Oct 15, 2020
COVID-19 Impact on Construction Materials in Chemical and Materials Industry
- Chemical and Materials
- Oct 07, 2020
COVID-19 Impact on Construction Materials in Chemical and Materials Industry
The Coronavirus has impacted many major industries around the globe out of which construction industry is that industry where the pandemic has created turmoil. Not only in any particular country, but construction industry has always contributed a good amount in the overall GDP of many countries. But one thing has been found common is that most of the major construction material consuming countries import a large share of their raw material from China. China being the origin country of COVID-19 has thus shaken the entire supply chain.
In the European Union, in year 2019, the construction and building materials sector has contributed around USD 1.44 trillion combined turnover with a GDP contribution of around 8%. The construction material business in European Union has provided employment to almost 23 million people in 2019.
In India, the size of construction industry is around USD 0.14 trillion with a contribution of 8% to the overall GDP of the nation. In India, the construction industry provided employment to 57.5 million people in 2019. This data clearly states that even a small impact on the construction industry may have large implication over the overall economic growth of the country.
Slowly and gradually as the pandemic will lesser its effects and the businesses will be back on trach after the lockdown, the government will have to take small yet crucial steps towards the recovery. But the full recovery is not possible only with the efforts of government but each and every player involved in the entire supply chain has to contribute substantially towards the recovery.
Various short-term revival actions will be taken place along with medium and long term resilience strategies to be implemented by the stakeholders of the industry. To be back on track soon, government, contractors and developers will have to collectively participate and play their roll to ensure a revival of the construction industry.
IMPACT ON DEMAND
Although the construction sector is among the highest contributing sector to the economic growth of the country, even after that it has been struggling more in few countries.
- In India, the building and construction sector was struggling from past few years due to several issues like demonetization, RERA, GST, among others.
The outbreak of COVID-19 has proved to be an addition to the existing issues. According to ICICI Securities, "The sector’s growth, which has already been substantially impacted due to muted real estate growth over FY17-FY20, would possibly witness further deceleration with renovation demand likely to shrink in the near term."
In the construction materials, there are various materials that have got impacted individually such as pipes, adhesives, wood panels, tiles and sanitary ware, and many others. It is expected that compared to other materials, the plumping pipe material will be less impacted followed by adhesives. A low demand here means reduced operations in building materials, builders’ merchants, and equipment manufacturers.
Also the reduced demand has resulted in overcapacity of building materials at suppliers’ end that are now forced to reduce their sales operations and thus shutting down factories. As per Dr. Fabritius, Xella CEO, “There are countries under full lockdown—for example, France, Italy, or Spain—where top lines are severely affected. There is almost zero economic activity and our factories have been closed.”
Additionally, refractory materials also play an important role in overall construction materials industry. The refractory material has witnessed a dip in the demand in the Asia-Pacific region due to weak requirement from end-user industries especially steel, cement and glass industry. As the steel production units, that are main users of refractory materials, are working with reduced capacity and in many countries are under complete shutdown, the demand for refractory materials has faced a setback.
As per the China Association of Refractories, Chinese refractory production in Q1 2020 was 4.1 Mt which is 25% less than that of Q1 2019. The cut in production is due to the less demand from end-user industries. The most part of the Chinese refractory goes into steel production and as steel industry is on its slowdown, the Asia-Pacific refractory market is suffering negative impact.
IMPACT ON SUPPLY CHAIN
Currently many countries are heavily dependent on the China for the supply of raw materials. This results in increase in the price of the raw materials to many folds and makes it difficult for manufacturers to sell the product in the market. Also, construction materials, not being a part of the essential business, are facing strict lockdown rules and manufacturers are not able to move their inventory out. This has resulted in lot of inventory and has increased the inventory cost of manufacturers.
In the U.S, around 30% of the total construction materials are imported from China and around 20% are imported from Canada and Mexico. Even some of the companies are dependent on China for around 80% of their total raw material supply. As China was the originator country, where this virus was first breakout, the international suppliers and logistics companies have to shit their operations in order to prevent this virus from spreading. This has impacted the overall supply chain of construction industry.
Most materials such as steel, copper, aluminium, stone, and fixtures are often manufactured from China in the United States. Owing to the closure of Chinese manufacturing facilities, only the Port of Los Angeles itself announced a 23% year-over-year reduction in shipping containers in February. This form of supply chain challenge and disruption is not only known from the US, but is constantly documented by nearly every country in the world.
Other than the raw material availability, another important factor of any supply chain is labor availability. The pandemic all over the world has created a crunch of labor as due to restrictions the factories and manufacturing sites cannot allow the complete labor to work at a time. Thus, keeping the safety concern, labors are working in multiple shifts and this has hit the production.
