Rattled contractors give projects a miss

Source : Business Times - 21 Oct 2008

Fearing rising costs, some stop bidding for new jobs

MANY contractors are refusing to tender for new jobs as they fear that their projected profits could dissolve into losses if the prices of raw materials keep climbing. This reluctance could delay some projects, industry players said.

The contractors are already working on very thin margins and at least four of them told BT that they were hesitant to take on new jobs. One Singapore Exchange-listed main contractor here said that it is better to have a smaller order book with opportunities for better profit margins than a large order book comprising many contracts with locked-in costs - which would squeeze margins if costs rose while building was in progress. Another listed construction company similarly told BT: ‘We’re becoming more choosy about accepting new contracts.’

The supply bottleneck continues even as construction demand is tapering off due to a correction in the housing market, said Citigroup economist Kit Wei Zheng. The value of construction contracts awarded fell to $1.1 billion in August, from $2.1 billion in July and $2.5 billion in June. Further slowdowns are expected as construction companies head for 2009.

‘Of the two problems, I would judge the more serious problem (at the moment) to be supply, rather than demand,’ said Mr Kit. ‘I have heard of some companies refusing to accept construction projects as initially projected profits could easily turn into losses if contracts do not allow for cost increases to be passed on.’

Projects are now being delayed because of the stand-off. The Ministry of Trade and Industry, for example, noted during the release of the Q3 flash GDP estimates that ‘despite a strong pipeline of projects, a shortage of contractors, a tight labour market for engineers and project managers, and longer waiting times for equipment’ have delayed projects.

The heart of the matter is this: the cost of raw materials is locked in when a contractor bids for a tender. When the prices of essentials go up, it eats into the already slender margins of main contractors here, who are powerless to pass on the increase in costs to developers.

According to data from industry regulator Building & Construction Authority, the prices of raw materials essential to the construction industry - cement, steel bars, granite, concreting sand and ready mixed concrete - have in some cases more than doubled over the past two years.

The price of concreting sand, for example, climbed 154 per cent from July 2006 to July 2008. Prices of steel bars also rose 126 per cent over the same period. Labour costs are also up as Singaporean companies fight with their counterparts in China and the Middle East to attract talent, many contractors report.

The authorities, aware of the strain that the increasing prices of raw materials are placing on the margins of contractors here, have asked developers to help shoulder some of the burden. But recent checks have shown that developers are not budging.

Developers have their own set of problems, analysts said. Their margins are being squeezed for current and future launches as construction tender prices continue to rise - especially in the current environment, where selling prices of homes are on the downtrend. But looking ahead, the prices of raw materials should come down as global demand slows, economists said. Prices have already come down slightly in recent months.

‘In line with the scenario of slower global growth, we are likely to see a downside to commodity and raw material prices,’ said CIMB-GK economist Song Seng Wun. As demand for raw materials from places like the Middle East - which is quickly losing steam - drops off, Singaporean contractors will be able to buy raw materials at cheaper prices, he said.

However, if construction demand falls off sharply in 2009, cheaper raw material prices won’t be of much help. Right now, both analysts and those in the industry are unsure about how much of a beating the sector will take next year. This year, construction demand is expected to reach $27 billion to $32 billion.

‘There is no reason to believe that the construction sector will be immune from the overall slowdown in demand,’ said Citigroup’s Mr Kit. He expects some easing in demand in 2009, but said it is hard to put a number to the fall-off at the moment.

CIMB-GK’s Mr Song, on the other hand, said that demand will fall, but will likely stay above $20 billion next year. The government is likely to respond to the slowdown in demand from the private sector by restarting some of the $4.7 billion worth public sector projects it had put off, both Mr Song and Mr Kit said.