Cost Management Report

「While capital investment may recover in FY2021, the downward trend in construction prices is expected to continue」

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The “Cost Management Report” (quarterly) provides an overview of domestic and international economic conditions and, drawing on a wealth of cost data derived from our track record as the leading architectural firm in market share, delivers timely, independent analyses of the construction market from a neutral perspective.

*This report was prepared by the Cost Management Group of the Quality Control Division of Nikken Sekkei Ltd for informational purposes. The contents of this report are current as of the date of preparation, and its completeness is not guaranteed. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited. CATEGORY Solution RELATED EXPERTISE Solution share

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Capital investment in FY2021 expected to fall below that of FY2019

Although there are positive factors such as a steady recovery in corporate earnings, the trend in forecasts for capital investment remains unchanged from before. It is expected that private sector capital investment will recover in FY2021, but will fall below that of FY2019 due to weak momentum, and that private residential investment will continue at a low level due to weak recovery (Fig. 1).

Further decline in construction backlog

Viewing orders received by construction companies, which reflect current construction trends, this has been declining for both major and second-tier construction companies* since FY 2018, when orders had increased significantly due to last-minute demand before the consumption tax hike. The figures for FY2020 Apr.-Dec. are lower than that of the past five years and construction backlog is shrinking as a result (Fig. 2).
* Leading construction companies: Obayashi Corporation, Kajima Corporation, Shimizu Corporation, and Taisei Corporation. Takenaka Corporation is not included due to non-disclosure of quarterly financial results.
*Second-tier construction companies: Of the construction companies with non-consolidated sales exceeding 300 billion yen in the past three years, with the exclusion of Haseko Corporation, these are the eight companies of Hazama Ando Corporation, Kumagai Gumi, Penta-Ocean Construction, Tokyu Construction, Toda Corporation, Nishimatsu Construction, Maeda Corporation, and Sumitomo Mitsui Construction.

Fig.1 Historical changes in private sector capital investment and private residential investment, and forecast
Sources: Cabinet Office "Quarterly Estimates of GDP"; JCER "Short-term Economic Forecast"
Fig.2 Domestic construction orders and construction backlog of construction companies
Source: Created from each company's financial statements
* Construction backlog in FY2020 is the value as of the end of 2020 Dec.

Polarization of competitive bid and negotiated contract prices is increasing

Due to factors such as the current slowdown in orders and lackluster forecasts for capital investment in FY2021, the falling trend in construction prices of competitive bid projects is expected to continue. On the other hand, the average divergence rate* of negotiated contract projects has been transitioning between 5 and 14%. It is believed that the difference with competitive contracts will expand and the polarization of construction prices will continue to progress after this quarter as well (Fig. 3).
*Average divergence rate: The average of the divergence rates, which indicate how much a project quotation had exceeded (or fallen below) the estimated price, of projects in a given year.

Be cautious of soaring steel prices

Japanese manufactured steel prices have been soaring since the beginning of the year (Fig. 4). The chief cause behind this is the rise in raw material prices due to China’s increased steel production. Although not everything is reflected in construction costs, caution is necessary against situations that could arise, such as a hike in the unit price of steel from that of the time of quotation for negotiated contracts and other projects where costs can easily be passed on, and claims for change in contract amount when construction work is underway.

Fig.3 Average divergence rates of competitive bid contracts and negotiated contracts
Source: Nikken Sekkei figures
Fig.4 Historical changes in ordinary steel price
Source: "Construction Materials Price Index," Economic Research Institute

The downtrend continues for the Tokyo, Kansai and Tokai areas

NSBPI
Tokyo area

Prices are increasing for some materials, but this has little impact at this present stage, and the downtrend has become stronger for both construction and services.

NSBPI
Kansai area

Although the prices of materials such as steel and electrolytic copper are rising, competitive pressure is strong, and the composite index dropped slightly.

NSBPI
Tokai area

There is no tightness in construction supply and demand, and despite the rising prices of materials such as steel and electrolytic copper, construction costs were suppressed, and the composite index dropped slightly.

NSBPI Trends
% change in NSBPI and contribution of construction and equipment

Tokyo’s ready-mixed concrete prices rise

The trend to raise the price of ready-mixed concrete is spreading. Ever since the Tokyo District Ready-mixed Concrete Cooperative announced that due to rising raw material and transportation costs, prices will be raised by 1,000 yen/㎥ (7%) starting from April 2020 contracts, price hikes have been spreading in Tokyo. Some ready-mixed concrete cooperatives outside of Tokyo have also announced price increases, with this trend spreading throughout the country. As ready-mixed concrete is a key material, attention should be given to this movement, as it will have a definite impact on construction costs.

Labor supply and demand is flat

Shortage of labor decreased in November and December 2020 and increased again in January 2021, but the fluctuation was slight, and the low level since April 2020 continues. Although this is due to the reduction in construction work, the decreasing number and increasing age of construction industry workers make it unlikely that labor rates will begin decreasing.

Historical changes in ready-mixed concrete price
Source: "Construction Materials Price Index," Economic Research Institute
Figure 8: Trends in the excess/shortage ratio of skilled construction workers
Source: MLIT “Construction Labor Supply and Demand Survey (total 8 occupations / nationwide / seasonally adjusted)