OUTLOOK: Europe construction strong on demand, supply constraints

LONDON (ICIS)–Construction in Europe is set to rebound in the rest of 2021 from the decline in 2020, bolstered by financial support from the EU, according to a report by analysts at Oxford Economics published on Tuesday.

The 1.5% increase for the construction industry in 2021, following the 6.2% drop in 2020, with the 27-country bloc’s sector benefitting from the €723bn Recovery and Resilience Facility (RRF).

This funding is a part of the €806bn Next Generation EU (NGEU) pot – which in 2018 totalled €750bn – as the public sector provides aid in response to the economic devastation caused by the Covid-19 pandemic.

“The EU construction sector is building a path to recovery,” said ICIS demand analyst Jincy Varghese.

“Much of the strength is coming from housing, while civil engineering works reported a modest increase. However, as with other parts of the world, the cost of materials is increasing at a record rate, putting strain on builders’ overall profitability.”

CHEMICAL REACTION
For chemicals used in the construction sector, robust demand has featured prominently this year, with fundamentals imbalanced by issues with supply chains.

One buyer for polystyrene (PS) and expandable polystyrene described construction as “booming”, but highlighted problems with raw material supply for steel and wood as well as plastics, which could weigh on the industry.

“All components are getting expensive and that is hitting construction companies, they are careful and cautious to start new projects…it depends how long supply problems continue,” they said.

“Prices would increase, it’s a vicious circle, unless supply improves and prices go down, i think we are in a temporary peak, but how long will the downwards trend will go.”

An EPS producer said “Construction will remain strong until winter but not clear what prices will do. Converters can only pass through price movements…high demand means high prices, it will be a determining factor of whether things slowdown for new projects.”

Demand in the recycled polyethylene (R-PE) and recycled polypropylene (R-PP) markets has noted consistent strength in the construction industry, with expectations that this will continue in early in the second half of 2022.

Again, tight supply of R-PE and R-PP has lengthened project deadlines for public works, and this has extended the peak season for the construction sector this year.

One polyurethane (PU) producer described the market as solid after recording double-digit growth in 2020 for demand for rigid foam feedstock methylene diphenyl diisocyanate (MDI), with 6-8% growth expected for the third quarter.

This has kept imports of MDI into Europe, but shipping problems have disrupted the marked from the end of last year.

“Everybody is looking for available shipping (slots) but all the possibilities are blocked until the middle of August…customers are fearing supply shortages or disruptions after the summer vacation season, but demand looks very positive, especially for panels and the roofing industry,” said the Asian-based exporter.

“The demand outlook is huge – we’re comparing against 2019 (and) we’re looking at demand up about 40%. It was a record first half…[Supply constraints] are probably going to put the brakes on,” said one rigid foam producer.

As a result, the source expected increases of up to €200/tonne on crude MDI in August.

SUSTAINABLE
There is a drive to boost growth in the construction sector in line with the EU’s sustainability targets.

In line with this, member states have pledged to apportion more than a third – at least 37% – of their RRF funding to green investments, and at least 20% to promote digitalisation.

For the construction sector this translates into making buildings more energy efficient and investing in national and urban infrastructure to encourage citizens to use less carbon intensive modes of transport.

REGIONAL
In Germany, the construction sector was the only segment to note an improvement in the latest data from the Ifo Institute, despite constrictions with logistics.

A drive for sustainability is shaping the recovery in different European countries.

“Under the Italian government’s super bonus scheme (an upgrade from its Eco bonus), a 110% tax deduction on expenses related to home improvement can be claimed. Its validity has been temporarily extended from 31 December 2021 to the end of 2022,” stated Varghese.

This focus will also support the construction of sustainable energy projects across the continent, including nuclear reactors in Poland, as well as wind and solar projects.

Longer-term, nations are assessing changes to population dynamics, which could drive fundamentals for different construction projects, as an ageing population could lead to increased demand for smaller domiciles.

SECTORAL
While in the near-term the housing segment is driving growth, in line with the most recent data from the EU’s statistical agency Eurostat, other markets may see track faster recoveries in the second half of the year.

Growth in the sector will be stronger for non-residential buildings, with growth tipped at 3.5% in 2021, driven by increased construction of education and health facilities.

Civil engineering activity is expected to rise by 1.3% over 2021, reflecting delays in scheduling new projects, and the challenge accelerating existing projects.

Commercial building was particularly affected by the pandemic, and while the sentiment has improved the situation is not expected to reach pre-pandemic levels until 2023.

Residential building in the EU is expected to increase by 0.3% over the course of this year, reaching a value of $417bn, driven by a rise in single-family dwellings.

Permits for this type of residency were 6% higher in the first quarter, compared to the fourth quarter of 2020, accounting for seasonal adjustment.

Despite the increase, this remains 60% below the peak reached ahead of the 2007-8 financial crisis.

Construction for multi-family dwellings is expected to start a recover in 2022 and will account for more than half of all residential construction activity for that year, particularly for continental Europe.

By Morgan Condon

Additional reporting by Fergus Jensen, Mark Victory and Stephanie Wix