微密圈

01 / SUMMARY

Hong Kong has emerged as the most expensive construction location in 2012 when compared in Euros, experiencing double-digit inflation as costs in Europe鈥檚 traditional high-cost markets of Switzerland and Denmark have stabilised. Australia and Japan have slipped down the rankings relative to the UK, mainly due to currency devaluations that have taken place during the year.

微密圈 costs have fallen slightly in the UK over the past 12 months, but the UK has maintained its position in the rankings as a result of a combination of a weak pound and some inflation in European markets. Eastern Europe has undergone some big price corrections and countries like Croatia, Bosnia Herzegovina and Bulgaria have tumbled down the rankings.

The cheapest locations to build remain India, Indonesia and Vietnam, where construction costs are 30-40% of the UK.

Outside of selected markets in Asia - including Hong Kong and Indonesia, where inflation is a significant issue - global construction markets are relatively subdued, with few where prices are rising in excess of 5%. Currency movements have been a factor in some price movements in 2012. Relative to Sterling, the Yen and Australian Dollar have lost in excess of 15%, whilst the Euro and Swiss Franc have strengthened by around 5%.

02 / COMMODITY PRICES

Commodity price trends

Commodity prices peaked in mid-2008 then dropped significantly in January 2009 to start rising again thereafter. Prices for metals peaked again in 2011 and have fallen progressively since. The main factor influencing demand for raw materials was the activities of the BRICs. Prices were also influenced by high volumes of commodities trading. With new sources of supply coming on stream, investment houses moving away from the commodity markets and a substantial reduction in the growth rates of Brazil, Russia, India and China, it is not surprising that prices have fallen in the short term. However, some forecasters have called the end of the 鈥渃ommodities super cycle鈥� and claim commodities have already entered a sustained period of below-trend price growth. This development will be of huge importance for low-cost construction economies, where material costs are a more significant component of project costs. Recent trends include:

• Australian coal has traded at around $100/tonne since the start of the year with major coal producers reporting a substantial drop in profits.
• Crude oil prices have been steadily growing since January 2009 and have stabilised at around $95 per barrel, subject to consistent supply conditions.
• Prices of aluminium have been dropping since January 2011 and are now at average of $1,800/tonne, 35% down from its peak in 2008.
• Copper recorded its highest price in eight years in January 2011 at $10,000/tonne. Currently, prices are on a downward trend due to higher stocks and demand concerns, and have reached $7,200/tonne.
• Slowing demand across manufacturing and construction in China has pushed prices of iron ore down to $133/tonne, down 11% on the year, but still three times higher than prices set in 2007.

Looking forward, the IMF forecasts that most metal prices will continue to soften over the next three to four years. Aluminium prices are however forecast to rise, partly as a result of exposure to increases in energy costs.

Currency trends

Currencies have seen some fairly substantial fluctuations during 2012/13, notably the fall of the Yen against world currencies, and the weakening of the Australian Dollar - linked in part to diminishing prospects for the minerals sector.

Probably the most significant movement over the year has been the 5% appreciation of the Chinese Yuan. Not only will this make Chinese imported materials to the UK more expensive, but it has also contributed to China moving to nearly half way up the global cost league.

Other notable movements against Sterling include the strengthening of European currencies including the Euro, Swiss Franc, Swedish Crown and Polish Zloty against Sterling - reflecting the positive response of currency markets to actions by the European Central Bank during 2012.

03 / EUROPE

Europe continues to struggle against the headwinds of Eurozone woes, deficit reduction and challenging export markets. The European Commission forecasts that Eurozone GDP will shrink by 0.4% in 2013, following a contraction of 0.6% in 2012. However, prospects for 2014 are looking brighter. During 2013, France and the Netherlands are expected to contract alongside Spain, Italy and the weaker economies of southern and eastern Europe. The brightest spots forecast by The Economist magazine are surprisingly the Baltic Republics - with growth at over 2% in 2013. Looking forward to 2014, only Slovenia and Cyprus are expected to be in recession; Ireland, Sweden and much of Eastern Europe will be growing at between 2% and 4%, and Latvia and Estonia could be storming away with growth rates of over 4%.

However, not all forecasters are convinced that the worst is over, with the OECD warning that protracted economic weakness in Europe 鈥渃ould evolve into stagnation with negative implications for the global economy鈥�. Weakness in European markets in 2013 is reflected in Euroconstruct Forecasts, which, while projecting a recovery from the depths of recession in 2012, has downgraded its forecast for 2013 to a further reduction in output of 2.8%. Few markets outside Scandinavia were expected to grow but as greater confidence returns into 2014, stable countries in Northern Europe and the Nordic zone will benefit from investor interest and a resurgent housing market. Europe鈥檚 starting point into recovery will be at volumes last seen in the mid-nineties, prior to the launch of the Euro, suggesting that many of the gains from the Euro-era have been lost.

Germany

Germany鈥檚 economy is reasonably robust, with a balanced budget and modest growth during 2013. GDP is forecasted to reach 1.9% in 2014, although the impact of a wider slowdown in the global economy may have a disproportionate impact on German export markets. Infrastructure contributes to about 30% of construction spend, so the 2020 target to generate at least 35% of electricity from renewables will have an important role in creating new opportunities as existing major infrastructure projects such as Berlin鈥檚 new airport approach completion. Rail could also be a big area of spend, although the viability of some major schemes is being challenged.

There is a growing interest in residential with large-scale urban developments like Neue Mitte Altona or HafenCity in Hamburg being developed for sale rather than for the rental market. Low interest rates of around 2.9% encourage buyers to buy into property. Looking beyond residential, an oversupply of office space is holding back the building sector.

There is inflation in the German construction market, running at 2.1% for the year with potentially 2.5% expected in 2014. However, labour is plentiful with excess demand being met from resources from Eastern Europe.

France

France, Europe鈥檚 second largest economy, looks set to underperform this year with negative growth of 0.1%. Paris and one or two other centres are doing well, but confidence elsewhere across the country is weak. Unemployment at 10.6% is high and is expected to rise, and the public deficit is also expected to increase from 3.9% of GDP this year to 4.2% in 2014, putting pressure on public investment. Hollande鈥檚 newly elected government has focused on social infrastructure and announced a 鈧�12bn investment plan to modernise its economy, which will create little opportunity for construction.

Reflecting current uncertainty, developers have also been moderate in their investment plans, requiring up to 60% pre-lets before committing to development. The residential sector remains weak outside of Paris with a moderate rate of growth forecast in the capital.

Contractors鈥� order books are expected to continue to fall during 2014. Labour is plentiful