Construction World - Indian Edition | September 2008

Cover story

Surviving Inflation

The construction industry is reeling under increasing cost of building materials. CW investigates to find out just how hard the impact is, and enablers of the industry - contractors, developers, architects - reveal how they are coping up with it.

This is truly the age of construction in India, with the industry recording a consistent growth of 25-30 per cent over the past three years. But this growth has come at a cost: the increasing cost of raw material, labour, transportation and acquisition of land.
“Steel, cement and labour, the foremost contributors to the overall costs of construction, account for 12-15 per cent, 10-12 per cent, and 28-30 per cent respectively of the total cost of construction,” says Kumar Ramesh, Industry Analyst – South Asia & Middle East, Environment, Building Technologies & General Engineering, Frost & Sullivan. And prices are at an unprecedented high. “The recent increase in the price of steel, cement and diesel has hit everyone in the construction industry, big or small, hard,” says Arun Karambelkar, Group Executive Vice-President – Procurement & Outsourcing, Hindustan Construction Company Ltd (HCC). “Further, indices for steel don’t reflect the actual price increases, resulting in inadequate compensation for escalation wherever available. Companies executing fixed price contracts and BOT projects are the worst affected. These unprecedented price rises may not only slow down the pace of growth of the construction industry, but will also affect the GDP.”

Steel is currently priced at Rs 50,000-52,000 per tonne, double the price in 2006. Cement prices, too, have seen a rise of 20 per cent from last year. A 50 kg bag is currently priced at Rs 260-270, and this is anticipated to rise further in the next two to three years. However, the prices are expected to stabilise in the long term, leveraging on the planned modernisation and expansion projects in the pipeline. And labour cost, which was between Rs 125-200 and Rs 100-175 for men and women respectively last year, has also seen a rise of 20 per cent this year. “Apart from the increasing raw material and labour costs, the surge in the expenses involved in land acquisition and transportation have contributed to the overall increase in costs associated with the construction industry,” says Ramesh. “In fact, rising material costs coupled with increased lending rates have contributed to an unfavourable investment climate. As a consequence, the construction industry has witnessed deferred investments from both developers and builders and end-customers. These factors have resulted in an obvious slowdown in the construction activity.”

Steel snapshot
For starters, let’s take a look at the Indian steel industry. According to Dr RKP Singh, Director General, Institute for Steel Development and Growth (INSDAG), production of steel in India is about 55.5 mt and demand is about 57.5 mt. There will be additional capacity generation by 2020 to the tune of 156 mt. This includes brownfield and greenfield expansion. “The domestic steel price is already lower than international price owing to governmental pressures,” he says. “Steel price may go up further by about 20 per cent during the year. However, this depends on the global steel market and prices.” Essentially, even though the rise in steel prices may be attributed to the inflationary conditions prevailing worldwide, Sanjay Choudhry, Chief, Corporate Affairs & Communications, Tata Steel, believes it also has much to do with the slow increase in India’s fresh steel capacity creation. India has moved from being a net exporter of steel to a net importer; the demand is growing at 12-13 per cent and production growth is only 5-6 per cent, causing pressure on prices. High input cost of iron ore and coal are another reason why prices are high and the fact that about 50 per cent of the iron ore India produces is exported does not help. Choudhry tells us Tata Steel has already augmented the production facilities at its flagship Jamshedpur Works from 5 to 6.8 mt and this capacity will further be expanded to 10 mt by 2010. Besides, Tata Steel’s greenfield expansion in the sector encompasses a 6 mt Orissa plant set to commence production by 2011-12, a 5 mt Chhattisgarh plant and a 12 mt plant near Jamshedpur. “Both greenfield and brownfield expansion will bring more Indian manufactured steel into the market and thus help level out prices, but only after a couple of years when new plants are commissioned,” says Choudhry. “Until then, the real estate sector will have to continue to grapple with the higher costs of steel. It is also pertinent to mention that the government should look into easing the ‘issues’ that are slowing the growth of steel capacity creation, such as the lengthy process of land acquisition for new plants, taking forest department clearances and so on.”

