British Steel Collapse: A Link In The Chain Of Rising Construction Costs
Last week British Steel collapsed into administration. The business entered its (potentially terminal) crisis at a time when the world steel sector looks more uncertain than ever. The trade war between the U.S. and China risks pushing up construction costs and destabilising supply chains in the construction sector. Nobody knows how it will end.
So is the British Steel collapse a sign of what's to come? And what will be the consequences for the construction costs faced by the real estate sector?
Steel is emotive. It represents the heavy industrial foundations on which sound economies are traditionally assumed to rely. Steel evokes masculine pride and old-fashioned values. Today, in Britain and in much of the Western world, it is in trouble. The overwhelming volume of much cheaper steel produced in China is dealing deadly blows to a business that was already on its knees.
British Steel is one of the victims. A £30M top up to a £120M government loan intended to save the business never materialised. The High Court dealt the final blow on 22 May by placing the business in administration. EY is now advising.
Despite the name, British Steel is a midsize business, and while it was once a state-owned business that was privatised in 1988, today it is not even the UK’s largest steel producer.
It employs 4,200 people directly in the UK in Scunthorpe and Redcar. The UK steel industry’s economic output is just £1.6B a year, equivalent to 0.1% of the UK economy and 0.7% of manufacturing output. Total employment is 32,000, 0.1% of the UK total.
Not only is British Steel a modest business by world standards, but it operates in a UK steel sector which is itself just a fraction of the size of that in the U.S., and is almost invisible compared to that of China. UK steel production ranks 22nd out of 45 steel-producing nations.
Output was 8 million tonnes in 2018, compared to 928 million tonnes from China, and 27 million tonnes from the U.S. No surprise that the UK is one of the world’s top steel importers (ranked No. 13). But even here, the scale is limited. Whilst the UK imports 3.1 million tonnes, the United States imports 87 million tonnes.
Steel has property problems of its own, of course. Steelmakers pay some of the world’s highest green taxes and their energy costs have been rising. Meanwhile they face local headaches like UK business rates. The result is that making a profit in the UK is ever harder, even without the global tariff and trade wars.
Concerns about the property impact of the British Steel crisis are most keenly felt in the logistics sector. Build-to-suit and speculative warehousing is on a roll, steelwork is the main component of construction, and timetables are short: three powerful reasons why disruption is unwelcome.
“It’s too early to tell the effect of the British Steel problems because until new orders for steelwork are placed, we won’t know how much longer we’ll have to wait for them to be honoured,” Savills Director of Building and Project Consultancy Will Cooper said.
“Steelwork has been challenging for developers for some time, because of the lead-in times they are having to wait for delivery. Today it is maybe 14-16 weeks which is a long time in a very busy sector like warehouse construction. In those circumstances, one less supplier is something that might lead to longer lead-ins. It is another factor making life difficult.”
Cooper is clear that it is lengthening lead-in times that worry him more that rising steel costs.
“It’s a constant problem. Developers are always wanting things done quickly, because the tenants want things quickly, and you can win or lose deals on the strength of keeping to occupier timetables. And because decisions by tenants are often last-minute, or they change their minds about what they want, you can’t pre-order the steel,” Cooper said.
Since so much UK steel is imported, the collapse of a small-scale UK producer ought to make relatively little difference to construction costs. Yet cost consultants agree with Cooper that it may add an extra unhappy element to the story of rising raw materials prices.
“The increase in UK construction costs is down to a number of interwoven factors but, certainly, two key components are rapidly rising material prices and labour costs,” Mace Managing Director for Cost Consultancy Steven Mason said.
"Material prices, which had begun to ease at the end of last year, in line with a more stable pound, have seen a sharp rebound at the start of 2019. In large part, this is due to substantially higher oil prices, although increased demand because of stockpiling may also be having an effect."
Although most material prices are increasing, European steel prices have come under pressure over the past year, Mason added. Caused by weaker demand, combined with strong global production, this has resulted in products such as rebar and fabricated structural steel falling in recent months.
"The labour market is also creating challenges," he said. "The number of employees in the construction industry hit a record high last year and, alongside high levels of skills shortages, this has meant wages rising rapidly. Furthermore, while it seems European workers haven’t been leaving the country en masse, the current Brexit situation won’t have helped matters, especially in London.”
The UK construction sector could do without the disruption caused by an international steel crisis and local producer collapses.
Construction consultancy Turner & Townsend said confidence is fragile, despite construction output growing by a solid 2.1% in the third quarter of 2018. The expansion slipped into reverse during the final three months of the year, which saw output fall by 0.3%. Construction output for 2018 as a whole remained in positive territory, but the 0.7% growth achieved is the slowest pace seen since 2012.
Behind this national average, there are wide regional variations in performance, with half the UK mainland regions feeling the chill. This loss of momentum, coupled with the lingering uncertainty of Brexit, has taken its toll on both business and consumer confidence.
Average construction costs in London now stand at £2,880 per square metre — now the third most expensive place in the world to build in 2019, behind only New York City and San Francisco, Turner & Townsend report.
Significant inflation in material costs have added to the pain, but it is rising labour costs that have done most of the damage. The average (fully loaded) construction wage in London has hit £35 an hour, fuelled by shortage of workers Turner & Townsend said.
“After years of negotiation, all Brexit outcomes still remain on the table for the construction industry, including no deal. What we do know is that the industry itself is ill-prepared for a major shock, with low margins, faltering tender pipelines and risk piled up in the supply chain. Clients need to act now to map dependencies – from plant, materials and finished goods to labour – to understand and model the potential impacts on cost and schedule,” Turner & Townsend UK Cost Management Managing Director Paul Connolly said.
The UK construction sector will have to weather the effects of President Donald Trump's decision to plans to levy a 25% tariff on imported steel, and the retaliatory tariffs that will result. It puts more pressure on already-high construction costs and could prevent some projects from breaking ground.
However, the nightmarish problems of steelwork are by no means the only headaches facing contractors and developers. Savills' Cooper nominates utility problems and the growing difficult of making electricity, gas and water connections quickly, or at all. Mace's Mason and Turner & Townsend's Connolly are mindful of labour costs.
One fewer relatively small-scale steel producer will not affect world steel prices, but the demise of British Steel symbolises the trouble that could be coming.