As Germany's economy faces its worst economic slump in recent times, the domestic construction sector has little to look forward to this year as investments and output shrink under pressure.
Data released last week shows that Germany's pre-adjusted GDP fell by 0.3 per cent in 2023 in an environment that continues to be marked by multiple crises, according to national statistics office, Destatis. Despite recent declines, prices remained high at all stages in the economic process and put a damper on economic growth, Destatis noted. Unfavourable financing conditions due to rising interest rates, and weaker domestic and foreign demand also took their toll. Consumer spending fell by 0.8 per cent over the year as a result of inflation. Meanwhile, government consumption was down by 1.7 per cent primarily due to the discontinuation of state-financed COVID-19 measures. The decline in GDP marks the first contraction since the COVID-hit year of 2020. Moreover, analysts have cautioned that Germany is on track for stagnant growth in 2024 at best, with an increased risk of a second consecutive year of negative output.
Drop in construction spending and output
After over a decade of steady growth, demand in Europe’s largest construction market is ailing under the pressure. Following a decline of 0.9 per cent in the previous quarter, German construction output increased by 0.4 per cent in the 3Q23, according to the German Institute for Economic Research (DIW Berlin). However, the institute’s forecasts point to further contractions in the 4Q23 lasting through to the 2Q24. Growth is expected to return in the 2H24, on the back of planned and approved construction projects. However, the number of buildings applications has been falling sharply for some time, the institute notes. Overall, it expects construction volumes will shrink by 3.5 per cent in 2024 to EUR546bn, before recovering slightly with a 0.5 per cent increase in 2025.
Spending is also in decline, with the Association of the German Construction Industry forecasting a drop in construction investment of 5.5 and 3.5 per cent in 2023 and 2024, respectively. New housing (which accounts for 33 per cent of housing investment) is anticipated to fall by 12 per cent in 2023 and 2024, on the back of reduced public funding, rising interest rates, a sharp rise in construction costs and difficulties for some developers. Indeed, Germany’s residential construction sector, which had experienced a years-long boom driven by low interest rates and strong demand, has seen new orders being considerably slower and existing orders being cancelled much more frequently. On the other hand, the renovations (less cement-intensive), public works and non-residential segments are holding up better than expected.
Weakening cement demand
Consequently, cement consumption has been weakening and is expected to have fallen by approximately eight per cent YoY in 2023 to 25.82Mt, according to projections by the Global Cement Report, 15th Edition (GCR15). Latest available data from the German cement industry association VDZ show a fall of 18.4 per cent YoY in the 1H23. Analysts at CIC Market Solutions anticipate a steeper contraction of 20 per cent in 2023, before easing to a decline of five per cent in 2024.
Despite the current downturn in demand, cement prices in Germany are still increasing as the relentless rise in both carbon and energy prices have resulted in a concerted industry effort to lift price levels. Following two prices hikes in 2022 (EUR9-12/t in April and EUR15/t in June), the rise in selling prices seen in 2023 is expected to be followed by a further increase in 2024.
Rationalisation on the cards?
Given the German cement industry’s existing challenges, from input cost inflation to muted domestic demand, rationalisation of the industry could be on the cards due to overlapping plants and persistent over capacity. With 21 companies, the German cement industry is represented by a mix of medium-sized, often family-owned enterprises as well as large international groups. Altogether, they operate 53 cement plants, of which 33 are integrated, according to VDZ. In 2022, the industry produced 32.9Mt of cement, translating into a capacity utilisation rate of 70 per cent.
Headquartered in Germany, Heidelberg Materials is the country’s leading domestic producer and is reportedly looking to take individual plants completely off-grid and shifting production to times when power prices are lower given the high cost of gas and electricity. Moreover, with Heidelberg Materials continuing its divestment drive as part of its ‘portfolio optimisation and margin improvement programme’, the company’s homegrown German operations could well form part of the readjustment process going forward.