Higher costs weigh on property sector

THE PRICES OF STEEL AND CEMENT, the power duo in construction, have touched new highs, setting off fresh alarms in an otherwise booming industry.
Over a short period of seven months, prices of steel and cement in July have risen by roughly 100% and 25%, respectively, according to industry players interviewed by BusinessWorld for this report. The increase in prices of these construction materials is feared to hit the bottomlines of developers who as a result are expected to rethink their expansion strategies starting this year.

Danilo Ignacio, president and chief operating officer of Lucio Tan-owned Eton Properties Philippines, said in an interview in June that construction cost has gone up by 20%, translating to roughly a 10% increase in the selling price of the buildings.

Francis Ceballos, executive vice-president of Landco Pacific Corp. has also lamented the higher bidding baseline of contractors, which has increased by 30% to 50% since the start of the year. And for its part, British overseas property-investment consultancy firm David Stanley Redfern Ltd. estimates that the country’s construction costs to further increase by more than 35% this year due to record prices of oil, steel, cement and global shipping.

To cover the rising costs of raw materials, DMCI Homes, which is set to launch five residential projects this year, raised in June its selling prices for housing units by 12%. Eton Properties also increased residential condominium prices by 5% in June. Robinsons Land Corp. followed suit in July with a 10% increase, alongside Ayala Land Inc. (ALI) which jacked up the prices of its residential projects by 20%. Megaworld Corp. has also joined the bandwagon but refused to name the exact figure, so is Filinvest Land Inc., which has re-adjusted its prices for an undisclosed amount ahead of everyone else at the start of the year.

With prices of materials soaring, some property developers have gone into panic purchasing, locking supply contracts with suppliers to shield themselves from the effects of future price increases.

In June, Eton Properties caused a major buzz when it placed orders for 10,600 metric tons of steel for P600 million to secure its four major projects. ALI, which has short-term deals with steel manufacturers and three-year long-term cement contracts, has also announced that it is spending P24 billion this year for its residential, office building, hotel and retail development projects, an estimated 60% higher than last year. It plans to develop 56,000 residential units this year along with several business process outsourcing (BPO) office spaces.
And there are some companies which are going back to the drawing board. Fearing an excess of supply, Fernando Camus, chairman of property consultant firm Jones Lang LaSalle Leechiu, said that developers are taking their cue from lessons learned in the 1997 Asian financial crisis, postponing high-rise developments in favor of low-rise cluster buildings that sell faster.
SM Prime Holdings, for one, has downscaled future mall blueprints on account of higher inflation. Also, Megaworld Corp. has pushed back a joint venture project with Fil-Estate Land Inc. in favor of safe market bets like middle income housing. “It’s a wait and see scenario at the moment for the key players in the sector,” said Anthony Fernandez, president of trade group Philippine Construction Association.

Outside intervention

In June, the Philippine Construction Association, invoking the provisions
of the Government Procurement Reform Act, asked the National Economic Development Authority to help facilitate an automatic amendment of all construction contracts signed this year on pay items that include steel components, fearing that negligent builders will resort to substandard materials for their structures in the face of expensive quality goods.

But the government has other ideas in mind. At the Fourth National Property Forum in July, Trade Undersecretary Elmer Hernandez announced that the government is looking to eliminate the 5% tariff currently imposed on imported cement, despite assurance from the Department of Trade and Industry’s Bureau of Trade Regulation and Consumer Protection that cement prices will likely remain stable for the next five months. The move will be a bane for the local cement industry which is still grappling with problems of overcapacity.

“Although the sector posted an 11% consumption growth last year, demand for cement is still at less than 60% of the capacity of manufacturers,” said Ernesto Ordoñez, president of the Cement Manufacturers of the Philippines (CEMAP). He added that when computed, the total increase in the price of cement for this year will only affect the total construction cost by 0.8%. According to the Department of Public Works and Highways, cement eats up 12% of the construction cost of residentials and 11% of the total costs of high rise building.

Manufacturers, on the other hand, are taking a different tack to help soften the blow of the price hikes. Listed steel manufacturer TKC Steel Corp. is rehabilitating its billet manufacturing plant in Iligan while Global Steel Philippines Inc., the country’s largest steel mill facility, recently inaugurated its plate mill manufacturing engines. The Indian-owned firm also announced its plans to set up a $1.6-billion integrated steel plant that will help make the Philippines an independent steel producer. For its part, cement maker Holcim launched a new masonry cement, Holcim WallRight, touted to shave over 32% off hollow block laying costs as it is more water-retentive and has triple the bond strength of general purpose cement.
Import reliance

Like other nations in Southeast Asia, the Philippines is still largely dependent on outside suppliers for key products like quality steel. According to a report from Global Steel, the country continues to import high-tensile special-grade plates from Japan, Korea and Europe and gets more than 72,000 metric tons per year of commercial-grade steel plates from China, Russia and the Ukraine.

“That the country is primarily an importer and a spot buyer makes it more susceptible to price fluctuations abroad,” said Benedict Miranda, director of Jones Lang LaSalle Leechiu.
As of last month, global steel prices have doubled over a 12- month period, an anomalous figure compared to the usual inflation rate of 5% to 10% per annum.

The same report from Global Steel showed that global annualized steel production also reached a record high of 1.4 billion tons this year. China currently dominates the steel market both as a producer and a consumer, while combined construction activity in emerging markets like India, Brazil and the Middle East, already accounts for over 75% of global steel consumption.

