EU economic recovery threatened by building material shortages

European construction executives are increasingly concerned that the building material shortage and higher material prices could undermine the EU's flagship EUR800bn Economic Stimulus Plan (ESP). The Construction Industry Federation (FIEC) has reported that cement prices have increased by 10 per cent in a single month, timber prices were up 20 per cent and bitumen prices have risen 15 per cent in three months. Market analysts suspect that the higher building material prices, product shortages as well as penalties for building delays will slowly start to absorb growing funds from the ESP.

The ESP for Europe's recovery for the EU's recovery post-COVID-19 is dependent on the construction sector to provide around 10 per cent of the output that is put towards the loans and grants to rebuild the member states' economies. Rising prices of building materials threaten the completion of construction projects and could impact economic growth.

Domenico Campogrande, director general of FIEC, said: "The danger is that we have this big EU recovery plan but if 30 to 40 per cent of these funds are absorbed in extra financial instruments to cover higher prices, it would be a real nonsense as it won't go into the real economy."

FIEC states that investment in construction in the EU will rise by 4.2 per cent in 2021 which will still be short of the pre-pandemic crisis levels. Meanwhile, employment in EU construction is expected to decline by 0.1 per cent by the end of the year. 

European building material scene
Italy is the biggest beneficiary of the EU recovery plan and the Italian government has put forward its 'National Recovery and Resilience Plan' for EUR68.9bn of grants and EUR122.6bn funds in loans. The country recorded a contraction of 10.1 per cent in overall construction investment in 2020, reports the National Association of Italian Constructors (ANCE). New housebuilding declined by 12.5 per cent, non residential building dropped by 13.5 per cent and civil engineering slipped by 2.5 per cent in 2020, while housing renovation fell by 9.8 per cent.

ANCE is forecasting an 8.6 per cent rebound in Italy's construction investment in 2021, mainly driven by the redevelopment of existing housing stock (14 per cent) and to a lesser extent by private investments for non-residential building (five per cent). However, Flavio Monosilio, ANCE research director, said: "We are facing shortages of many basic materials for construction and this is very dangerous as Italy is being hit harder than the rest of Europe. The crisis is at the heart of the new EU recovery plan."

In France architects are grappling with the country's new environmental directive, introduced last year, that requires public buildings to use timber for 50 per cent of their building materials to lower CO₂ emissions. Consequently, a shortage of timber has slowed the French construction sector while prices for timber have soared by 50 per cent since the start of the year. This has led to timber being sourced from overseas, as well as a drive for bio-sourced materials to lower carbon footprints including the sourcing of low-carbon concrete. Ciments Français and Lafarge France announced price rises of EUR5/t in May as higher cement consumption in France has tightened supply with consumption expected to rise by 6.5 per cent in 2021, according to CIC Market Securities.

Meanwhile, 44 per cent of Germany's construction companies surveyed by the Ifo Institute in May announced difficulties in procuring building materials on time while less than six per cent of them said the same in March 2021. Total construction investment in Germany is only expected to rise by 0.9 per cent in 2021, according to FIEC.

Spanish construction investment has a more positive seven per cent growth forecast by FIEC for 2021. House renovations and new housebuilding will lead the recovery. Housing permits are expected to reach 73,499 in 2021, up from 59,942 in 2020. Oficemen's April data reported Spanish cement demand expanding by a staggering 116 per cent YoY to 1.239Mt, while cement demand in the first four months of 2021 increased by 24.5 per cent YoY to 4.617Mt. 

In the UK demand for cement and other materials has hit record levels this summer. The UK's construction output growth reached a 24-year high in June as the recovery in the construction sector was driven by housebuilding and commercial construction, according to the IHS Markit/CIPS UK Construction PMI^® Total Activity Index. The Index hit 66.3 in June, up from 64.2 in May 2021. Housebuilding increased at its fastest rate since November 2003, while commercial work output reached its highest activity since March 1998.

Summary
EU member states are relying on the Economic Stimulus Plan to help stablise their economies as they emerge from the pandemic. It is therefore vital that supply chains in the building materials sector are unblocked to eliminate shortages and enable a more rapid and sustained EU economic recovery.