Cement capture
Now, on to cement. Today, there are about 125 large cement plants and more than 300 mini ones, and global majors are also eyeing an entry into the country. Consequently, there has been a degree of shake-up, with mergers, acquisitions and foreign companies buying stakes in Indian firms. According to market research consultant RNCOS, demand growth of 8.37 per cent outstripped supply growth, which has stood at 4.84 per cent in the past five years, and is expected to keep escalating in the face of sustained need for better infrastructure and more real estate projects. The demand-supply shortfall sent prices spiralling, and the upward trend was boosted by external factors like the escalation in fuel prices as well as raw material and labour costs. Cement companies are sensitive about the price issue, and most are unwilling to comment on the subject. However, a senior official in a major cement company, speaking on condition of anonymity, admitted that there was a big jump a couple of years ago, but maintained that the rate of increase has slowed down now. In his view, the past year has seen a rise of about 5 per cent in cement costs, which he does not consider alarming. He also expressed the view that the construction industry hasn’t been very affected by the rise in cement prices, a fact that most others in the industry disagree with vehemently, as you will read further into this article.
Sources from the cement industry maintain that the costs of production have gone up tremendously over the years. Power is much more expensive than before, coal prices have gone up and transportation costs are prohibitive. Cement is moved by rail, road and even by water and requires labour for loading and unloading too. Of course raw materials have gone up in price too. All this has adversely affected operating margins. According to these sources, it is these additional operational costs that are being passed on to consumers.

Demand for cement in general keeps step with the GDP, and, industry sources say, if the GDP growth is maintained at around 7 to 8 per cent this fiscal, the growth in demand is likely to be around the same. The major cement companies are all planning to increase capacity, some of them thinking in terms of doubling existing figures. But additional capacity is introduced only towards the end of the calendar year, by which time the demand pattern is expected to stabilise. As such, the industry doesn’t anticipate any significant dilution in price, at least till March 2009. Asked about the possibility of a price hike, representatives of leading players, again on condition of anonymity, said the rates could well go up, unless the monsoon season proves to be a very active one, which means construction activity would slow down. According to the RNCOS report, the southern region led cement consumption, at 44.5 mt in FY 2007 and demand grew 10.4 per cent. This was followed by the northern and eastern regions at 8.9 and 9 per cent, respectively. The Centre for Monitoring Indian Economy (CMIE) expects production to grow by 11.5 per cent and consumption by 12 per cent in 2008-09. And RNCOS predicts that consumption will grow over 22 per cent by 2009-10 from the figures for 2007-08. All considered, the CMIE predicts a healthy fiscal for the cement sector.

Industry-wide impact
“As per our indices, the overall cost of construction has risen by 8.93 per cent over the past two years, due to rise in the cost of cement alone,” says P R Swarup, Director General, Construction Industry Development Council (CIDC). “The rise in the cost of elements on account of steel has contributed almost 6.28 per cent. As the use of the two materials is in varying proportions in works, the overall impact needs to be worked out using the percentage factors of incidence of respective elements and varies depending upon the type of structure.”

“The increase in cost of construction owing to increase in steel prices will be 15-20 per cent,” weighs in Singh. “The price rise in steel is mainly guided by steep increase in cost of main raw materials like iron ore, coking coal, furnace gases, etc. The increase in price varies from product to product.” Swarup has another significant point to make. “While the average escalation in price ranges between 9.75 and 13.25 per cent because of cement and steel, you have not considered the price rise on account of petrochemical products and resultant products,” he points out. “The overall impact, therefore, will be much higher in real terms. Another major factor that has affected the overall cost is the cost of supervisory and working personnel, which has risen in some cases as much as 150 to 300 per cent in the past two years alone.”