Prices of steel materials like slabs, billets, cold rolled coils and hot rolled coils (HRC) have doubled since the start of 2008. Slabs and billets now range from $950 to $ 980 per metric ton from $650 in December 2007, with HRC and CRC at over $1,000 and $1,300 per metric ton, respectively. Local prices for construction materials such as reinforcing bars, GI sheets and other brand of steel based materials have likewise increased by as much as 50%. In June, a 10-millimeter thick steel bar fetched P190 per piece, a sharp rise from P139 in June last year, while corrugated GI sheets sold at P55 per linear foot according to the Trade Department.

Price increase culprits

Blame the price increases of steel and cement on the iron ore and coking coal. A big bulk of the world’s supply of pig iron, the basic material in steel manufacturing, are reportedly being siphoned off to China, which needs the mineral to rebuild the cities damaged by the May earthquake. Steel producing countries such as Japan, Korea, Australia, Taiwan and India have also been experiencing tight supply because of flourishing domestic demand.

The price of coking coal, a main energy ingredient for steel and cement has also increased. As of August, the price of metallurgical coal has spiraled by 300% in the global market from beginning of this year. Iron ore prices have likewise risen by 85%. From $36 per ton last year, coal is now selling at $120 per ton and is seen to go up to as much as $140 per ton this year. Holcim Philippines Inc. senior vice-president for sales and marketing Eduardo A. Sahagun has calculated a P2 hike per bag of cement for every $10 increase in coal rate.

Skyrocketing oil prices, which sparked a shift to coal for power generation, helped ignite the soaring demand for the old fuel.The world’s coal consumption now stands at around five billion tons a year, up 40% from 2002. And early this year, the global stockpile was further squeezed by heavy rains in Australia that flooded some of its coal mines and by unusually heavy snowfalls in China, also a major exporter of the product.

Although cement makers outside Asia have been able to switch to cheaper, oil-derived petroleum coke, local manufacturers continue to depend on the carbon for a fraction of its energy needs.

“But we are currently seeking alternative sources of fuel,” assured Ernesto Ordoñez, president of the Cement Manufacturers of the Philippines. Power cost accounts for a quarter of the total production cost for cement. It does not help that the country has the highest electricity cost in the region, nearly double the rates of its neighbors.

In April, cement prices rose by at least P8 per 40-kilogram bag following an increase in coal prices from global suppliers Indonesia, Vietnam and Australia. Prices further jumped by P5 in July.

Continuing growth

Despite troublesome times, property developers remain bullish about their revenues. Last month, DMCI Homes said that it expects its sales to grow to P11 billion this year from P7.5 billion in 2007. Eton Properties claimed that demand has yet to slacken, even in the face of rising home financing rates and rising inflation.

This is contrary to recent forecasts from the Global Property Guide, which predicted that the current upswing in real estate might be seeing its end soon, owing to recent property price hikes caused by higher construction costs. Although demand has yet to die down, the research firm said developers might start to feel the pinch upon the completion of their present projects.
After a five-year tic following the 1997 Asian Financial Crisis, the country’s real estate sector is currently riding on the wave of renewed end-user demand, driven by the burgeoning business process outsourcing industry and increased property acquisition from overseas Filipino workers. A report from the trade group Construction Industry Association of the Philippines showed an increase of 10.2% boost in private construction activities last year from 2006, propelled by residentials, commercial space and

Further increase

Prices of construction materials reached their peak in July, rising at a much faster pace owing to soaring fuel prices according to the National Statistics Office. Mr. Sahagun of Holcim said in the same month that local cement prices are not likely to subside soon, with the commodity trailing the upward price movement of coal in the world market.

The high swing in steel demand also shows no signs of slowing down. “There has been no noticeable change in local demand despite the steel price increase,” said Mr. Fernandez of Philippine Construction Association.

Data from the International Iron and Steel Institute suggest that global demand for steel will continue to grow until 2009 at a rate of 6.3% to 1,363.3 million tons from this year’s current figure of 1,282.1 million tons. In the Philippines, property development and infrastructure, the biggest consumers of steel in the country, are set to sustain the local steel craze until the end of the current real estate boom cycle, tentatively pegged at 2012.

Last month however, saw a slight fall in the world market price of steel from a peak of $1,240 per metric ton in June to less than $900, attributed mainly to sluggish demand as the Middle East region went into a seasonal slowdown in construction due to the hot summer weather. China, which hosted the Summer Olympics in August, also temporarily halted the operations of some of its industries in an effort to curb pollution.

Local prices of steel have similarly gone down. From a peak of P67 per kilo in July, the metal’s selling rate is now down by 7% to P60.5 as of end-August.

But Medeliano Roldan, president of the United Architects of the Philippines, fears this is only temporary. “Nobody’s constructing because it’s the rainy season. Come October demand for materials should go up again as contractors resume their projects.”

Salvio Perez, president of the Filipino Galvanizers Institute has said that he expects the steel price escalation to continue until the end of the year.

However, Mr. Fernandez thinks otherwise, saying:“The construction boom around the world is gobbling up the demand for iron ore and the drastic steel price increase is just a knee jerk reaction to that. It’s not a seasonal issue either. Judging from recent indicators I think the worst is not yet over for this year.”