The future of the construction industry: supply chain issues

There are many headwinds facing the construction sector right now. Here, Lombard focus on the supply chain challenge, and discover how one customer is navigating the disruption.

How are businesses in the construction sector being affected by supply chain issues?

“The supply chain issues change almost daily. We’re facing severe timber price increases and shortages, and the price of steel has risen by over 200% in the last 18 months.

“The same materials seem to be rising month by month. The increases used to be annual, with single-digit figures. Now, we’re seeing double figures quarterly.

“We try to find a positive in every negative, so we’ve changed the way in which we procure materials. We now buy in bulk and store materials at various locations. And we buy direct from manufacturers. So, rather than spot-buy on a weekly basis, we’re now buying in bulk to supply the site for maybe one or two months.

“As a business, we like to differentiate ourselves and keep one step ahead of our competition by giving our customers tailored extras when they buy a house. These range from garden paving to appliances. Unfortunately, due to the supply issues, we’ve had to rein this back in, which is a decision we did not take lightly.”

What’s changed since the start of 2022?

“We’re constantly having to change and be agile in the way we operate.

“We’ve noticed there’s no pattern to anything. Materials came off allocation in Q1 this year and then slowly they’ve slipped back into allocation again. These include key components for development, such as cement, timber, steel and insulation.

“Winter is always a quiet or quieter time in construction. So yes, materials were easier to access. When you get into the summer months, that’s everyone’s busy time and the market picks up.

“The cost of living did change things in Q1: it freed up some materials. We had a little bit of breathing space to secure new deals. Now the market has picked up and we’re feeling the pressure again.”

How is market demand for construction being affected by the supply chain issues?

“We’re not the only developers bulk buying and storing. I’ve got good relationships with buyers at national, regional and medium-large housebuilders and they’re doing the same, avoiding price increases by tying in deals and sitting on materials. It’s swallowing up a lot of the stock and that does filter down. As the old saying goes, you’re better looking at the materials than looking for them.”

What are you doing to protect revenues and profitability?

“We are absorbing price increases. Luckily for the housing market, the pound per square foot has increased. House prices have rocketed, and houses are in high demand. So we’re not losing money; we are riding the wave of that. But profitability has not increased. And we’re looking at whether the housing market might drop.

“As a company we are trying to be savvy. We continually monitor outgoings, costs and the availability of skilled workers.”

I can’t see this changing any time soon. We will be seeing shortages for the next 12 months

Jamie Drake
Lead Buyer, Skipton Properties

How might the industry adapt if supply chain problems are perceived as long term?

“Because I have manufacturing contacts in the industry, I have some insight as to where they think the market’s going. We’re being told there could be shortages until Q2 2023. If that’s the way the market is going, we have to plan ahead and adjust.

“Ensure that when we’re starting new developments, we are acting fast. We’ve invested in a new development programme so that our architects and engineers can give us drawings sooner, which means we can get the tenders out sooner and get prices set.

“I can’t see this changing any time soon. We will be seeing shortages for the next 12 months.”

Is this an opportunity for the construction industry to address sustainability concerns?

“We are pushing to be as sustainable and green as we can be. We’re a carbon-neutral company.

“The construction industry is stretched by the supply chain crisis, though. We’re having to make different decisions on transport and materials to get by, and this has an impact on sustainability. We’re struggling with where we can find materials from closer supply chains.

“One example is the European timber market, which has completely crashed because of an issue between America and Canada. That’s why we’ve seen such a high rise in timber prices. And the UK can’t grow the quality of timber for housebuilding that grows in Eastern Europe.”

What predictions do you have for the medium-to-long term for supply chains in construction?

“I’ve been in the industry for 15 years. When we had the crash in 2008, the construction industry was the first to go down and the last to recover. Throughout the pandemic, the construction industry was allowed to carry on, which is why the demand was so high.

“Personally, I think there will be a crash at some point and that will impact the supply chain and requirements for materials. As severe as that may be – it’s obviously not a good thing – it may settle things down. We can only act in the time that we’re in.

“If everybody pulls together – the merchants, the manufacturers, the end user – and rides this out, then I think we will pull through this. But we are probably looking at anywhere between five to 10 years to go back to where we were.”

Read our round-up of the headwinds facing the construction industry and watch our video where Simon Rawlinson, Head of Strategic Research and Insight at Arcadis UK, discusses what’s on the horizon for construction in 2022.

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