Construction Sector: Tough Times Ahead

HIGH oil and steel prices, rising interestrates and a slowing economy havesparked concern in the country’s constructionindustry. Recent construction numbersand business confidence surveys have thesector worried about what may lie ahead inthe coming months.“During the last three years, constructionhas benefited from an important boom.The results of the first semester of this yearwere also good,” said Jaime Molina, presidentof the Costa Rican ConstructionChamber. “However, by June, the amountof square meters being built was lower thanMay. That was the first sign the situationhad begun to change.”Rodrigo Diáz, director of housing systemsfor Holcim Costa Rica, a manufacturerof cement and ready-mixed concreteproducts, was more upbeat, but admittedtough times are ahead for construction.“Compared to the second semester oflast year, the first semester of this yearshowed some growth. We met our expectations,”Diáz said. “The second semesterdoesn’t look as bright as the first. In partthis is a seasonal factor. With the rainy seasoncomes less construction.“The rise in interest rates will reduceinvestment,” he said. “We’ve also facedimportant increases in the price of oil andsteel. There are elements that make theequation for the second semester difficult.”LAST year was a record year for construction,as nearly 2.75 million squaremeters of new construction were built –41% more than in 2002, according to theConstruction Chamber (TT, Feb. 6).The construction sector started this yearwith a bang. During the first six months of2004, an additional 1.86 million squaremeters of construction were built – 33%more than during first semester of 2003.The sector’s recent pessimism was evidentin the recent business confidence surveyconducted by the Union of Private-Sector Chambers and Associations(UCCAEP), an umbrella group that representsmore than 40 business groups,including the Construction Chamber.Most members of the construction sectorwho took part in the survey said thesecond quarter of this year was worse thanthe second quarter of 2003. In general, thesector expects the third quarter to be moredifficult than the second quarter.Construction was the most pessimisticof the seven sectors of the national economysurveyed by UCCAEP.UNPRECEDENTED increases in theprice of oil, steel and other raw materialsfor construction apparently are responsiblefor much of the pessimism shown by theconstruction sector.Oil prices have skyrocketed in the lastyear. The price of a barrel of oil in NewYork dropped to just below $43.47 thisweek after reaching a record high of$48.70 last week (TT, Aug 20), still significantlyhigher than last year’s averageprice of $28.Petroleum and its derivatives play anessential role in every phase of the constructionprocess. Oil is necessary not onlyfor fuel for transportation, but also to manufacturethe plastics used for pipes and tubing,for example.Costa Rica-based Durman Esquivel,one of the region’s largest producers ofpipes and PVC products, said it has beenhit hard by rising oil prices.“Just as other businesses in the constructionsector, Durman has been affected by theincrease in the cost of raw materials,” saidGeorge Durman, manager of DurmanEsquivel’s Costa Rican subsidiary. “We’vetried to protect the consumer from theseincreases, but have reached the point wherewe have had to increase our prices.”Rising fuel costs have also resulted inhigher land and freight transportation costs.“According to our estimates, constructionwill continue to decline during theremainder of the year,” said GuillermoUlate, commercial director of CEMEXCostaRica, the country’s largest cementmanufacturer. “If oil prices continue toincrease, everything will increase.”A dramatic surge in steel prices and ashortage last February have also taken abite out of the construction sector’s profits.Earlier in the year, the construction ofmassive public works and industrial projectsin China sparked a worldwide shortageof steel and a sharp increase in itsinternational price.In Costa Rica, steel rods (varillas) arerequired for the construction of homes andbuildings under the country’s ConstructionLaw and Seismic Code (TT, Feb. 27). Inearly March, the shortage ended. However,steel prices continued to rise.On average, the price of steel rods hasincreased 40% since last year. The price ofcertain types of rods has increased by asmuch as 100%, according to theConstruction Chamber.THE rising cost of borrowing money isthe third factor hurting construction.After four years marked by historicallylow interest rates, international rates beganrising in May after it became clear thatU.S. Federal Reserve Chairman AlanGreenspan would begin to gradually raisethe interest that U.S. banks charge eachother on overnight loans (TT, May 14).Local interest rates further increasedlast month, when the Central Bankannounced it was tightening the country’smonetary policy (TT, Aug. 30).“This is like poison,” Molina said.“Interest rates have risen and will continueto rise; so have the reserve ration for banks(the percentage of a bank’s assets kept bythe Central Bank to ensure the bank’s stability)and the colón’s devaluation rateagainst the U.S. dollar.“Construction depends on financingfor those who build and for those whobuy,” he explained. “Expensive credit hurtsconstruction.”CEMEX’S Ulate also cited limitedgovernment spending on roads and otherinfrastructure projects as a factor that isdragging construction down.“The public sector is the real problem,”Ulate said. “It’s been several years sincenew major road projects have been constructed.The Costa Rican ElectricityInstitute’s investments have also been limited(TT, Dec. 24, 2003).”Spending on infrastructure is likely tobe further cut next year, unless theLegislative Assembly approves thePermanent Fiscal Reform Package – a taxreform that would increase governmentrevenues by creating new taxes andincreasing existing ones (TT, Aug. 20).“We need public projects to counter thedrop in private investment,” Ulate said. “Interms of infrastructure, Costa Rica is startingto lag behind its Central Americanneighbors.”