Global supply chains issues, major demand for construction work and navigating NZ’s alert level boundaries are creating a ‘perfect storm’ for the construction sector, research shows
Striking images of gridlock at Los Angeles ports help to provide a tangible display of the supply chain dysfunction dogging the world during the Covid-19 pandemic.
Those disruptions have a particularly profound impact for remote island nations like New Zealand, as Newsroom has reported – and the country’s construction sector is not exempt from feeling the pain, according to newly released research from the Construction Sector Accord.
The research, carried out in May and June but only released late last month, found that 53 percent of construction businesses flagged shortages of materials and supplies as affecting their ability to deliver on time and to budget.
Shortages of experienced and skilled staff were mentioned by 34 percent, while 13 percent identified increases in the price of materials and supplies.
Perhaps most worryingly, 48 percent of construction businesses predicted supply shortages would get worse over the next three months, while 34 percent thought it would remain the same; there was only the slightest uptick in optimism looking further out, with 32 percent predicting a deterioration in six months’ time and 35 percent a similar environment.
“I’m a positive person by nature, I’d love to say those figures haven’t been borne out but they have, and possibly we’re in a worse position,” Building Industry Federation chief executive Julien Leys told Newsroom of the findings.
Leys cited the Los Angeles gridlock, and the decision to move to a 24-hour schedule in a bid to clear the backlog, as symptomatic of the fact that “every part of the supply chain, it would seem, is under immense pressure”.
For the construction industry in particular, it was increasingly difficult to secure critical materials like steel mesh, as ongoing shipping delays dovetailed with a surge in demand for all types of building products and stockpiling from businesses trying to protect their own interests.
“It used to be 12 months ago, six months ago it was still operating to a large extent on the ‘just in time’ model … you need something and you put in an order and talk to your supplier, and you get it next week or the week after that.
“Now it’s four to six weeks, or months.”
When freight did reach New Zealand waters, there were ongoing issues with efficiently moving products through the ports, Leys said.
While new Ports of Auckland chair Jan Dawson defended the port’s current workflow in a Newsroom Pro Talks interview, she pointed out that shipping giant Maersk had identified Auckland as one of the most congested ports in the world, while moving freight from Tauranga to Auckland by truck was now taking three weeks, rather than three days.
Some shipping lines were choosing to move their vessels onto more valuable routes between Asia and the US, rather than carrying small amounts of cargo on trans-Tasman journeys.
“One company has had to move 20 percent of their materials onto other vessels, and it adds to cost and just creates a real headache – we are realising that as a small market in the South Pacific, the problem is to ensure we still get the shipping companies providing routes here.”
Those supply-side issues were being exacerbated by the massive demand for construction work, Leys said, with a surge in new housing and build consents coupled with a trend towards housing intensification in the country’s larger cities.
Eight houses were being built on sections that used to hold just two – which had an exponential effect on the building materials needed.
Large government infrastructure projects like Auckland’s City Rail Link and Central Interceptor wastewater tunnel also used a significant amount of building material; Leys knew of one domestic steel rod manufacturer whose limited capacity meant that if it needed to make infrastructure mesh, it had to stop work on its residential materials.
“When you get these inter-regional boundary issues that constrain movement of people and goods, that just exacerbates the problem … Auckland’s Level 3 or 4 becomes Christchurch’s problem, because we can’t get materials or people out and vice versa.”
– Dean Kimpton, Construction Sector Accord
Construction Sector Accord transformation director and construction consultant Dean Kimpton told Newsroom the findings of its research added weight to its earlier assumptions about the impact on the construction industry, allowing it to make its case more strongly with government ministers.
Kimpton said the sector was keen to smooth out the difficulties in moving people and goods around the country once they did arrive, allowing it to “manage down” the international factors beyond its control.
“When you get these inter-regional boundary issues that constrain movement of people and goods, that just exacerbates the problem … Auckland’s Level 3 or 4 becomes Christchurch’s problem, because we can’t get materials or people out and vice versa.”
While the Government had made changes to allow Auckland businesses producing critical materials like plasterboard and insulation to resume operating when the city was at Level 4, he wanted to move from materials-based approval to business approval, with companies able to show they could meet necessary health standards allowed to work on all their products.
Leys said the supply issues and large demand meant some builders were unable to take on any new work for at least the next year, due to either a shortage of materials or the concern they would be unable to complete a job on time.
The price of building materials was also rising on a weekly basis, leading to uncertainty over the cost of projects, while labour shortages were also having an impact on costs.
“We’re in a perfect storm where the only way things are going is up,” Leys said.
Figuring out the ‘new normal’
So what can be done to weather the worst of that storm?
Leys said construction companies and builders needed to get better at thinking ahead and hiring staff who were highly skilled in procurement to avoid being caught out.
“Big players through to smaller builders, it’s all about planning ahead … as an industry we have not been great at doing that, but we are getting better.”
Some had to carry larger amounts of inventory than in the past – although that did also have a financial impact, as businesses were forced to invest in stock upfront when they would not necessarily make that money back for some time.
Kimpton agreed greater planning around stock levels was important, although he warned that excessive stockpiling could in turn damage the industry if it meant materials were being held back and not put to use.
Eighteen percent of the survey respondents felt that more manufacturing and processing should be happening in New Zealand, or that less New Zealand product should be exported.
Leys said local manufacturers had already had a slight resurgence, with the higher prices for their products no longer a disqualifying factor.
“It’s almost a bit of a joke to think about that now, because the key priority is availability and having the product.”
“When we get through this phase of Covid and we probably have open borders and most of the country is vaccinated, I think what we’re going to see is a building and construction industry that is so much better at planning than it ever used to be.”
– Julien Leys, Building Industry Federation
Kimpton noted it was “not just as simple as we pull a big chunk of [manufacturing] onshore”, and said domestic manufacturing of the most critical products could be coupled with greater diversification of supply chains rather than relying on a single market or supplier.
The Construction Sector Accord was working on a “road map” to operating in a Covid environment which was likely to be released before the end of the year, he said.
Leys said some New Zealand companies could invest more in technology development and process automation, reducing their reliance on unskilled labour, while the planning improvements would reap long-term rewards.
“When we get through this phase of Covid and we probably have open borders and most of the country is vaccinated, I think what we’re going to see is a building and construction industry that is so much better at planning than it ever used to be.”
Both Leys and Kimpton agreed it would be two years at least before supply chains returned to something resembling a pre-Covid normal – a figure which could scare some.
But as Kimpton put it: “There’s a new normal now, and we’ve got to figure this one out.”
