+3% YoY) to INR348/bag in Gujarat. As a result, prices in West were flat QoQ at INR350/bag (+7% YoY).

East – Demand in East has been the strongest among the regions at >10% YoY, supported by government spending (particularly in West Bengal, Assam, and Odisha) as well as improved labor availability. However, due to aggressive expansions undertaken by various players, East has seen the weakest pricing among the regions in the past three years – current prices are the lowest in the last three years. The rest of the country, meanwhile, has seen an over 10% increase in prices in the past three years.

Price in East has declined ~INR45/bag since May’20. It declined ~5% QoQ in 3QFY21 due to a sharp INR20–25/ bag MoM decline across states in Dec. In 3QFY21, price in Bihar / Jharkhand / Odisha / West Bengal declined 6%/7%/8%/5% QoQ.

 

STEEL PRICES CREEP-UP

Since India entered the unlocking phase, steel prices have been on a continuous uptrend. Price of construction steel or TMT bars had recently touched Rs 45,000 a tonne in some markets, which was at least 30-40 per cent higher than the rate in the pre-COVID period.

The rise in prices of steel has hit the construction industry hard. Expenditure on steel constitutes about 15% of any construction project. In projects such as construction of bridges, it goes up to 20% to 25%. Stability in prices of steels is an important factor in signing government or private projects. But, the way in which steel prices are moving upward in recent months has come a rude shock to the builders and contractors.

Indian steel mills increased the price of the benchmark hot rolled coil by Rs 1,000-1,500 per tonne despite a reduction in the customs duty on a list of steel products announced in the union budget as a move to bring down high domestic prices. State-run Steel Authority of India NSE 1.91 % hiked the price by around Rs 1,000 per tonne, while JSW Steel NSE 0.38 % and ArcelorMittal Nippon Steel (AMNS) increased it by around Rs 1,500. Other steelmakers are expected to follow suit.

Indian Steel Association (ISA) explaining the reasons behind the price increases stated that prices of iron ore, a key input for manufacturing steel, have soared globally because of greater demand from China and other countries that have made a quick turnaround since the global lockdown wreaked trade. Demand for steel within India has also recovered, but mining of ore in some states remained subdued. It also urged for a six-month ban on the export of iron ore till the situation stabilizes.

Presently, only the residential sector has seen a revival of demand, while the commercial and industrial segment is still reeling under pressure. The rising construction cost will discourage builders from launching new projects.

 

CONCERN RAISED ON STEEL & CEMENT PRICE HIKE

According to CREDAI, Cement and steel rates have increased by 40-50 per cent during lockdown and alleged price cartelisation and unfair trade practices by the manufacturers. The association has written a letter to Minister of Housing and Urban Affairs Hardeep Singh Puri seeking his intervention in the matter. CREDAI further added that these sudden increase in price of steel and cement like construction materials will lead to increase construction cost and then final product will be costly.

“Looking at the adverse effects of artificial price hike of steel and cement on real estate sector and Indian economy, we have unanimously decided to support the movement initiated by Builders Association of India against cartelisation of steel and cement manufacturing companies. We will also request to the government for an urgent intervention,” said Kirti Thacker, State Chairman, BAI- Gujarat chapter.

The Joint Action Committee (JAC), comprising various real estate developers like BAI, CREDAI, NAREDCO, SABCA and workers association, has demanded that the State and Central governments constitute a Regulatory Authority for restricting cement and steel prices to protect the interests of the construction sector.

The Joint Action Committee (JAC) of BAI, CREDAI, NAREDCO, SABCA and Workers’ Associations are demanding that the State and Central governments take necessary steps to establish a regulatory authority for steel and cement sectors. JAC representatives said that constituting a cement regulatory authority for the sector would curb cartelisation and ‘undue profiteering’ by manufacturers. Similarly, authority for the steel sector was necessary to keep a tab on irrational hike in prices. The steel and cement companies had cartelised pushing the construction industry into doldrums.

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