Construction industry warns rising costs will weigh on EU stimulus package
Construction industry leaders across Europe have warned that ‘dangerous’ price hikes and shortages of many building materials risk undermining the EU’s flagship € 800 billion economic stimulus package.
The EU construction sector generates nearly 10% of the bloc’s economic output, and large infrastructure projects represent a significant part of the Brussels stimulus fund, which will distribute grants and loans to rebuild the economies of the Member States after the Covid-19 pandemic.
But the prices of building materials, from steel and lumber to concrete and copper, have started to rise sharply in recent weeks as the economic rebound in Europe and elsewhere – including the United States and China – kicks off. a construction boom.
According to the European Construction Industry Federation (FIEC), bitumen prices rose 15 percent in just three months, cement prices rose 10 percent in a single month, and timber prices rose. increased by more than 20 percent.
Public infrastructure projects typically impose penalties on builders for delays, while contractors often have to bear the cost of unexpected price increases.
Domenico Campogrande, director general of FIEC, warned that the price hike and further delays risked diluting the impact of EU funds.
“The danger is that we have this big EU stimulus package, but if 30 to 40 percent of these funds are absorbed into additional financial instruments to cover the higher prices, that would be real nonsense because it won’t go into the real economy, “he said.
In a recent letter At the European Commission, FIEC said it was “alarmed” by price increases and material shortages, including more than doubling the Italian price of steel bars used to make reinforced concrete in four months until March.
“This phenomenon jeopardizes the contribution of the construction sector to economic recovery and threatens the potential impact of European stimulus programs,” he said.
In Italy, the largest recipient of Brussels stimulus funds, the government plans to devote more than 100 billion euros of its EU funding to building new infrastructure over the next five years. But the construction industry has warned officials it will struggle to meet the challenge without major reforms.
“We are facing shortages of many basic building materials and it is very dangerous because Italy is hit harder than the rest of Europe,” said Flavio Monosilio, research director at ANCE , the association of Italian construction companies. “This crisis is at the heart of the EU’s new recovery plan.”
Construction executives attribute the bottlenecks to several factors, including the strong rebound in demand that has outstripped the supply of materials in many countries, as well as the disruption of supply chains linked to the pandemic and persistent trade tensions.
Some materials were affected by additional problems such as a bark beetle infestation that affected timber production and delays in the redistribution of unused steel.
Thomas Birtel, managing director of Austrian construction group Strabag, said price increases had “increased significantly over the past two weeks” and the company had to “report delays at individual construction sites because the material is simply no longer available “.
Strabag, which built the Copenhagen metro in Denmark and the Limerick tunnel in Ireland, operates its own concrete and asphalt plants, but Birtel said: “Construction is a small-scale business and it isn’t even not possible to control supply chains for all buildings. materials.”
In Germany, 44% of construction companies surveyed by the Ifo Institute in May reported problems with the on-time supply of materials, up from less than 6% in March.
“We haven’t seen a bottleneck like this since 1991,” said Felix Leiss at Ifo. “This obviously caused a slowdown in construction activity in April, at least temporarily.”
Production in the German construction industry fell 4.3% in April from the previous month, despite the fact that companies in the sector reported a record order book of 62 billion euros in March.
“Many producers are not able to deliver the materials before the end of the year and this is a real problem,” said Stephan Rabe of the German construction industry association. “A lot of money is invested in public and private sector construction projects in the United States and China, and it absorbs a lot of materials. The wood is produced in Germany and exported to the United States, so it is scarce here. ”
Some German politicians have called on Berlin to demand temporary EU export restrictions on timber and other materials.
As the U.S. government prepares to launch a $ 1.7 billion infrastructure program and the global economic recovery is expected to accelerate, pressures are expected to remain elevated over the coming months.
“It will take time to get back to normal – at least at the end of the year,” Campogrande said.
Some countries, such as France and Germany, have responded by relaxing the rules of some public sector construction contracts, removing late fees and compensating contractors for unanticipated price increases.
Monosilio said Rome has yet to offer any relief to the sector, which has been battered by a decade-long drop in public infrastructure investment, a lack of bank funding and long delays in approvals and payments from projects.
Italian Prime Minister Mario Draghi said that the “fate of the country” depends on the success of a package of 248 billion euros of investments and reforms mainly financed by the EU recovery and resilience plan. It includes investments in high speed train lines, renewable energy facilities, smart electricity grids and energy efficient buildings.
EU states have a poor track record when it comes to distributing funds; in the six years leading up to 2020, they spent on average just over half of the money allocated to them by Brussels.
Without reforms to address the problems of Italy’s construction sector, Monosilio said similar problems could hamper the EU’s stimulus spending efforts.
“The Draghi government absolutely wants to improve the situation,” he said. “[But] it is a sword of Damocles which hangs over the whole European project.