Cost Management Report 2019 October-December

Business sentiment (in both the manufacturing and non-manufacturing sectors) is deteriorating. According to the September Tankan survey (Bank of Japan’s Short-Term Economic Outlook Survey), the Business Conditions DI* has declined for three consecutive quarters since the December 2018 survey, and the outlook is expected to worsen further.The Business Conditions DI is highly correlated with private-sector capital expenditure (with a six-month time lag, and the Business Conditions DI tends to lead); therefore, the deterioration in the Business Conditions DI is expected to lead to more cautious private-sector capital expenditure plans (Figure 1).
In line with the decline in private capital investment, investment in non-residential construction is expected to decrease from fiscal year 2019 through fiscal year 2020, and total construction investment (excluding civil engineering) is also projected to decline (Figure 2).
*Business Conditions DI: An economic sentiment index published in the Bank of Japan’s Short-Term Economic Outlook Survey (Tankan), calculated by subtracting the percentage of companies that perceive economic conditions as “poor” from the percentage that perceive them as “good.”

Anticipating a decline in construction investment, construction companies are taking a proactive approach to securing contracts, and bids in most price-competitive projects tend to fall below the estimated price.The average deviation rate* for price-competitive projects has widened compared to the previous year, reaching -6.6% (Figure 3). On a case-by-case basis, there are projects where the deviation rate reaches as high as -21%. On the other hand, the average deviation rate for specially commissioned projects remains positive, highlighting a clear polarization in construction prices between price-competitive and specially commissioned projects.
*Average Deviation Rate: The annual average of the deviation rates between the estimated price and the bid amount for each project.

The decline in estimated prices in competitive projects is primarily due to falling prices for equipment installation and steel frame construction. In particular, the average deviation rate for equipment installation has widened sharply, suggesting that construction companies are intensifying their efforts to reduce equipment installation costs in response to intensified price competition (Figure 4). Steel frame construction prices (including materials and labor) are now being seen below 300,000 yen/ton even in the Tokyo metropolitan area.

Nikken Sekkei conducts its analysis using its own proprietary index, the "Nikken Sekkei Standard Construction Cost Index (NSBPI)," which shows the movement of construction prices.
The Nikken Sekkei Standard Construction Cost Index is an index calculated by using a standard rental office as a quantity model and reflecting the actual market price based on Nikken Sekkei's own research in a timely manner.
With 2002 set as 100, the first quarter is January-March, the second quarter is April-June, the third quarter is July-September, and the fourth quarter is October-December.

Tokyo metropolitan area: Construction prices for price-competitive projects are falling, and the downward trend is expected to intensify.
Kansai region: Large-scale construction investments are planned, and construction prices are expected to continue their upward trend.
Tokai region: Construction prices are showing signs of weakness.

Steel: Upward trend has leveled off.
Ready-mix concrete: The rise in Osaka is particularly noticeable.

Steel prices fell due to factors such as declining scrap prices and raw material prices including iron ore and coking coal, as well as a decrease in shipments due to sluggish construction demand.
Although the volume of ready-mix concrete shipments decreased, prices rose. In particular, prices rose in Osaka due to the ready-mix concrete cooperative's efforts to encourage non-member plants to join the cooperative. The Tokyo ready-mix concrete cooperative has decided to raise prices by 1,000 yen/m³ from contracts made in April 2020, but it is expected that the impact on construction costs will be small and that the downward trend in construction costs will not change.