Equity 1 July 2021, 11:58am

Building material prices take off in Hungary, gov't may announce export ban or restrictions

Portfolio

The price of building materials and raw materials in the construction industry have been skyrocketing globally and in Hungary as well for months. Márton Nagy, economic policy advisor to Prime Minister Viktor Orbán, said at Portfolio’s Construction Industry 2021 conference that the cabinet is also looking into this matter. He has addressed the problem at detail, including an assessment of the current situation, the pricing power of businesses, and the local production of essential building materials. Portfolio has learned that the cabinet will soon take action, including immediate and resolute measures, to stem the drastic price hikes in the sector. László Koji, Chairman of the National Federation of Hungarian Building Contractors (ÉVOSZ) has also mentioned potential drastic measures in an interview with InfoRadio.

Extreme price increases in the construction industry

By the end of May, prices in the construction industry were up by 25 to 30%, ÉVOSZ Chairman László Koji told InfoRadio.

He thinks the solution is to create a glut of products and the export of essential building materials should be banned.

Koji added that prices started to climb sharply at the end of March and that the federation warned the government that market players would not be able to sort this problem out themselves.

A large share of building material manufacturers were either out of commission or producing at a fraction of their capacity over the past 18 months due to the coronavirus pandemic. Now that the pandemic is petering out pent-up demand of one and a half years has suddenly emerged, while there are less previously manufactured materials, and no one were producing to pile stocks. As a consequence of that construction industry players procured 48% of all materials they used from import in 2020 therefore

Koji argues that we need to check product by product what caused the price increase.

It was the cost of production that went up considerably at articles of wood, steel products, rockwool and certain insulating materials

, said Koji.

The expert has also talked about the structure of the price hikes:

constructors raised their service prices by 8% at building projects and 10% at refurbishments in Budapest;
material distributors upped prices by 5 to 7%;
in case of some essential building materials prices more than doubled.

Drastic measures seen in the pipeline

When asked what steps the government could take to tackle this issue, Koji replied that

the solution is not necessarily rigour and ministry-price bricks.

The key question could be

how you can create a plethora of locally manufactured essential materials on the market, e.g. by restricting or banning their export.

He said that at least mandatory registration should be implemented to see what materials are leaving the country. A lot could depend on the ‘craftiness’ of building material traders in the crisis that is taking shape, as they are now trying to stabilise prices and cope with the shortages via alternative channels.

Koji later told public television M1 that when it comes to locally produced building materials slates for export a moderate restriction would not hurt. Domestic orders and builders should be prioritised. Additionally, new countries should be added to import sources. He added that more building materials could be bought from Turkey, China, Russia, Ukraine, or Moldova, for instance. Koji also raised the issue of a potential surcharge that may be slapped on businesses that have recently raised their prices exceptionally and for no good reason.

The government is expected to announce in the near future what it will do as a response to the immense price hikes carried out by construction material producers, as Prime Minister Viktor Orbán said it is morally unacceptable that manufacturers respond to the family support scheme by raising their prices even by more than 100%, Magyar Hang reported on Tuesday.

The PM said he would like proposals to this end to be discussed already this week.

It is unclear what regulatory changes might be in the pipeline. Márton Nagy, advisor to PM Orbán on economic issues, told Portfolio’s Construction Industry 2021 conference that foreign companies abuse their pricing power that is damaging for the local building material sector. His remarks suggest that the cabinet would not shy away from going after foreign-owned building material producers.

There are already some ominous signs. Competition watchdog GVH launched an investigation in early June to find out what was behind the sharp increase in prices in the construction industry. As the market of certain building materials is dominated by just a few players, they might drive prices higher than the prices we usually see in a competitive situation. Last year, the GVH opened a procedure against cement market players over the possible breach of the prohibition on abuse of a dominant position. At the end of June, the state invited a private tender for the sale of mining rights. (The winner was Kvarchomok Ltd, member of Bayer Construct Group, and was given the right of mining in one of the country’s largest gravel pit.)

Cover photo: Soeren Stache/picture alliance via Getty Images