Germany's construction sector is showing signs of weakness despite having been supported by strong stimulus plans. This week CIC-Market Solutions reported that the explosion in raw material costs and uncertainty concerns over inflation were impacting stock market prices in the German building materials sector.

S&P Global's analysis of May 2022 indicates that rising price pressures dampened demand in the German construction sector with material shortages and uncertainty among clients. Civil engineering had the steepest rate of decline and residential building projects fell at their fastest pace since February 2021.

Meanwhile, new orders declined for the third straight month in May on rising price pressures and higher borrowing rates, said RTT News. Product delivery delays remained historically high in May, despite easing in the two previous months.

Is inflation the main culprit?
CIC-Market Solutions states that the acceleration of inflation from the low point of 3Q20 and capacity bottlenecks will be fatally damaging to construction growth in the short term. This is despite very strong supporting factors such as German stimulus plans that total EUR56bn, made up of the future plan (Kraftpaket) and EUR269.6bn for the BVWP multi-year infrastructure plan by 2030. The construction sector is also underpinned by the European Next Generation plan and the volume induced by the implementation of the Green Deal package.

Construction input inflation is estimated to be running at 7.5 per cent, according to CIC-Market Solutions and probably by 10-12 per cent by the end of 2022. The federation anticipates a 0.5-2 per cent decline in demand for structural work at a constant exchange rate.

Impact on cement producers
Inflation is already having an impact on raw material prices, energy prices, fuel prices and logistics for German cement producers. Electricity prices have escalated by a multiple of 3.7 since the beginning of 2021, according to Leipziger Strombörse. The weighted average price for electricity has risen from EUR8.40/100kWh in 2015 to EUR19.20/100kWh in 2022, CIC-Market Solutions estimates. Coal and petcoke price rises have also risen from ~EUR12.5/t in 2020 to ~EUR24.7/t in 2022, says the research house. Meanwhile, variable costs for German cement manufacturers have virtually doubled from 2012, from ~EUR25/t to ~EUR48/t, according to CIC-Market Solutions estimates. 

Cement prices will rise
The only solution for cement producers is to increase cement prices. In January 2022 private companies reported that cement prices rose by EUR9-12/t for CEMI and a second increase has followed of ~EUR15/t between 15 April and 1 May. Dyckerhoff (Buzzi Unicem group) has not yet announced a cement price increase, but publicly traded and private cement producers have implemented price changes. Temporary closures at Opterra Zement's Karsdorf plant, CRH and ex-Lafarge plants in eastern Germany may ease the amount of cement on the market. The cement produces are otherwise still operating at full capacity, claims CIC-Market Solutions.

Summary
Germany is dependent on Russia for most of its energy needs and the ongoing conflict in Ukraine will heighten concerns about the country's lack of energy sourcing diversity. Some cement producers are likely tied into medium- to long-term contracts that may help them weather the storm, but many are already reacting to the difficulties of falling demand and higher energy costs. It remains to be seen how long production can keep running at high utilisation rates, but German cement producers, such as Opterra, are already turning towards investments in renewable energy to reduce fuel costs.