Russian Construction Materials "Pushed Up" From Rock Bottom
09.11.2009 — Analysis
The insignificant bounce of the construction materials prices in Russia in the autumn has not caused the "domino principle". Production volumes have not gone up, investors have not come back to the market. While they are not here, RusBusinessNews observers had a look at the future of the Urals construction sector.
Construction materials prices, it seems have found the bottom and just about noticeably started climbing up again. According to the data from the joint study by Builders Association of Russia (BAR) and the Quantity Surveyors Union in January-September 2009 the prices fell by 8.4%. At the same time beginning in August the construction materials prices are going up. This may be just by a hundredth of a percent per month, but growing sustainably for the past three months.
BAR and Quantity Surveyors Union experts predict that the prices of the key construction materials will not decrease any further. "On the contrary, a slight growth is possible for certain positions (cement, rebar, concrete aggregates, mortars, and concretes). The price reduction peak has been passed in April-June when construction materials prices went down 2.87-3% per month. It is now possible to talk, with careful optimism, that the bottom has been reached or almost reached," says the study report.
Yuri Chumerin, the Director of the Union of Companies of the Construction Sector of the Sverdlovsk Oblast, is convinced that the ice started breaking up. "At the moment foreign investors are yet again ready to fund projects in the construction sector not only within the Sverdlovsk Oblast but all over Russia. The appropriate documents are being drawn up," he told RusBusinessNews. "According to European analysts in 2011 Russia will experience a boom in construction of housing and other premises. This is why 2010 is viewed as a transition period when unfinished projects will be completed and the cycle will start anew.
Representatives from the construction sector companies are in possession of a different kind of information. Roman Borisov, the Deputy Director of SJSC GLIMS-Production (Moscow), informed RusBusinessNews that due to the financial crisis the implementation of the majority of projects is still experiencing difficulties. "In the last 3 years at least seven cement plants have been announced as coming to the Urals. Many wanted to implement such a project, including the Ural Mining and Metallurgical Company. All this, however, was being said at the time of the construction boom when there were cement shortages. The number of cement plants has eventually not changed. There are nice projects for the production of wall panels and sand-lime brick but we predict that there will be no boom in the production of construction materials in the Urals for at least 5 years. The conditions are not right for that," Mr Borisov thinks.
It is worth pointing out that out of the 7 mentioned cement plant construction projects 4 have been offered by Chinese companies. Xie Jinying, the Consul General of the People's Republic of China in Ekaterinburg, informed RusBusinessNews that not a single one of them at the moment has come back to these projects.
In the Sverdlovsk Oblast there are only 2 large investment projects worth mentioning in the construction materials production sphere. Both of them involve participation of foreign investors. The first one is the construction of the calcium carbonate production plant in Polevskoy, the plant worth over a billion roubles will use ground marble as the raw material, it is being built by the Swiss company OMIA. The capacity of the plant will amount to about 300 thousand tons of products per year. Calcium carbonate is used in manufacturing paints, plastics, and construction materials.
"Due to the crisis and change in market demand the investors have suspended our project for a year," Maksim Popov, the Polevskoy Branch Director of OMIA-Ural, told RusBusinessNews. "Now the implementation is back on track, all documentation has been processed, and it is planned to complete the construction of the plant in 2011. By that time we are also expecting the start up of the plant of the international group Maxit. This will be located on the neighbouring industrial site. We are planning to ship some of our products to Maxit for the production of dry construction mixes. We are making the product which is inexpedient to transport long distance, only within about 1,500 kilometres. The Sverdlovsk Oblast has been chosen for the establishment of the production because this is the industrial centre, the economy is rapidly developing here."
The second investment project in the Mid Urals is the construction of the new production line at OAO Sukholozhskcement with the capacity of 1.3 million tons of the construction material per year. This line is being constructed since 2006 next to the existing plant. The construction is funded by the German company Dyckerhoff AG, the main shareholder of Sukholozhskcement. The dry cement production is planned to start in May 2010.
"In 9 months of 2009 the production amounted only to 40% at our plant as the demand for cement diminished rapidly. We are producing into warehouse at the moment. We are not suspending the construction of the new capacities as the point of return in the implementation of this project has been passed," admitted Vladimir Klementyev, the Marketing and Sales Director of OAO Sukholozhskcement. According to his predictions demand for cement in the Urals will start growing in May 2010 but it will be possible to achieve the 2008 levels of production and consumption no sooner than 2012. "We are working for the future," says Mr Klementyev. "The manufacturer that has the state of the art production capacities wins. Our new line will use the dry cement making process. This gives huge savings in power consumption and labour intensity."
The fall in demand for construction materials made in the Sverdlovsk Oblast is explained not by the crisis alone. Neighbouring subjects of the Russian Federation are actively carrying out policies of regional protectionism gradually reducing the amount of construction materials brought in from outside and promoting by all possible means the establishment of local production facilities. For instance the Tyumen Oblast government offers state guarantees to companies implementing large projects including those in the construction sector. They also offer targeted loans and subsidies for the compensation of some costs of bank credit interest and some spending on leasing payouts. It is due to this that the Tyumen Oblast needs in key construction materials today are practically entirely covered.
Amongst the large investment projects being implemented in the Tyumen Oblast in 2009 there are the start up of the first train of the wall materials plant Porevit (Yalutorovsk) and the new high tech line for the production of tension concrete cavity panels 1,490 mm wide at ZhBI-5 (Russian abbr. for Reinforced Concrete Plant Number 5). The second train of the cement store with a packaging line in the Tyumen Housing Construction Company has also been commissioned.
At the same time the existing market situation in the Urals does not stimulate the influx of investment to the construction industry. Due to the diminishing demand the production of construction materials in the Sverdlovsk Oblast ion monetary terms has dropped by 40% in the first 9 months of 2009 compared to the same period last year. The steepest reduction (4.6 times) has been noted in the large panel manufacturing for panel housing construction. Mortar production is 40.4% down, prefab reinforced concrete - 42.2%, concrete mixes - 42.8%, wall materials - 45.6%, and construction brick is down 50.8%.
Potential investors should note that today the majority of the Urals construction sector companies only use about 50% of their capacities. This means that the growth in the consumption of construction materials in the nearest three to five years will not cause any shortages in key product types. New players can take a worthy position in the Urals market only by offering state of the art materials and innovative manufacturing technologies.
Moreover, representatives of DIY chain stores are actively seeking local suppliers for those construction materials for which a high proportion of the cost is taken by transportation costs (dry construction mixes, foamed plastic etc.). In general it is worth pointing out that in the passed crisis year only the individual houses construction experienced growth. This means that the orientation of some manufacturers of construction material to the needs of "individuals" and the appropriate retail sales networks have a good future.
Pavel Kober, Maria Truskova
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