In the view of R Vasudevan, Managing Director, Vascon Engineers Ltd, general construction cost has gone up 50 per cent in the past three years. “Apart from this, the cost of finance has increased as commercial buildings are shifted from build to lease models,” he adds. “And salary revisions of support and office staff have gone up 200 per cent in the past three years, increasing the overall overhead cost from 5 to 12 per cent.” SA Reddi, Advisor, Gammon India Ltd, echoes the plight of the contractor when he iterates that most short-term contracts are based on fixed prices. “The contractor has no remedy in such cases,” he says. “Many appeal to the employer for reimbursement of extra costs. Some enlightened employers do consider the appeal and reimburse the extra cost, at least in parts.” He explains how contracts lasting more than a year generally provide for price variations in materials, labour and equipment. “The variations are based on a formula approach where percentages are allocated towards materials, labour and equipment,” he elaborates. “Price variations are accounted for by the respective percentages and price indices published by the government. This approach partially covers the extra expenditure incurred by the contractor. In some cases, ‘star’ rates are specified for cement and steel in the contract agreement. In these cases, the contractor gets full reimbursement of extra cost.”

Mohammed Ali Vakil, Director - Marketing, Customer Care, R&D and IT, Vakil Housing Development Corporation, expresses the builder’s point of view when he says, “The rising price of raw materials like steel, cement and bricks has led to the rise in the cost of construction. As construction costs and also land costs have increased substantially, builders find it difficult to cut the prices on finished products to absorb the rise in EMI owing to increase in the interest rates. The liquidity crunch prevailing at present has affected mid-sized and small real estate developers. To bail themselves out of the situation, they are forced to liquidate their land and sell incomplete projects to bigger developers or private equity players at lower values.” Dhananjay Mangesh Gulwadi, Executive Director, Sobha Developers Ltd, agrees, while pegging the increase in construction cost at “30-40 per cent, owing to the rising prices of cement, steel and fuel”.
Speaking of the rising price graph, Thomas M Pothen, building contractor from Southern India, says cement cost Rs 160 a bag in Chennai in 2001- 2002. The price came down to Rs 140 or thereabouts in 2003, but again climbed up to Rs 160 by 2005. In 2006, it went up to between Rs 196 and Rs 220, averaging at Rs 205 a bag. In 2007, a bag of cement cost Rs 225 to Rs 260. This year, it has hit Rs 280 and is continuing an upward momentum. In fact, Pothen has undertaken a comparative study of the price hike in various building materials. According to him between 2002 and 2008, blue granite prices rose 85 per cent as did the price of steel. Bricks increased by as much as 126 per cent while sand prices went up a whopping 150 per cent. Labour charges increased 75 per cent. In comparison, the rise in the cost of cement was 75 per cent in the same period. Putting things in perspective, AK Saini, Scientist F & Head of Civil Engineering, Bureau of Indian Standards, says, “The increased cost of construction has to be seen in the context of economic growth of the country and affordability to buyers. The regions in the country experiencing rapid economic growth generally offer better affordability to the population but the cost of land also goes up in such areas. The regions that are not growing at a rapid pace face more problems on account of the rise in cost of materials while the cost of land may not rise to such an extent.”

Alternate avenues
How, then, can the construction industry get some succour? One avenue mooted by many is the use of alternate materials. “Under the scenario, it would be prudent to follow proper planning, design and construction norms as laid down in the National Building Code of India 2005 (NBC 2005) and concerned Indian Standards,” says Saini. “NBC 2005 provides for use of alternate building materials and technologies even for those materials for which Indian Standards have not been developed. It provides a scheme for selection of such materials based on the underlying principle of suitability to end application, strength, fire resistivity, thermal resistivity and environment friendliness. The Indian Standards, including those for conventional building materials such as steel and cement, are not only updated but also take care of consumer interests.”

