BUILDING costs that were based on estimates from before the current rise in fuel prices are in danger of spiralling, according to construction companies, which said end-users will eventually need to help them recover the costs.
“Previous projects won were based on old fuel prices… We are now buying at higher prices to feed our trucks, excavators, graders, etc. Moving forward, construction cost will increase,” according to Levi B. Agoncillo, Aboitiz Construction’s vice-president for business generation and technical services.
“The increasing fuel cost will definitely affect Aboitiz Construction particularly in equipment-intensive projects like site development,” Mr. Agoncillo said in an e-mail responding to a BusinessWorld query.
He said that the cost of about 50% Aboitiz Construction’s operations is directly linked to fuel prices.
Last week, prices of gasoline, diesel, and kerosene products fell by P5.45, P11.45, and P8.55 per liter, respectively, after a decline in the crude oil benchmark for Asia, which is set in Dubai, putting an end to a run of 11 weeks of steadily-increasing pump prices.
But fuel costs are expected to climb again this week, according to Energy Undersecretary Gerardo D. Erguiza, citing the increase in the Dubai crude benchmark. An oil company has estimated that diesel prices will rise by P7.95-P8.15 per liter this week while gasoline prices will increase by P2.95-P3.15 per liter.
“Fuel and electricity costs represent a significant part of our production costs,” Holcim Philippines, Inc., a supplier of cement and aggregates, said in an e-mail last week.
“Surging commodity prices are definitely affecting cement production costs,” it added.
Megawide Construction Corp. said increasing fuel prices are affecting everything across its supply chain.
“For Megawide, this directly comes in (the form of) delivery costs for construction inputs as well as raw materials ordered from suppliers needed by the different sites,” the company said in a statement to BusinessWorld.
“Also, this could be reflected in higher electricity costs if power plants supplying electricity are oil-fired, which makes renewable energy the perfect alternative at this time.”
It added that some of the higher costs will be mitigated by its practice of operating “mobile and on-site batching plants located in major projects.” With such facilities, “the impact is less pronounced compared with other players which do not operate mobile plants.”
Holcim said that it “cannot fully absorb” the cost increases and will have to pass these on to customers.
“For the past years, our company has stepped up operational efficiency measures and alternative fuel and raw material consumption to help manage volatility of energy commodity prices and as part of our overall sustainability direction. However, these are not enough to offset the unprecedented price surges we are experiencing,” the company added.
Aboitiz Construction’s Mr. Agoncillo said the cost of building factories to produce goods and infrastructure to deliver the goods will be higher, and cost increases will be “indirectly passed on” to consumers.
REAL ESTATE PRICES
Claro dG. Cordero, Jr., director and head of research at Cushman & Wakefield, said one key component of construction costs — real estate prices — “will likely increase as fuel or energy prices remain on an upward trajectory.”
“Currently, the recovery of demand for construction materials (as economies further open up) and the persistent global supply chain disruption resulting in port blockages are factors that aggravate the increasing cost of fuel/energy — likely increasing the cost of construction materials in the short- to medium-term,” he said in an e-mail replying to a query from BusinessWorld.
Joey Roi H. Bondoc, associate director for research at Colliers Philippines, said in an e-mail that rising fuel prices “could lead to increase in interest rates and result in higher mortgage rates.”
“Property investors should be wary of rise in mortgage rates and changes to payment terms and (promotional offers) implemented by developers at the height of the pandemic in 2020,” he noted.
“Tweaks to promos and discounts are likely to be implemented especially once the appetite for residential units starts to rebound,” he also said.
PROPOSED GOVERNMENT ACTION
The government can mitigate higher fuel prices by lowering the tax on fuel temporarily in order to soften the disruptive effect on business, Aboitiz Construction’s Mr. Agoncillo said.
“It’s difficult to bid for projects now because we cannot guarantee our prices for a longer period of time,” he noted.
Megawide said a shift to renewable energy could be a solution to reduce dependence on imported energy sources.
“Localization of supply chain among contractors can also help manage the impact of higher transportation costs,” it added.
Cushman & Wakefield’s Mr. Cordero said one effective way to achieve stability in real estate prices is to employ data-driven forecasting on the movement of prices of construction inputs, adding that hedging against price movements may be needed.
“Moving forward, industry players should engage in commodity futures as a hedge against the future increases in construction material prices. The government, on the other hand, should provide timely and updated producer price indices to assist industry players in making reasonable forecasts/estimates of construction prices,” he added.
He also proposed strategic agreements with contractors and suppliers to share in the risk and upside related to movements in construction costs.
“Developers and the government should also explore alternative sources of construction materials by developing locally-developed materials and technologies to minimize risks due to global supply chain disruptions and unstable fuel/energy prices.”
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The article was originally published in Business World and written by Arjay L. Balinbin.
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