The confluence of factors that has severely stressed global supply chains will likely continue to challenge the global economy into the first half of 2022. The strain will ease as production resources are reallocated to areas seeing the greatest demand and price increases.
Moreover, a shift in household spending away from home related projects towards travel and leisure will relieve pressure on the supply of construction materials.
Even so, new price spikes are possible into next year during the next phase as global supply chains and inventories struggle to catch up after setbacks.[1] The longer-term risk will be in factory and logistics labour shortages. The multiple stressors on the system include:
- Record high consumer and industrial demand following Covid-19 driven shut-downs in production.
- Start-and-stop recoveries among different economies and producers worldwide due in part to continuing efforts to combat periodic outbreaks in the pandemic.
- Shortages of power, computer chips and parts has caused intermittent shutdowns in China, which accounts for 24% of U.S. machinery and electrical imports.
- The chip shortage has crippled production in multiple sectors globally, most notably the IT products and automotive industries.
- A shortage of shipping containers and shipping capacity as well as truck drivers is constraining port throughput, causing bottlenecks, and contributing to sharp increases in freight costs.
- The Suez Canal blockage has delayed more than 18,000 shipping containers.
- Winter storms and blackouts in the U.S. and low water levels on the St. Lawrence River are forcing ships to reduce their loads.
Steep increase in material costs
The overall effect for the development industry is a sharp year-over-year increase in materials costs from August 2020 to August 2021.[2]
- Regular gasoline unleaded: +77.5%
- Particle board and OSB: +71.1%
- Diesel fuel: +67.2%
- Plywood: +61.3%
- Steel bars, plates & structural shapes: +49.0%
- Copper wire and cable: +31.4%
- Gypsum: +22.9%
Success depends on taking a proactive approach
We recommend all stakeholders – lenders, developers and contractors — in a project take a proactive and collaborative approach to planning and mitigation. Specific actions can include:
- Ordering materials well before they are needed (12 to 24 months).
- Identifying and assessing what alternative systems are available, and what the trade-offs are for cost, quality, and life-cycle.
- With quotes for lead times on joist in some areas hitting two years, many structural engineers are offering alternative systems in either structural steel or concrete, both cast in place and pre-cast, for exterior envelope if a firm price can’t be provided for the pre-formed aluminum panels. Alternative systems can include masonry veneer, curtain wall, etc.
- Reviewing key inputs if they are in high demand, or there is a shortage or outright lack of specific products clients wish to order; in either case there would likely be a delay in receipt on site.
- Identifying where products in question will be manufactured, assembled and shipped from in order to gauge likelihood of delay. If clients can engage in and enter into contracts for transport ahead of time they can avoid issues with moving their landed product from port to destination.
We are here to help
Establishing and maintaining dialog with project partners and investors is key. A collaborative approach can help resolve bottlenecks. For example, working with lenders to ensure funds can be released to pre-pay for materials, such as appliances, can keep projects moving forward.
Effective risk management starts with sound analysis. Connect with us for any assistance in analyzing supply chain issues and assessing materials availability and costing.
To learn more, please contact:
[1] https://think.ing.com/articles/supply-chain-problems-are-here-to-stay
[2] https://canada.constructconnect.com/joc/news/economic/2021/10/gap-between-increases-in-material-costs-still-immense
