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Is it mere public posturing to halt construction due to rise in raw material prices?

The scale of operations and financial bandwidth also defines whether a builder can afford to halt operations. Larger projects and/or developers sitting on high debt may find it unsustainable to halt construction.

Just when the real estate industry bodies had firmed up their public posturing to halt construction, there was uneasiness at the developers’ end. Many of them had their back-of-the-envelope calculation, as to whether the construction strike would actually help or hurt the business.

A Noida-based developer agrees that he is not in a position to halt construction. For him, the choice is to bear the additional pressure of Rs 2 crore with expensive raw materials or cough up Rs 4 crore towards operating expenses and interest costs.

The complex nature of the business that real estate is, every stakeholder has his own set of calculations when it comes to taking the price hike protest beyond public posturing. It also depends upon the stage of construction.

Also read: Housing prices may rise 10-15% by April, rising construction costs hurting business: CREDAI-MCHI 

For a newly launched project, the price hike is killing since maximum steel and cement is consumed in raising the RCC frame structure. At the finishing stage, the hiked price of raw materials such as electrical materials, plumbing and CP fittings hurt too, but not to the extent of cement and steel prices.

The scale of operations and financial bandwidth also defines whether a builder can afford to halt operations. Larger projects and/or developers sitting on high debt may find it unsustainable to halt construction.

Here’s a look at the issues that has led to this impasse.

Is it cartelisation?

Prima facie it seems there is a cartelisation. In 2019, the Competition Commission of India (CCI) had examined complaints of cartelisation in the cement industry. In December 2020, CCI raided some of the largest cement makers in the country.

Last year, the Union Road Transport and Highways Minister Nitin Gadkari had accused the steel and cement makers of cartelisation. He had also asked the industry to look for alternatives to replace steel and cement amid a steep rise in commodity prices.

There is no apparent economic rationale for the steep rise in raw materials. And hence, the allegation of cartelisation gains ground.

Is cartelisation possible?

In a free market economy, the businesses are all about demand and supply. Now that the demand is high, and Russia-Ukraine war has given fresh impetus to the manufacturers to export at higher prices, they are making the most of it. Most steel and cement producers are hiking prices and there is seems to be a covert understanding among competitors. Some raw material producers are also cancelling existing contracts with developers by invoking the Force Majeure provision.

To what extent have prices increased?

Developers claim that steel prices have gone up by 121 percent and cement by nearly 38 percent in the last two years and that cost of construction has increased by at least Rs 500 per sq. ft., making projects unviable. Similarly, the cost of electric wires have gone up 150 percent; plumbing material and CP fitting material by 50 percent; aluminium 64 percent; fire-fighting is 71 percent higher; internal painting has jumped 50 percent; aluminium windows up 56 percent and stones up 66 percent.

Has production peaked?

As per industry estimates, cement and steel manufacturers have not peaked capacity utilisation. With around 60 percent of production, there is still room to produce more rather than increase prices. Hence the cartelisation.  Of course, the supply chain of production is a challenge for raw material producers as well.

Can the sector afford to halt construction?

In my view, real estate stakeholders don’t really intend to halt construction for long and it is only public posturing. The business cycle does not seem to suggest that the large universe of developers can afford to halt construction.

Impact of cartelisation

The impact of price hike and alleged cartelisation is the reason behind increase in  construction costs. New launches would suffer and the market is in any case not ripe for developers to pass on the increased construction cost to buyers. The under-construction projects face a Catch 22 situation. The developers, at least the reputed brands, cannot suddenly invoke the ‘Escalation Clause’ in their agreements with buyers and face a backlash.

Affordable housing would be the worst hit as pressure on margins is already making several projects unviable. There could be many more defaults on part of the developers to deliver projects, since business with low margins could become unviable. The housing market that had revived a bit post Covid-19 is clueless about how to deal with this imbroglio.

Should the government intervene?

Some government infrastructure projects may also suffer due to this alleged cartelisation and the government must intervene. The options could be one of the suggested solutions or a combination of these:

  • Comprehensive policy on supply chain

  • Fixing prices of raw materials

  • Discourage exports of raw materials

  • Crackdown on cartelisation

It is to be seen how the government handles the issue and how the real estate stakeholders absorb the pressure.
Ravi Sinha is CEO, Track2Realty.
first published: Apr 9, 2022 07:17 am