UniCredit Bank Austria Industry Report
Construction suppliers to post record year in 2021, weaker performance in 2022 expected
- Sales in the wood processing industry increased by 30% in nominal terms in 2021, building materials manufacturers' sales increased by 13%
- Strong increase in construction costs in 2021 primarily driven by timber prices, but price increase slowing down
- Climate protection requirements positively influence prospects of wood processors, but increase cost of mineral building materials production, especially cement
Austria's construction industry reached record levels in 2021. Driven by strong construction demand, the two central sectors in the construction supply sector, wood processing and building materials, reported a 30% increase in sales to €11.4 billion and a 13% increase to €7.4 billion respectively. Meanwhile, construction supply activity will lose momentum against the backdrop of record growth in the previous year and due to the slowdown in construction activity in 2022.
"At the same time as construction demand growth weakens in 2022, we can expect to see further easing in the rise in construction material costs, which most recently increased by 24% in residential construction this past December 2021. Wood price growth has already slowed in recent months and the prices of other building materials are set to follow during the year", says UniCredit Bank Austria Economist Günter Wolf. With the introduction of the carbon tax for fossil fuels from July 2022, wood will, on the one hand, become more attractive as an energy source, as the difference in price between wood and heating oil and gas will continue to improve. On the other hand, some building materials sectors, especially the cement industry, will be burdened with higher production costs.
Construction supply business will cool down in 2022, but remain on growth track
Construction growth is expected to flatten out over the course of 2022, primarily because numerous investment gaps in building construction and civil engineering have been closed in recent years. Residential construction in the domestic market, the main consumer of wood in the construction sector, is also losing momentum, indicated by the decline in building permits that has been evident for several quarters (on average, the number of building permits in the first three quarters of 2021 fell by 4% compared to the same period last year). Furthermore, orders from major export markets for construction suppliers are expected to increase at a slower rate in 2022 compared to the previous year. The Euroconstruct research network expects that the construction industry in Germany, the most important export destination for domestic suppliers, will probably not gain any stronger momentum in 2022 after two years of flat performance. It is not likely that the stronger growth in construction output in Italy, the second most important foreign market for construction suppliers, will be able to compensate for the weakness in sales (30% of Austrian wood and wood products exports and 21% of other construction materials exports are supplied to Germany, and around 24% and 6% respectively to Italy).
However, a decrease in demand in the construction supply sector is unlikely. In line with the continued above-average favourable assessment of the order situation of construction companies in Austria in January 2022, building materials manufacturers can expect robust growth in demand in the coming months. The most important drivers will continue to be the ongoing major civil engineering projects in Austria and residential construction. Beyond 2022, the demand for building materials is growing, especially in the area of residential renovations, driven by rising investment in climate.
Construction material costs mainly driven by lumber prices in 2021
The record increase in lumber and wood panel prices was a major contributor to the overall 19% increase in residential construction material costs in 2021, averaging 20 to 30%. The increase in the price of construction timber, due to high demand accompanied by massive supply difficulties, has slowed down in recent months. It appears, however, that the supply situation is slowly improving. That said, the average price of sawn timber and semi-finished wood products in Austrian wholesalers in January 2022 was still 23% above that of a year ago.
In comparison, the price trend for other building materials was moderate. In January 2022, the wholesale price for this product group was 11% higher than in the previous year. Prices for plastic products, such as insulation boards and PVC pipes, recorded the steepest increases with an average of 15%. Cement, bricks and concrete gravel cost around 7% more at the end of 2021 than in the previous year, the price for ready-mix concrete was 5.2% higher. In contrast to lumber prices, the cost of mineral building materials has not slowed down in recent months and is an indicator of the continued strong demand in the construction sector heading into 2022.
"Construction demand will slow down over the course of 2022, and, at the same time, the supply situation of wood products will further improve. As a result, the price increase of building materials will flatten out, both for wood products and for products made from mineral raw materials. Due to the continued growth in construction activity, a decline in prices for construction materials is not anticipated", says Wolf.
Climate protection targets positively influence prospects of wood processing companies
The economic prospects for wood processing in Austria are definitely positive, especially because wood as a raw material is available in abundance, can be sourced in a CO2-neutral way with little energy input, and thus contributes significantly to the greening of the economy and the containment of the greenhouse effect. Wood contributes to around 9% of the total energy consumption in Austria. The Austrian Biomass Association expects the consumption of wood for energy production to increase by one fifth by 2030, if the measures according to the Renewable Energy Expansion Act and the Energy Efficiency Act are implemented.
One advantage of wood as an energy source is the low price of the raw material compared to oil and gas. In 2021, a kilowatt hour of heating oil cost Austrian households an average of 7.5 euro cents, natural gas 7 euro cents and wood pellets only 4.7 euro cents gross. The relative price gap between the energy sources has not changed significantly even with the massive price increase in the second half of 2021; wood pellets also cost 30% more in January than in the previous year. With the introduction of the CO2 tax for fossil fuels as of July 2022, the price gap in favour of wood as an energy source will further improve.
In addition, the timber construction campaign is also set to gain further momentum in the coming years. The overall share of timber construction in Austria, measured in terms of the gross building surface, has increased from 14% in 2008 to 24% in 2018. According to Proholz Austria, though, the increase in the share has slowly flattened out. A similar trend is evident in the production value of prefabricated timber buildings, an indicator of timber construction development for single-family homes: Following the record result of €560 million in 2012, the production value has dropped almost continuously, despite the veritable residential construction boom in the subsequent years.
From 2019, demand for wooden buildings in the single-family home segment seems to have recovered, as indicated by the rising production value in the segment. A significant portion of the 21% increase in production value through October 2021 (the most recent data), however, was likely to be the result of the sharp increases in lumber prices.
Environmental protection requirements increase cost of producing mineral building materials, especially cement
In Austria, the production of building materials is one of the most carbon-intensive industrial sectors, accounting for 20% of the sector's greenhouse gas emissions. In relation to the sector's value-added, the emission intensity of the production of building materials is five times higher than the industry average. The cement industry is at the forefront, emitting 3.2 million tonnes of the total 5.1 million tonnes of CO2.
That makes the cement industry one of the industrial sectors most affected by climate protection targets. The current climate protection targets in the Fit for 55 package stipulate, among other things, that plants in the scope of the EU Emissions Trading Scheme, which includes all cement manufacturers, annually reduce their emissions by 4.2% from 2024 to 2030. In contrast, total greenhouse gas emissions from the Austrian cement industry decreased by only 1.4% from 2008 to 2020 annually.
The financial burden on cement producers resulting from the new emission trading targets will increase. The European Cement Association quantifies the increase in the total cost of producing a tonne of cement in the EU27, as a result of an assumed increase in the price of emission allowances from €55 to €90 per tonne of CO2, at an average of 5%. The development of certificate prices is roughly in line with the price increase since May 2021.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954;
Email: guenter.wolf@unicreditgroup.at