Inflation is down, but construction industry must still play safe

Core inflation, which excludes volatile items like food and energy, eased to 3.6% year-on-year (YoY) in December, with goods inflation ticking up to 1.9% y-o-y from 1.6% in November.

The housing and utilities category saw a YoY increase of 4.4%, contributing a full percentage point to the overall CPI.

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While annual maintenance and repair costs rose modestly by 1.5%, electricity prices continued their steep climb, up 11.4% YoY in December due to the Nersa approved tariff hikes.

Low consumer inflation may generally signal a less challenging environment for cost containment, but the construction sector faces unique pressures.

Housing and utilities costs, particularly electricity and water tariffs, continue to rise at a pace that outstrips general inflation.

Addressing the tariff hike elephant

Electricity prices, for instance, have increased by an average of 10.5% annually over the past 15 years, far above headline inflation rates.

For infrastructure and building projects, this means higher energy costs during construction phases, especially for energy-intensive activities such as cement production, welding, and transportation of materials.

Additionally, water tariffs – the second-largest contributor to housing inflation in December – rose by 5.5% YoY, further impacting operational costs.

Maintenance and repair costs, though rising more slowly at 1.5% YoY, add to long-term financial planning concerns for both public and private projects.

With inflation forecasts for 2025 ranging between 3.8% and 4.4%, according to the Sarb and National Treasury, project planners need to anticipate continued pressure on operational and input costs.

The repo rate dilemma

South Africa’s repo rate remains at 7.75%, with a corresponding prime lending rate of 11.25%.

These high borrowing costs are a significant factor in the construction and infrastructure sectors, where large-scale projects often rely on credit.

Even with inflation at its lowest levels in recent years, the cost of financing remains a substantial hurdle, particularly for smaller contractors and developers.

A moderation in core and housing inflation, combined with a lower-than-expected headline CPI, suggests a degree of stability in certain cost categories.

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Clever strategy

All signals point to the construction sector needing to adopt proactive strategies to manage input cost volatility and energy expenses.

While inflation is looking good, the cost pressures on building construction and infrastructure projects remain significant.

The 30 January 2025 rate decision will be closely watched, but managing energy, water, and material costs – along with high borrowing rates – remains critical to sustaining project viability in a challenging economic environment.