The flip side of Australia’s resources boom has been a sharp increase in the cost of steel and other business inputs. Mark Beyer reports.
The flip side of Australia’s resources boom has been a sharp increase in the cost of steel and other business inputs. Mark Beyer reports.
Talk to motorists about rising costs and they will focus on oil prices, but talk to business people and they will most likely focus on steel prices.
The price of steel has risen by nearly 40 per cent over the past 18 months and its impact is being felt in everything from the cost of new houses to the viability of new mining projects.
Like many other current economic trends, rampant Chinese demand lies behind the higher prices and the prospect is for further increases.
Iron ore exporters recently negotiated 71 per cent price rises and coal exporters have gained 100 per cent-plus price rises, adding to the costs facing steel producers.
The higher cost is just one issue facing users of steel.
Securing timely supplies and managing regular price increases are added issues facing project developers and steel fabricators.
RCR Tomlinson director John McColl said quotes for steel supplies used to be good for a few weeks but now hold for only a few days.
“That is a real issue,” said Mr McColl, who added that filling relatively small orders had also become a problem.
“The amount of flexibility we were used to in the past 15 years is fast diminishing.”
Ausclad business relations manager Joe Macri said big clients were placing orders six to 12 months in advance to lock-in supplies, but it was difficult to ensure spot orders could be filled.
“In the past it was always there,” Mr Macri told WA Business News. “A lot of the flexibility has gone now.”
Higher steel prices were one of the contributors to a 25 per cent increase in building industry costs during 2004, according to the latest survey by the Master Builders’ Association and Bentleys MRI.
MBA housing director Gavan Forster said the impact of higher steel prices has been exacerbated by the increased use of steel in roofs.
“Most builders did not anticipate these increases and/or their extent so the cost escalation has bitten into their profit margins,” Mr Forster said.
Surprisingly, steel products are still popular in some applications because competing products have increased in cost even more.
For instance, the increase in Colorbond roof sheeting costs has been outstripped by the increased cost of using clay roof tiles, reflecting higher labour rates for roof tilers.
Higher steel pieces have added to cost blow-outs in the resources sector, with Tanami Gold last week becoming the latest company to defer a project because of rising costs.
Tanami said rising fuel, steel, labour, explosives and mining contractor costs had forced it to change its plans for the $20 million Coyote gold project.
View Resources and Gleneagle Gold have also deferred gold projects, while in other sectors projects are proceeding only because higher commodity prices are offsetting higher costs.
A case in point is Roc Oil’s Cliff Head project, which is proceeding despite a 50 per cent spike in development costs over the past year.
The increased cost of the State Government’s desalination plant illustrates the pervasive impact of higher construction costs.
Premier Geoff Gallop announced last week the project would proceed, even though construction costs had increased 12 per cent to $387 million. This will be partly offset by lower operating costs.
The Reserve Bank has expressed concern about higher raw materials prices, which it says constitute a risk to its 3 per cent inflation forecast for 2005.
It notes that producer prices are already above this level. Its preferred measure – the price of outputs from the final stage of production – rose 4.3 per cent in 2004.
Other official measures of producer prices show bigger increases, but are well below the increases claimed by industry surveys.
The Bureau of Statistics said the cost of manufacturing inputs rose by 9.7 per cent while building industry costs rose by 8.7 per cent.