At the end of last year, we reported that the increase in the cost of construction materials was coming to a halt, after eighteen months of exceptional rises. There were several reasons for that assessment, chiefly the fact that shipping costs were moderating. Since then, shipping costs have continued to fall, but raw materials prices have been going in the opposite direction, and have recently risen fairly significantly. If this trend continues, those who suffer will not only be developers and contractors, who at present can only link 40% of the price of a home to the Residential Building Inputs Index, but also home buyers, on whom part of the price increase will fall.
In the period August-October 2022, the Residential Building Inputs Index rose by only 0.1%. In November it fell 0.2%, and in December it was unchanged. In 2021, the index rose 5.6%. That together with global developments made it look as though the trend was downwards, but it now seems that this was a premature conclusion.
In January this year, the index jumped by 1.2%, one of the highest monthly rises seen recently. In February it actually fell, by 0.2%, but it rose by the same amount in March. In the twelve months to the end of March 2023, the rise in the index was 3.7%.
The chief cause of the rise in the Residential Building Inputs Index lies in one of its main elements: "materials and products", which constitutes 44% of the index and includes all the raw materials for construction: cement, concrete, gravel, steel, wood, and so forth. This item rose substantially in the first three months of this year: by 10% in January, 8.6% in February, and 7.4% in March, giving a 25.8% cumulative rise in the quarter.
The rise in the materials and products item reflects global developments but also local ones. Hanson, one of the leading producers of cement and concrete in Israel, recently announced a 3.9% hike in the prices of its cement products. Tambour announced a 15% rise in plasterboard prices from mid-April. In December, Readymix, another major concrete company, announced a price rise of at least 12% for its products "because of exceptional price rises in concrete production inputs, cement, shipping, aggregates and sand, capital costs, and other production costs." In July 2022, the price of gravel completed two-stage rise of 118%. In August 2021, cement producers Ciment and Har Tuv Cement announced a 15% price rise.
Nir Yanushevsky, VP Business Development at construction company Yanushevsky and deputy president of the Israel Builders Association, points to one of the main causes of the rise in raw materials prices despite the fall in shipping costs: the depreciation of the shekel. The shekel-dollar exchange rate has gone from around NIS 3.53/$ at the beginning of the year to around NIS 3.65/$ today.
"Raw materials prices depend on many elements," he explains, "from shipping and fuel prices to global supply and demand, geopolitical developments such as what is happening in Ukraine and Turkey, and inflation - and also exchange rates. The Israeli construction industry is mainly an importer, and so the local currency plays a very important role. Depreciation of the currency affects the market very significantly, and immediately, but it must also be said that around the world raw materials prices are rising to this or that degree.
"A local player has to deal with this situation, and he does so in two ways: we are already seeing a slowdown in building starts, because anyone who doesn’t have to build simply won’t do so at present; and contractors, whose profit margins are in single figures, and who in the past decade didn’t have to deal with this aspect of rises in inputs, are only choosing projects in which there is strict linkage to the index, and are much more hesitant about bidding in new tenders."
Published by Globes, Israel business news - en.globes.co.il - on April 30, 2023.
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