Construction is typically an important part of life in cities and states, but during this time, constraints on public transport and the closing of schools, child care facilities and businesses are expected to have a major effect on the ability of employees to operate. Many construction firms, site managers, and contractors also enforce employee travel bans or travel limits on such employees from high-risk states. It is likely that a lack of skilled labor would hinder the success of certain ventures.
IMPACT ON PRICE
As the lockdown is prevailing in most of the countries spread of the virus, the supplies of domestic building materials availability has increased at the suppliers end due to its inability to supply. At the same time, importing of raw materials which have major impact over the overall price of construction materials has also faced issues. This has result in the unpredictable mix of price fluctuations.
Also it is expected that the price of the building materials can go up in the long term due to bottlenecks in the overall supply chain. Once the building construction firms will try to normalize their activities by returning to normal business, it is estimated that there will be supply chain bottleneck created by the surge in demand across the globe.
The other impact of COVID-19 on building and construction materials industry can be assessed in the following points:
- Most impacted units are the under development projects where the delay is expected by more than six months.
- Due to the delays in construction projects during the lockout, additional interest will be charged on working capital loans to be borne by suppliers or contractors depending on the arrangement for risk sharing.
- It is estimated that labor costs for skilled workers will rise by 20 % to 25%, while labor costs for unskilled and semi-skilled workers will rise by 10 % to 15%.
- It is expected that the project costs in the short term might rise due to the protocols of incorporating social distancing, PPE, and hygiene.
- Costs for linear projects like irrigation canals, dams, transmission lines, and highways, among others do not rise, but the price of non-linear projects is projected to rise by 2-5%.
STRATEGIES TO DEAL WITH COVID-19
To be back on track, the building construction firms are now needed to identify critical building materials and focus there. The meaning of analyzing the critical building materials is to classify the building materials among long lead-time requirement and short term requirement, availability of suppliers in COVID-19 affected countries, and their exposure to COVID-19 regions.
Another aspect of manufacturers have realized is their over dependency on one supplier, Its time for the firms to start looking for alternative suppliers, mostly local suppliers to avoid any further risk and to be prepared for any such crises in future.
Though it’s not certain by when businesses will be on track, but whenever they will, there will be demand crunch for raw materials. All will rush to procure raw materials. Building construction companies should start communicating with possible suppliers of building materials from now on to prevent demand problems.
The sudden pandemic has created a “new normal” for the construction industry. The demand, supply, price, and all the other factors that are impacted from the outbreak of COVID-19, are now looked from a different perspective. Majority of the changes have taken place in man (labor), materials and money.
- Change on the focus will be an automation, mechanization & off-site fabrication, basically alternative strategies to reduce dependency on labor.
- Technology will be used more to maintain balance between man power and demand required.
- Migrant laborers will be provided better on-site facilities for health & hygiene also an attempt will be made to stop reverse migration in future.
- Work will be made according to small crews and teams will work in shifts.
- Materials will be sourced from alternate suppliers.
- Awareness regarding the geography of supply chain.
- Building flexibility to avoid any further disruptions in supply chain.
- The operating cycle will be closely mobilized, sensed, configured and re-configured so that the risk can be mitigated.
- Regular profit assessment even when the firm is undergoing low revenues.
- Cash flow reserves to be given more importance along with revolving credit lines that will provide support to day to day working capital.
- Debt refinancing is required even in the pandemic situation when the revenues will remain constrained.
Apart from these changes, developers need to focus on the right balance between the market forces such as financings, customer demands and materials. Manufacturers need to analyze the demand supply once again by using the advanced construction materials technologies to support forecasting.
The upcoming few months and years does not look much fruitful for the businesses in the construction industry. The impact of COVID-19 will affect all players. Construction industry provides job to millions of people in many countries. Thus the development of employment will depend on for the speed of recovery and the duration of crises. To avoid any mass layoffs, most of the firms are now looking for short-work schemes.
To cater the existing demand of the customers, companies can turn to digital or online sales channel- both on B2B and B2C front. Firms that will adopt these changes sooner will be able to garner valuable shares as compare to those who will respond late and will not be able to grasp this opportunity.
Another major aspect for the recovery will depend on the government support. The government investments into infrastructure and finance support to the private and commercial investors may help the industry to regain its position soon. Also for an efficient buyer of construction materials, the outbreak of Coronavirus has proved to be an eye opener to keep a secondary list of suppliers and that too mainly domestic or regional. So that in case of macroeconomic risk, buyers can gets support from interim suppliers.
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