However, it is clear to everyone that there really is no replacement for essential materials like cement and steel. As Swarup says, “The laboratories and scientists have been working on several materials for the past four decades but have not been able to come out with any real alternates. And with dismal investments in R&D in our country, I do not foresee the possibilities of having an alternate solution in the foreseeable future.” “As of now, the possibility of alternative materials to cement and steel is remote,” agrees Reddi. But he offers a workable option. “The industry can certainly try to reduce consumption by adopting various scientific methods and choosing higher grade materials. Cement consumption for concrete can certainly be reduced by 20 to 30 per cent from the present levels by adopting scientific methods of concrete mix proportioning. A part of the cement can be replaced by either fly ash or ground granulated blast furnace slag. Both these replacements are available at a much lower cost compared to the cost of the cement. Similarly, the use of reinforcement bars of higher grades, such as Fe500, can reduce consumption of reinforcement steel by up to 20 per cent.” Joining cause with him are Vasudevan, who says Vascon is adding fly ash with cement to reduce consumption, and Gulwadi, who recommends the use of Fe500 rather than Fe415. In fact, Gulwadi also tells us how Sobha is coping with the rise in input costs with the help of better negotiations with the vendor; long-term special contracts with suppliers; managing inventory at site and reducing stockholdings; and introducing more mechanisation at sites to reduce material handling and thereby reducing wastage. To this Vakil adds, “The slowdowns in demand, rising interest rates and input costs and the meltdown of realty stocks have only compounded the problems of developers. Credit is the need of the hour to help these organisations complete their projects and help them sustain their expansion plans.” However, he believes the current phase is temporary and the market is likely to rebound after the general elections later in the year. Ramesh too believes that the situation will improve dramatically over the next few years. The construction community hopes he’s right!

“The surge in the expenses involved in land acquisition and transportation have also contributed to the overall increase in costs.”

- Kumar Ramesh, Industry Analyst -
South Asia & Middle East, Frost & Sullivan

“The unprecedented price rises may not only slow down the pace of growth of the construction industry, but will also affect the GDP.”

- Arun Karambelkar, Group Executive Vice-President - Procurement & Outsourcing, HCC

“The increase in cost of construction owing to increase in steel prices will be 15-20 per cent.”

- Dr RKP Singh, Director General,
Institute for Steel Development and Growth (INSDAG)

“Both greenfield and brownfield expansion will bring more Indian manufactured steel into the market and help level out prices.”

- Sanjay Choudhry,
Chief, Corporate Affairs & Communications, Tata Steel


“The laboratories and scientists have been working on several materials for the past four decades but have not been able to come out with any real alternates.”

- PR Swarup, Director General,
Construction Industry Development Council (CIDC)

“Salary revisions of support and office staff have gone up 200 per cent in the past three years, increasing the overall overhead cost from 5 to 12 per cent.”

- R Vasudevan, Managing Director,
Vascon Engineers Ltd

“Cement consumption for concrete can certainly be reduced by 20 to 30 per cent from the present levels by adopting scientific methods of concrete mix proportioning.”

- SA Reddi, Advisor, Gammon India Ltd

“The slowdown in demand, rising interest rates and input costs have only compounded the problems of developers.”

- Mohammed Ali Vakil, Director - Marketing, Customer Care, R&D and IT, Vakil Housing Development Corporation

Architectspeak
Two architects tell us how they cope with rising building material costs

