52 (147) 2022

Real estate and construction

Living in times of VUCA

By Christopher Siemieński, sales and marketing manager, Skanska SA
Header skanska

“What is VUCA?” you ask. It used to be an obscure acronym, first used in 1987 by the US military to describe the new, post-Cold War, multipolar geopolitical reality. Today it’s a trendy term used by the corporate world to describe the reality we live in. Ever since the pandemic broke out, we live in Volatile, Uncertain, Complex and Ambiguous times. What used to be predictable isn’t any longer. Why? Markets (in general) and their sectors such as the construction sector, are multifaceted and can be affected by many different variables such as labour, materials, financing and even so-called acts of God such as wars and pandemics. All of these variables are co-dependent, but when one variable runs amok, in construction for example, investors and general contractors can compensate or accommodate. With the pandemic, we are now witnessing all the variables that affect the construction market running wild. Here is short and simplified rundown of the predicament we find ourselves in today.

What’s happened with construction costs in Poland recently? They’ve skyrocketed! (This isn’t only a Polish problem). Here are a few examples of price increases, in Poland, in 2021 compared to 2020, the cost of mineral wool increased by 40%. Since 1 January this year, mineral wool has increased another 20%. Concrete has increased by 27% last year and another 15% since January 2022. Bricks? 50%, with another 28% this year. Asphalt? 75% last year. Below are two charts showing the price trends of aluminium and copper – key materials in electrical wiring or building facades. These examples illustrate my point well! Why is this happening? As always, it’s a question of supply and demand, but this time, we’re seeing serious disruption in demand and a vacuum in terms of supply.

Shanghai Stock Exchange (currency USD) – aluminium price over past five years

Shanghai Stock Exchange (currency USD) – cooper price over past five years

Source: tradingeconomics.com

If we look at the supply side of the market, we are witnessing a period of spectacular disruption. One of the factors affecting the cost of certain construction materials in Poland (and the rest of the world) is… China. “Of course,” you think to yourself. “Covid has caused a supply chain disruption”. This is partly true, but it’s not only due to Covid.

The world has turned out to be overly dependent on China. In 2020, almost 23% of EU imports came from China (Eurostat), which amounts to over $442 billion. This includes construction materials such as chemicals, paints, pipes, wiring, tiles, doors – you name it!  So, when the first lockdown occurred, production in China came to screeching halt and shortages began. Supply began to run low. One would think that once the lockdown measures eased, it would only be a question of time before Chinese production would ramp back up to its pre-lockdown levels. That’s what I thought, but it turns out I was wrong. Nobody could have predicted that the weather would affect the supply chain as well. Extreme heat, extreme cold and heavy rains flooding various Chinese coal mines over the past several months in regions such as Henan and Shanxi, coupled with resurgent demand for Chinese goods in the wake of the pandemic easing, conflicting energy policies from the Chinese Communist Party, and extreme market distortions, have created serious energy shortages in the country, not to mention double digit price hikes for Chinese coal, increasing costs of production.

Over the past year or so, these energy shortages have forced the state to cyclically shut down production across the country to ensure that the average Chinese citizen has energy to cool or heat their home during extreme weather conditions. Consequently, Chinese production has not been able to return to its pre-lockdown levels. Covid lockdown measures can be managed by the state. They can be harsher or lighter, depending on the need. The weather, on the other hand, cannot be managed. Who knows what 2022 will bring in terms of weather conditions and how they will affect production? To add more fuel to the flame, costs of any form of transport from anywhere to anywhere, have drastically increased. China’s additional “zero-Covid” policy has also made it more difficult to move goods in and out of China. We can therefore conclude, that we are short on supply.

What about the demand side? It is worth remembering that prior to the pandemic, the Polish market was already red hot in terms of demand. The pandemic was seen as a black swan that could cool things down a little. It did for a short while, because there simply wasn’t much activity with all of the uncertainty floating around. Demand in construction (and other sectors) dropped for eight months or so. Fearing an economic disaster because of these lockdowns, central banks across the globe, including the National Bank of Poland, decided to drop interest rates to almost zero (although these are now going up and their effects will be a bit delayed). The idea was to keep money circulating on the market. But if money is cheap, what do you do with it? You invest. You buy apartments. You build warehouses to meet the growing demand of e-commerce. You are bound to get a better return from apartment rentals than by keeping your money in the bank. But over-investing in turn creates inflation, salary increases and labour shortages, which is precisely what we are seeing in Poland at the moment.

Today, we find ourselves in one hell of a storm. Booming demand coupled with serious supply shortages. Let’s not even get into the soon-to-be-felt consequences of a Russian invasion of Ukraine and how that could destabilise the entire region!

What can the construction sector do if costs of materials become either too expensive or unavailable?

Necessity is the mother of invention and maybe it’s now time to seriously examine the concept of the circular economy! Perhaps we have reached a point where it makes more business sense to recycle and reuse construction materials than to use new materials. Not only is it environmentally much more friendly, as it reduces the carbon footprint in an already heavily carbon-intensive industry, it is also cheaper. Investors can reduce their construction costs by even 20%-30%, if they use recycled materials.

Skanska is a strong believer in the second life of construction materials. Our residential project, Epic, in Malmö, Sweden is a perfect example of innovative upcycling. A total of 35,221m of window frames were reused from another project, where the old windows had to be dismantled. Also, 17 tonnes of leftover bricks from the façade of the old project were reused as flooring in our Epic building. Concrete can also be recycled! Skanska has developed a residential project in the Czech Republic, Čertův vršek, where all of the concrete elements were made entirely from Rebetong – recycled concrete!

We live in times of VUCA. There is no doubt about that. But pressure, although unpleasant at first, can bring new opportunities. Coal is the first analogy that comes to mind, for obvious reasons. Over time and with pressure, coal turns into diamonds. Perhaps these VUCA times are the spark that can help further induce the green revolution that is heading our way! If the environment isn’t a good enough argument for investors to recycle and reuse, perhaps the money saved in their wallets will be a good enough argument.

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