How The Costs Of Construction Get Affected By Natural Disasters: A Detailed Take
Construction is one of the most vulnerable industries in the face of natural disasters. If a disaster strikes, it will immediately impact construction costs: Building materials are a significant expenditure for any business, and even the slightest hiccup in price could lead to a quick decline in profit. In addition, construction-based companies often depend on contractors and sub-contractors who would be forced to lay off workers if there’s no work to do. For this reason alone, the Finveo research team analyzed how natural disasters affect construction costs in detail below.
How Natural Disasters Affect Construction Costs
Natural disasters can have a huge impact on the availability and cost of building materials. A drought can dry up river beds, increasing the time and costs associated with extracting the materials. When a disaster occurs in the middle of a construction project, the materials can be delayed or doubled in price. If a construction project is halted, even temporarily, you can expect to see an increase in costs of up to 25%. A drought could also result in a decline in the quality of building materials. For example, if the source of sand in your area is dry, then the sand you use will be of lower quality, which would increase the cost of construction. Similarly, if there is a fire or other disaster that affects the supply of building materials, then the cost of construction will increase significantly as you’ll have to use a greater amount of inferior material to complete the same project.
Another disaster that causes huge damage to construction and affects prices is an earthquake. The sooner you start planning for a new construction project in an earthquake-prone region, the better. When an earthquake strikes, it can give plans a quick and brutal reexamination. The cost of any new construction project is going to skyrocket after a natural disaster and will take some time to settle down again. In fact, according to research conducted by Construction Economics, the cost of new construction builds after an earthquake averages 467 percent in the long term. That said, it’s still possible to incorporate earthquake-resistance measures into your construction plan to ensure that your investments aren’t rendered useless after an event has devastated everything around them.
The latest catastrophic disaster that happened in Turkey recently showed the importance of the construction industry. The reconstruction of areas devastated by the earthquakes in southern Turkey has been projected to cost nearly $45bn, according to estimates by the Turkish business newspaper Ekonomim.
The Importance Of Labor And Materials Costs
When it comes to natural disasters, one aspect of construction that is extremely important to understand is labor costs. On a small scale, labor costs will increase or decrease depending on the availability of labor. Still, in a greater sense, natural disasters can have a significant impact on the cost of labor in industry.
Due to the higher demand, the prices of materials will also increase and affect the overall project cost. Some metals will even be affected in the market as CFDs or futures assets, as people will speculate on the price and try to get some profit out of the situation. One of the assets that are now in high demand is Iron Ore , and it seems people are optimistic about the future steel demand.
From 2020 IRON ORE 62% FE futures marks a significant price increase, which can be seen in the chart above.
Comparison Of Construction Prices In The USA And Europe
Speaking of new construction after a natural disaster, you need to keep in mind that the strength of a building is directly related to its cost. When it comes to construction, U.S. construction prices are significantly higher than construction prices in Europe.
The latest 2023 reports state that the cost of construction of a typical home in the USA is around $150 per square foot , while in European Union countries Construction cost index reached €131.8 per square meter.
Construction Stocks
Not only are the prices of resources affected by the sudden change in demand, but so are construction company stocks. Our research team's findings led to the top 3 constructions companies that record a price increase:
1. CRH plc (NYSE:CRH)
CRH plc (NYSE:CRH) - Irish firm that produces and distributes building supplies. Building Products, Europe Materials, and Americas Materials comprise its three operating segments. As of September 2022, CRH plc (NYSE: CRH), which started its share repurchase program in May 2018, had returned $3.8 billion to shareholders through the program.
On September 13, Elodie Rall, a JPMorgan analyst, kept her Overweight rating on CRH plc (NYSE: CRH), however, she dropped her price target from EUR 59 to EUR 50.
2.Caterpillar (NYSE:CAT)
Some of the world's largest vehicles were produced by Caterpillar. The business is the top manufacturer of industrial gas turbines, diesel and natural gas engines, diesel-electric locomotives, and construction and mining equipment worldwide.
Caterpillar is very competitive when the demand for construction equipment is strong. The business, which offers heavy machinery for construction sites, also reaps rewards from the accompanying increase in demand for raw materials, which encourages mining businesses to invest in new machinery.
All of this adds up to a massive business. In 2021, Caterpillar generated $51 billion in sales and $6 billion in free cash flow, which allowed it to pay out $5 billion in dividends and share repurchases to shareholders while still having $9.3 billion in cash on hand at the end of the year. With a current dividend yield of roughly 2%, investors have many opportunities to benefit.
3. Nucor (NYSE:NUE)
Many large construction projects use steel as a primary material, and Nucor is one of the most efficient steel producers in the world. The business revolutionized steelmaking in the 1960s by using a cheaper method to melt junk into usable steel bars instead of the massive, inefficient blast furnaces previously used to combine metals.
Today, Nucor is one of the biggest U.S. steel producers and is known for being one of the few businesses that can continue to turn a profit even while consumer demand declines.
With $36.48 billion in revenue, Nucor made $6.83 billion in 2021. A dividend has also been paid by the corporation for 196 consecutive quarters. Investors currently receive a yield of 1.3% , and Nucor's drive to buy back annual shares worth billions of dollars should be advantageous.
Final Thoughts
Although natural disasters are unpredictable and cause significant damage to buildings and completely change the lives of people from affected areas, we still need to keep in mind that with the right precautions we can make an impact on the resistance and quality of construction.
Also, don’t let the increase in prices and demand devastate your optimistic view of the future, and take the opportunity to be informed about the latest market movements and secure your financial stability. We live in uncertainty and investing in our future by being involved in trading might be a good choice.
