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Fuel price rises to hit company profit margins

Rising costs of borrowing and soaring materials prices have created a 'perfect storm' for contractors, who are facing significant losses otheir projects.

Capital project consultant HPR managing director Kelvin Hingley told NCE this week that companies are increasingly unsettled by the uncertain economic future and managers are panicking.

"Raw materials have been rampant for four to five years, and companies operating on fixed price have really suffered," he said. Oil and steel prices alone hit record highs this week.

Hingley's views are backed by two new surveys due to be published next week that warn the construction industry is in danger of a downturn due to soaring fuel and material prices and the continuing credit crunch.

The Civil Engineering Contractors Association's (CECA's) Spring work trends and the Construction Products Association's (CPA) State of Trade surveys, to be published next week, will show growing concern from contractors and manufacturers about future prospects.

"Energy prices and raw materials are a major concern at the moment and this will affect prices of cement, concrete and steel," said CPA economics director Noble Francis.

One manufacturer of clay and plastic pipe work, Naylor Drainage, told NCE that soaring gas prices had seen its products go up by 15%.
Meanwhile, CECA economics advisor Jim Turner said that members had warned in its latest survey about the soaring cost of fuel, steel and waste to landfill.

"Levels of work are still quite strong by historic standards but order books have weakened quite considerably for the second quarter in a row," said Jim Turner.

"Historically, planners look at price changes over the previous year, and take a view over the next year," Hingley said. "Now wider economic changes are coming together, and they cascade down to the project. There is no magic bullet for this, just better and more comprehensive pricing.

"Managers can still do their job well, but they need the right information to work from, and they need this information quickly," he said.
CECA and CPA are particularly concerned about the private housing sector which has nose-dived in the first quarter of 2008.

Figures from CPA show there was just 37,000 housing starts in the UK in the first quarter 2008 compared with 51,000 for the same period in the previous year – a drop of more than 30%.

Turner said CECA members were reporting a big drop in infrastructure work relating to new house building.

Meanwhile there are strong rumours that cash strapped banks are reluctant to bank-roll PFI schemes having just been effectively cleaned out by funding a £2.5bn project for new RAF refuelling aircraft.

Bankers backing M25 widening scheme bidders have already reported that it is more difficult and more expensive to raise funds, and in particular to lay off debt (NCE 3 April).

The sector is also likely to be on the front line of new forms of government funding in the future, as International Financial Reporting Standards are rolled-out over the next year throughout Whitehall and Westminster. "The problem is that PPP and PFI will now be on the government's balance sheet," said one senior banker who brokers PPP/PFI deals.

"The government has long-term costs. To continue to fund these projects they will have to cut-back in other areas," he said.

Click here for Brent crude oil price 07/08

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