The trade wars ripple effect
Every year we ask our experts around the world to tell us about the challenges in their markets. Moving into 2019, high on the list are concerns over tariffs, which ranked in the top five issues affecting construction across our global locations. But with steel a key building material, what is the real impact import tariffs might have on construction costs around the world?
Steel import tariffs
After years of liberalising trade, recently imposed tariffs on steel (25 percent) and aluminium (10 percent) imports have unsettled financial markets and sparked concerns about global trade.
The imposition of tariffs represents a challenge with real cost implications for construction. The industry needs to consider more than ever the amount of steel in various types of construction. If we know the steel design, we can evaluate the degree of impact a steel import tariff might have on construction costs around the world.
Steel is a vital component in most construction, although the steel design of buildings varies greatly depending on the type of construction. While the superstructure accounts for the greatest amount, it also includes piping, many lighting fixture enclosures, stairways, ornamental metals, etc.
Impact on construction costs
Steel’s proportion of a building’s total cost varies by country and region. As a general guide, we estimate the proportion (as indicated by the square metre or square foot costs in this publication) tends to range upwards from 5 percent to 25 percent, for the most steel intensive buildings.
At the lower extreme a 25 percent rise would add about one percent on the total cost. For the more steel intensive buildings the increase could top 6 percent.
But not all cost rises from import tariffs would be passed on in full. As economists say: “prices are sticky”, a term when global price rises or falls are not necessarily passed on in full immediately. They are often delayed for various commercial reasons.
Meanwhile, local steel producers and fabricators, not impacted by tariffs, would also tend to mirror to some extent the price changes in imported prices.
US steel prices
To capture the current impact of tariffs on construction, we recently undertook a cost study of a 90-story building at the Hudson Yards Development completed before tariffs were introduced. We found that if it was being built now the tariffs would increase the cost of the core and shell construction by between USD75m and USD100m.
Owners and developers can expect to spend five to ten percent more on their overall core and shell construction for tall and supertall steel-framed buildings.
Furthermore, tariffs are also creating delays at customs. This affects build programmes and turning to local supply doesn’t necessary solve the problem alone. It means thinking more creatively around the full supply chain from steel mills, to fabricators and erectors.
Overall USA steel price demand is rising given the amount of current construction. While there has been some stability as of late in the price of steel from 2018, we still expect to see incremental rise across the region.
Commentary by John Robbins, Managing Director, USA and North America, Head of Real Estate
Tariff concerns in Asia
As the largest global producer of steel, the tariff impact affects steel exports across Asia. Nevertheless, the biggest impact has been on sentiment and fear rather than export earnings, which make up only a small proportion of the total export value.
Tariff concerns are Asia wide, as regions wonder what else is coming.
In Hong Kong increased volumes of steel in the Asia market, due to a lack of export opportunities in the USA, may result in downward steel costs.
In Japan, the effect is mostly felt by the auto exporters having to cut margins to compete in the USA market. In the longer term over the next 12 to 24 months, this is expected to trickle through to the Japanese construction market, with steel fabricators looking at ways in which they can mitigate the cost impact associated with the tariffs, which will ultimately drive an increase in the cost of steel.
Commentary by Mark Richards, Managing Director, Asia Real Estate
Canadian market price increases
Canada is the biggest international buyer of American steel. The introduction of the USA’s tariffs led Canada to announce retaliatory tariffs on steel and a variety of other USA goods. The net effect was to increase prices of steel and aluminium-based building products in the Canadian market.
For 2018, the overall impact of the tariff was an increase of approximately three percent to five percent in overall construction cost.
This is significantly higher for steel-intensive buildings such as manufacturing or industrial facilities and warehouses.
Tariffs are likely to continue to contribute to higher construction costs across the region in the short to medium term (three to six months) and will level off until the supply chain catches up with the market demand.
Commentary by Marcos Sibal, Director
Rising costs in Africa
Tariffs on steel imports into the USA add to the cost of building products equipment and machinery exported from the USA. These additional costs affect the global supply chains for building materials and equipment. They are especially onerous for developing countries, such as Africa, where construction is sensitive to costs of imported materials and machinery.
Faced with rising costs from existing suppliers, construction firms in African countries, for example, are forced to seek cheaper alternatives from other regions less affected by the tariffs.
Changing a supplier mid-stream in a project carries risks of delays to schedules, inferior quality and higher costs.
Looking forward, there are positive movements in East and West Africa, where increasing commodity prices are driving investment decisions and the tariffs are likely to continue to contribute to higher costs across the region.
Commentary by Mark Haselau, Managing Director