Shortage of construction materials: The market needs new incentives for development
Guarantees for investors, preferential lending terms and other opportunities
Despite the war, construction projects are starting to come back to life. In Kyiv alone, developers have resumed work on several projects. In addition, developers are announcing plans for new projects. However, this market already faces certain challenges, including a shortage of domestic construction materials. The latter is caused not only by the war in Ukraine. However, in the post-war period, construction will be one of the key drivers of economic growth. Nazar Bench, owner of the investment and construction company Phoenix Group, told Mind how the market could be supported, and why it is relevant now.
The market is facing a shortage of construction materials
In 2021, positive dynamics in the main segments of the construction materials market signalled that the market had adapted to the pandemic. Given the active construction of transport infrastructure, and the demand for new residential space and commercial real estate, the industry was growing.
With the outbreak of a full-scale war, construction stopped, and the market for construction materials shrank. Thus, according to the State Statistics Service, construction volumes decreased by 65% in 2022. Today, companies continue to operate on a limited basis.
In addition to reduced demand, the main reasons limiting the sector include the impossibility of access to raw materials needed to manufacture construction materials and the destruction of production facilities, both in the war zones and in the de-occupied areas. Companies located in the occupied territories have also stopped working.
Today, the market is primarily experiencing a shortage of rebars, thermal insulation materials, dry mixes, aerated concrete blocks, etc. There is also a shortage of materials imported from russia, such as window glass and chemicals used in construction.
The shortage and devaluation of the national currency led to an average price increase of 60% in 2022. In addition, the cost was affected by the reconfiguration of production processes and supply chains due to the inability to use optimised transport routes. In turn, active price growth will be typical for the market throughout the entire period of hostilities.
Producers need investors, and investors need guarantees
Before the war, positive trends dominated the construction sector. In recent years, the share of imported materials in the market has been declining. The process began in the crisis year of 2008 with the rise of the dollar. Since then, several companies have modernised their construction materials production, which has reduced costs and improved product quality.
At the same time, the market did not use its full potential, particularly in terms of construction products. It is due to unfavourable policies and a lack of incentives to open production facilities, as the country has the necessary raw materials for the production of bricks, glass, ceramic tiles, etc.
The issue of economic and political instability also created obstacles to attracting foreign investment in the industry.
The lack of transparent business rules and corruption are among the issues, in particular. Only recently, a law was passed that promised investors to ease the tax burden on projects. With the start of the full-scale invasion, the problem has worsened, and businesses now need other guarantees.
The Ukrainian construction materials market needs new incentives for the development
The development of domestic production of construction products is an important task in the context of reconstruction.
The volume of construction materials produced before the full-scale invasion, and even more so today, is not enough to overcome the consequences of the destruction of buildings and infrastructure. While existing (domestic or imported) construction materials are currently helping to meet spot demand, the active reconstruction process requires a range of measures to support the sector.
The option of importing products from abroad will fill the market in the short term and solve the problem of shortages in certain categories. In the long term, it will lead to a situation where it will become unprofitable to develop certain construction materials production. As a result, there is a risk of losing certain market segments.
In its turn, new domestic enterprises can supply the Ukrainian and foreign markets, including through the production of construction materials, in the niches that have been vacated by the restriction of imports of russian and belarusian products.
To ensure that the reconstruction is based mainly on domestic materials and that funds remain in the economy, the government must manage the process properly. Foremost, it needs to understand what construction materials are needed and in what quantity, and then work to resolve the situation.
A separate incentive programme can also help support the construction industry, which will, among other things, increase its competitiveness in the international market. Among the tools that have proven to be effective are loans for equipment upgrades and companies expansion on favourable terms. As well as tax cuts, which can reduce business costs and help support the industry in general.
After the Second World War, for example, a number of countries resorted to import substitution mechanisms, actively investing in the development of their own enterprises.
During the recovery period, Ukraine will be a promising investment destination. Today, investors continue to work on projects that have been agreed until 2022. The main problem for attracting new investments is the lack of a guarantee of compensation in case of destruction. A law defining a mechanism for insuring investments against war risks is currently under development.
The importance of the construction industry cannot be overestimated. The war in Ukraine has had a significant impact on the sector, leading to a decline in construction and a corresponding decrease in all segments of the construction materials market. To ensure that the industry is ready for the challenges that will come with the reconstruction, a range of measures should already be working on, from auditing the current situation to insuring investments in production.
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