Cementing progress
As worry grows throughout the market, experts say there's no cause for panic, pointing out that rising supply should ease price pressure in the near future
As the price of bricks continues to rise - commanding twice or even three times as much as last year - anxiety in the market is growing with it. Developers worry about whether they can secure enough bricks and cement to build Poland's roads, bridges, offices, homes, shopping centers and stadiums, while consumers wring their hands over rising property prices.
Szymon Jungiewicz, market-research firm PMR's head construction analyst, summarizes the current situation: "In the years between 2001 and 2004, the property market saw a recession as development stalled prior to EU accession, forcing a large number of manufacturers to cut production in a struggle to keep afloat in a floundering market - or to shut down altogether," he says. "The current boom on the market appears relatively sudden by comparison, and it has put a significant strain on manufacturers of construction materials who have yet to catch up with skyrocketing demand."
Market recovery
According to data from PMR Research, the value of the construction market experienced a drop of 6.6 percent over 2002 and 2003, to settle somewhere between zł.76 billion and zł.80 billion. The market did not begin to recover until 2004, and only in 2005 did it reach pre-recession levels of around zł.82.4 billion. Last year, the value of the construction market jumped over 15 percent to hit zł.95 billion, and experts anticipate further increases in the future as the wheels start rolling on the Polish property market - prognoses for this year value the market at as much as zł.130 billion.
Under the strain of heightened demand, the Polish market is already experiencing a dearth of building materials in general, and of bricks and cement in particular. Shortages have already caused prices to surge dramatically for these products as well as the raw materials used in their manufacture, such as sand. Industrial metals such as copper, reinforced steel and mineral wool have also experienced local price-hikes as metals continue to perform strongly across global markets.
In April this year, the market immediately absorbed the 1.6 million tonnes of cement produced in Poland during that month, despite an increase in production of over 27 percent on April 2006. Last year, a total of 14.6 million tonnes of cement were produced, up from 12.3 million tonnes the year before. Meanwhile, 35 percent more building permits were issued for the residential sector alone last year, totaling 168,000. Increased labor costs and higher salaries also play a significant role, as labor costs incurred during production can account for close to 50 percent of the value of a finished product. Currently, construction employees are seeing pay rises from 30-110 percent this year, according to data from the CEE Property Group.
Natural course
Experts consider the increase in prices as a function of the market getting set to see a boom in property and infrastructure development over the next five to 10 years. Jungiewicz says manufacturers are already investing in expanding their production capacity and he anticipates a supply surge in the near future. Zbigniew Bachman, director of the Polish Chamber of Building Industry and Commerce (PIPHB), agrees that the current situation is "an anomaly which will soon see correction."
Paweł Grzàbka, a member of the board at CEE Property Group, shares this optimistic outlook, assessing, however, that expansion of production capacity requires complex logistical procedures which will take several months to implement, not to mention a considerable injection of capital.
"Construction companies are fully capable of coping with the situation as the industry gets back into gear," he says. "Currently, prices in Poland have reached the level of prices throughout the EU and are not expected to rise more than a few percentage points this year, after which prices should begin to level out. The price of cement in Poland is still E4-8 [zł.15-31] lower than the EU average per tonne, so there is still room for growth as demand increases, spurred by infrastructure projects, following, for example, directives for Euro 2012 preparation," Grząbka adds.
According to Grzàbka, increasing imports of building materials would prove a short-term solution, effective only when local production falls significantly below demand. The costs incurred from transport of heavy materials such as bricks and large-volume materials such as styrofoam, cancel out any potential savings from the purchase of slightly cheaper materials from countries such as Ukraine. Moreover, Eastern Europe is set to see its own boom, which portends a potential shortage and subsequent rise in prices for those countries as well.
Alternative solutions
Many developers are looking towards alternative solutions from companies like Rigips, a firm which produces custom drywall, installed according to the developer's parameters by contractors certified by Rigips itself. The firm's representatives say they are experiencing no shortages despite an already large number of supply contracts this year from prominent developers.
Nonetheless, it is unrealistic to imagine that the sector will simply do without bricks, mortar, steel and cement, so construction firms will have to face the challenge. PIPHB's Bachman insists the state should expedite the process of upgrading production capacity on the part of manufacturers and suppliers. "We have to find solutions from within and financial support on the part of the government with regard to tax reliefs and facilitating credit-line extensions to producers. [The] advance of both output as well as new, potentially cost-effective technologies is critical to achieving balance within the industry," he says.
State officials from the Ministries of Construction, Regional Development, Finance, the Environment and the Economy are to meet later this month to discuss proposals that would relieve some of the burden on manufacturers and could help prices settle. These would include expediting the start-up process for new quarries for aggregates such as sand, gravel and stone, and easing CO2-emission restrictions for the sector, as well as negotiating with the EU for lower VAT on construction materials.