DEEPAK GUPTA
Principal Architect
D + R Design
Bengaluru

Gupta observes that the cost of structural steel has increased 35 to 40 per cent since September 2007. Cement and aluminium costs have also increased in this period. This has translated to an 8 to 10 per cent increase in the cost of constructing a typical residence of 4,000-5,000 sq ft built-up area in Bengaluru.
For instance, the projected cost of a certain residential project Gupta was working on - the Joshi residence - increased by Rs 6 lakh over an initial budget of Rs 60 lakh. The four-level house was to be built on a sloping site amid beautiful natural surroundings - a huge Kadam tree and other trees and shrubs dotted the plot. Thus, the house was conceived in a contemporary style with large openings, to achieve visual continuity between the interiors and the exterior landscape. However, only an RCC-framed structure would allow the creation of a ‘transparent’ structure with large openings. So the structural design simply could not be altered to reduce steel during construction. Nevertheless, the increase in steel costs resulted in curtailing some other design features - such as large, glazed openings, skylights and glass canopies - to balance the client’s budget.
“The rising cost of steel has led us to consciously adapt building design using more load-bearing walls and filler-slab roofs instead of RCC columns to reduce the consumption of steel,” he says. But, interestingly, this move also furthers Gupta’s eco-friendly approach to architecture - he supports the design of structures that use less steel and other manufactured building products as such materials have high embodied energy resulting in both higher fiscal and environmental costs. He explains his alternative design approach with an example. “Our Mankala residence project has a composite structural system, wherein the structure is a combination of load-bearing Besser concrete blocks, terracotta blocks, filler-slab roofs and [only] one RCC column. The filler-slab roof that uses terracotta block required 20 per cent less steel than a typical concrete slab. Besides, most of the exteriors and some interior walls of the residence are not plastered to further reduce costs.” Fortunately, clients–of both residential and commercial projects-are now more open to design options that use less steel in construction. Gupta is also currently finalising the design of a mixed-use commercial complex at Durgapur (West Bengal). Its schematic design proposed steel-framed canopies of parking areas cover an area of 6,000 sq ft. Conceptually, the design envisaged visually light structures in steel. However, in the light of increased steel costs, he is exploring the possibility of using pre-cast RCC members for canopies that would use less steel than a purely steel structure.

NITEEN PARULEKAR
Design Principal
Niteen Parulekar Architects Pvt Ltd
Mumbai

Parulekar holds the view that the cost of steel has already seen its peak in the recent past and prices have marginally reduced today. Further, speaking of how the prices of raw materials affect construction, he points out that construction techniques across the world vary from region to region, and country to country. For instance, developers in Dubai use RCC structure even for multistoried towers whereas in USA the use of structural steel is prevalent. This is because USA does not have the requisite supply of concrete, while on the other hand Dubai has a good supply.
How about India? Parulekar opines that in India, both structural steel and reinforcement steel have high associated costs! So the choice of using which rests up to the architect, although we almost always prefer sleeker columns and slab designs. “However, we need to improve the grades of steel and concrete that are being manufactured in India to opt for such designs as importing these inputs would adversely affect project cost and duration,” he maintains. “Most important, architects need to strike a balance to achieve good timelines and cost and perhaps even look at composite structures boasting innovative design. The bottom line is that an architect’s participation in the process of designing a structural frame alongside a structural engineer is paramount.”


Builders’ Viewpoint
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MR Jaishankar,
Chairman and MD, Brigade Group.
“The rising cost of the building materials like steel, cement and other commodities has certainly made a huge impact on the construction industry. The construction cost has already gone up by 15 to 20 per cent and this in turn has affected the real estate business thus the interest rates of home loan have gone up, which I feel is a dual effect.”

Niranjan Hiranandani,
Chairman, Hiranandani Developers
“I feel the rising cost of building materials on high valued construction cost or other infrastructure cost does not affect much but when you look at the low cost housing construction, all these basic items like steel, cement or any other commodity used do make an adverse effect on the common man. High interest rate is also something disastrous again because large number of people in our country still don’t own their first house. Under this circumstance the rising cost of building material will definitely increase the cost of construction and with high interest rates and this would be always going to get adversely affected. Though RBI has seriously looked up to 3 million of property loans but still I feel the interest rate is too high. Industry should make an effort to keep a check on building materials which will bring down not only the construction cost but also the interest rates.”

Mofatraj Munot,
CMD, Kalpataru Properties
“Last two years construction cost has practically doubled which is a serious concern and has a huge impact on the construction industry. The rise in building material has moved the price upward leading to sluggishness in the purchase of housing and all this is because input cost has gone up. Today housing is a principal need of any human being and I think government should give a subsidy and should do something about the rising building material cost and high interest loans.”

“The increased cost of construction has to be seen in the context of economic growth of the country and affordability to buyers.”

- AK Saini, Scientist F & Head of Civil Engineering, Bureau of Indian Standards

 




 

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