Cost Management Report

「Construction Costs Continue to Rise; Steel Prices Cool, while MEP Work Orders Continue to Grow」

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This report has been prepared by the Cost Management Group of the Engineering Dept. of Nikken Sekkei Ltd for information purposes. The information in this report is current as of the date of publication. Its completeness is not guaranteed, however. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited.

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Construction Costs Continue to Rise;
Steel Prices Cool, while MEP Work Orders
Continue to Grow

Upward trend in private-sector construction investment

Private-sector construction investment in FY2022 is expected to decline 1% from FY2021, while a 2% increase is expected in FY2023 as Japan’s domestic economy recovers (Fig. 1).
A breakdown shows that although private-sector residential investment in FY2023 will decline 2% from FY2021, private-sector non-residential investment will increase 8%, boosting construction demand.

MEP subcontractors secure steady amount of work-in-hand

As indicated in the previous Apr-Jun Cost Management Report, the FY2022 estimate of received orders at major and semi-major construction companies remains at the same level as in FY2021. As for major MEP subcontractors, orders received by the four HVAC (*1) and five electrical subcontractors (*2) have remained stable, with FY2021 work-in-hand reaching its highest in four years, and many companies expecting even more orders in FY2022 (Fig. 2). Under this robust order environment, the shortage of labor is acting as a restraint on new orders. Delays in deliveries due to supply constraints have not improved.

*1: The four major HVAC subcontractors: Takasago Thermal Engineering Co., Ltd., Taikisha Ltd., Sanki Engineering Co., Ltd., and DAI-DAN CO., LTD.
*2: The five major electrical subcontractors:
KINDEN CORPORATION, KANDENKO CO., LTD., KYUDENKO Corporation, Yurtec Corporation, and TOENEC CORPORATION.

  • Fig. 1: Trends in private-sector construction investment (residential and non-residential) Fig. 1: Trends in private-sector construction investment
    (residential and non-residential)
    Compiled from “Estimate of Construction Investment" by the Ministry of Land, Infrastructure, Transport and Tourism, and “Quarterly Outlook of Construction and Macro Economy" by the Research Institute of Construction and Economy (RICE)

  • Fig. 2: Trends in orders received and construction work-in-hand by MEP subcontractors Fig. 2: Trends in orders received and construction work-in-hand by MEP subcontractors
    Prepared from each company's financial data

Steel Prices Cool

Steel prices, which have a large impact on construction prices, appear to be cooling due to falling demand from China and other countries. Tokyo Steel's prices for steel H-beams have remained flat since May, while steel rebar prices fell in September (Fig. 3). On the other hand, the three major glass manufacturers (*3) announced renewed price increases starting in October. Prices of non-steel products continue to rise due to higher costs for raw materials, labor, and foreign exchange rates.

*3: AGC Inc., Nippon Sheet Glass Co., Ltd, Central Glass Co., Ltd.

The rise in steel construction costs slow, while MEP construction expands

Construction prices continue to rise in the current quarter due to constant orders and increases in material prices. Looking at price indexes by construction work type, the increase in steel construction costs slowed, but upward pressure on MEP construction costs remained strong at +4-6% vs. the previous quarter (Fig. 4). The overall rate of increase remained high at +3%.
Except for some large-scale projects where competition for orders continues to be intense, increases in material prices and other costs tend to be passed along, and thus overall construction prices are unlikely to fall soon.

  • Fig. 3: Trends in steel sales prices Fig. 3: Trends in steel sales prices
    Prepared from Tokyo Steel Co., Ltd.’s "Construction Materials Price List"

  • Fig. 4: Percent change in each NSBPI construction project on the previous quarter Fig. 4: Percent change in each NSBPI construction project on the previous quarter
    Prepared from Nikken Sekkei data

Building Construction Costs Slacken, while MEP Costs Accelerate; Composite Index Continues to Rise

Nikken Sekkei Standard Building Price Index (NSBPI)

The composite index rose approximately 3% vs. the prior quarter and 12% on-year.
Although upward pressure on steel materials prices softened, the main factor affecting the overall index, the upward trend in building material prices, remains strong, with manufacturers announcing price increases for glass and other materials from fall onward.

Increasingly, companies are having difficulty in selecting MEP subcontractors. Upward pressure on labor costs is intensifying, in addition to equipment.

  • Fig. 5: Changes in NSBPI Fig. 5: Changes in NSBPI

  • Fig. 6: Percent Change in NSBPI and Contribution of Building Work and MEP Work Fig. 6: Percent Change in NSBPI and Contribution of Building Work and MEP Work

Crude prices decline, but the yen continues to depreciate

Rising crude oil prices have fallen since June 2022 as Russian supplies have not decreased as much as expected, and the supply-demand balance has eased due to the global economic slowdown. Meanwhile, the yen has continued to depreciate, hitting the 140-yen level (vs. the U.S. dollar), a level last seen in the late 1990s. If the yen continues to depreciate for a prolonged period, the burden on manufacturers and the probability of cost pass-throughs will increase.

Sense of labor shortage remains at a high level

The labor excess/shortage rate has remained at a high level of over 1.1% since December 2021, reaching 1.4% in August (Fig. 8). By occupation, plasterers and formwork carpenters (in building work) show large shortages, at 6.4% and 3.9%, respectively. By region, Hokkaido has a high shortage rate at 4.1%. There are no signs of improvement in the supply-demand balance.

  • Fig. 7: Crude oil price and yen exchange rate Fig. 7: Crude oil price and yen exchange rate
    Compiled from "Commodity Prices" by The World Bank and "Exchange Rates" by the Bank of Japan

  • Fig. 8: Construction Skilled Worker Excess/Shortage Ratio Fig. 8: Construction Skilled Worker Excess/Shortage Ratio
    Source: Ministry of Land, Infrastructure, Transport and Tourism, "Survey on Supply and Demand of Construction Labor" (eight job categories, nationwide, seasonally adjusted)

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