Will we be facing construction delays?
The key challenges that Polish construction companies are facing consist in the dynamic increase in construction material prices, which, together with further interest rates hikes, high inflation and high fuel prices, contributes to an increase of overall production costs. The threat of a wave of bankruptcies in the construction sector is becoming real. Add to that the material shortages and the outflow of workers from the construction sites to their country at war and we may soon be facing an investment slowdown. Are moods in the construction industry really that bad?
Small and medium companies must prepare for a crisis. It is them in particular that will feel the staff shortages, as here the percentage of employees from Ukraine is clearly higher. In 2022, there were nearly 373,000 Ukrainians legally employed at construction sites. How many of them came back to their homeland? We do not know yet, but experts are expecting another wave of returns when the reconstruction process after the war begins. Construction companies in Poland are considering replacing Ukrainians with workers from the Caucasus, Belarus or Moldova. In the companies sector, we are also facing the greatest salary pression in the 21st century. In March 2022, it was 15.7% YOY.
The steel market is one of the industries severely impacted by price increases. We have been reporting increasing prices already back in 2021. The pandemic shook supply chains and limited steel availability threatened both private and commercial construction sites. When the prices settled in 2022, a geopolitical crisis came. It brought about new uncertainty which, unfortunately, provokes stocking up on inventories. Companies are buying massive volumes of materials, which further aggravates shortages. Both Ukraine and Russia are huge steel manufacturers. In 2021, nearly 20% of the steel used in Poland was from Ukraine (approx. 1.37 m tons) or Russia (approx. 1.36 m tons). Such serious problems with supply liquidity may disturb completion of investments or even put new ones on hold.
Increasing prices of construction material are also the result of the high oil prices and the dwindling zloty-dollar exchange rates. Prices of cement, concrete, aggregate or coking coal used in steel production are also beating all-time highs. High fuel costs translate to transport price increases. All of this is happening against a background of high demand, while construction companies are trying not to slow down. This is confirmed by wholesalers, whose profitability has increased in comparison to the pre-pandemic and pre-war time, although it cannot be denied that even then we could see rising costs.
We can rest assured that there will be some perceivable the negative consequences. What remains to be seen, for the moment, is the scale. We can probably expect lower margins in big contractor companies, worse financial position of SME subcontractors, along with a drop in demand for construction services in the private sector. What would be necessary would be an increase in public sector contracts and indexation of fees to accommodate actual cost increases. This might be the salvation for the industry.