Why it will cost you more to build that house

Steel prices have surged by 25 per cent in just one month as supply disruptions hit raw materials on account of Covid-19.

This has led to additional costs for the housing industry, where steel is a crucial component, worsening things for a sector that is already struggling with low demand and its attendant foreclosures.

Already, developers are unable to find buyers for completed units, while others are staring at the stalling of their ongoing projects after capital dried up.

A survey across retail outlets dealing with construction materials has indicated that the most-widely used steel bars, denoted by their strengths TMT8 and TMT10, are selling in the range of Sh470 and Sh660, respectively, around Nairobi.

In other towns, prices are significantly higher due to transport costs as most steel production is concentrated around the capital.

Just last month, the same steel bars retailed at between Sh350 and Sh530, representing a spike in prices that has not been witnessed in recent years.

Steel, which among the most traded commodities in the global market, has for years been stable and predictable.

Guru Raval, the chairman of the Devki Group of Companies, told Home and Away that the pricing distortion in Kenya has been occasioned by a shortage of raw materials.

“It has been a little bit unstable as the international availability is quite short owing to the impact of the coronavirus,” he said.

Iron ore is the main ingredient in steel and its pricing has shot to its highest levels since the global financial crisis in 2008.

While Kenya has confirmed deposits of iron ore, there has been no meaningful exploitation of the mineral, meaning that the country is not cushioned from pricing shocks in the international markets.

It could take up to six months for the supply disruptions to be fixed and prices to normalise, according to Raval, whose firm accounts for the biggest share of steel production in Kenya.

Most smaller steel mills use recycled steel as their main raw material but have been quick to adjust their prices to reflect the increase in the global market.

Steve Oundo, an architect and former chairman of the National Construction Authority, said an increase in steel prices would have a significant impact on housing prices.

“There has been low production globally owing to Covid-19, hence this is a supply versus demand issue which is raising the prices. It will impact negatively on the housing industry through increased costs,” Oundo said.

Steel accounts for up to 15 per cent of the eventual cost of construction depending on the type of housing, with high-rise buildings consuming more metal to meet structural strength requirements.

The resurgence of the Chinese economy from the ravages of the coronavirus has been touted as the main reason for the surge in demand for steel in the nation often referred to as the world’s factory.

A sustained increase in pricing on both spot and future prices, as witnessed just this week, would have a long-term impact in Kenya when the costlier commodities arrive in the country.

Usually, a lead time of about six weeks is recorded between the time the products are procured and arrival in the country for further processing into the required steel bars.

While movements in the international market have an almost immediate impact in Kenya, the shifts are mostly speculative.

In effect, a spike in steel prices in the Asian markets today would be felt at home immediately, which would explain why the retail prices for steel bars have recorded wild volatility even within the same week.

Manufacturers communicated the price changes to their traders three times in the first week of August, for instance, yet it was not possible to have multiple consignments imported over the same period to justify the price movements.

When the costlier consignments of inputs eventually land, it is normal to expect another wave of price reviews, which means the impact of the spikes in the international markets would be felt more than once.

A previous study on the steel processing industry found the main source of the product in Kenya is recycling, ahead of imported billets - which are semi-finished products that are melted to produce the required shapes and sizes of bars.

Recycling of scrap is preferred as it uses 60 per cent less energy to produce steel, even though the quality and strength of the finished product is often compromised.

It would explain why steel products made from billets retail at a significant premium even though, to many ordinary consumers, the cost savings on the lower quality is the major determinant in their decision making.  

mmichira@standardmedia.co.ke