Construction industry challenges

From the shockingly high fuel hike last June and its subsequent fall, instability of building material supply and prices, liberalisation of importing building materials and the recent amendment to the Stamp Act 1949, the construction industry is facing one challenge after another.

It was not that long ago when unstable building material supply and prices, especially that of steel bars and cement, caused delays in or deferment of some construction projects.

Building material prices have since stabilised although prices may  rise in the coming months.
President of Malaysian Iron and Steel Industry Federation (MISIF)  Chow Chong Long recently reportedly said that steel demand and prices may have reached their bottom, or at least near the bottom.

He added that the prices may creep up higher in the coming months, as new orders from the construction sector gained traction.

Meanwhile, the Master Builders Association Malaysia (MBAM) is calling for consistent policies from the government for the industry to move ahead smoothly.

Steel and cement liberalisation
MBAM president Ng Kee Leen says  with the import of steel permissible, prices here are now in line with the international price of RM1,700 per tonne or less, from almost RM4,000 per tonne last year. The industry, however, is still working towards the importing of cement.

“Local manufacturers are selling cement at 15% to 20% higher [than the regional price]. Once liberalisation is completed, I think local manufacturers would then have to match the prices in the region. We don’t know when that will take place, but international traders are working on it,” Ng tells City & Country.
MBAM deputy president Kwan Foh-Kwai says the liberalisation of supply of cement will take longer than steel to kick in due to inadequate infrastructure such as tankers.

“Not many ports in Malaysia can handle cement imports because they don’t have the facilities. If Malaysia doesn’t have a clear liberalisation policy, it won’t attract people to come in. We are not against anyone, but if there is no free trade act, there won’t be sustainability (in building material prices),” he adds.

Kwan is referring in part to the government’s conditional liberalisation on cement — all imported cement must be tested to ensure it meets the Malaysian standard. The testing is undertaken by the Standard and Industrial Research Institute of Malaysia (Sirim) and Institut Kerja Raya Malaysia (Ikram) and the process, Kwan says, is costly and time-consuming.

MBAM recently received quotations of the testing costs from the two bodies. Ikram is formerly a research institute under the Public Works Department.

More jobs
Ng says the construction industry suffered three consecutive years of negative growth from 2004 to 2006, before positive growth of 5.5% was achieved in 2007.

“Projects awarded in 2007, valued at some RM80 billion, are for two to three years, but many jobs have slowed or been deferred because of the higher building material prices. With price stabilisation, many jobs were back while new ones have been awarded,” he says.

“In 2007, steel bar and rod consumption was above 400,000 tonnes a month, whereas the current monthly consumption is only about half of that. Cement consumption, however, only dropped by about 10% as there are still ongoing renovation works,” says Ng, adding that data on the building materials consumption in 2008 is not available yet.

Ng expects the demand for building materials to pick up in 2H2009, and 2007 level can only be reached again in 2010.

Bank Negara Malaysia has forecast the construction industry to grow at 3% this year, and Ng says both the government and the private sector must work hard to achieve the target.

Stamp Duty Act amended
Payment default has always been the industry’s major problem, and MBAM hopes for the formulation of the Construction Industry Payment and Adjudication Act (CIPAA) to ensure security of payments. Kwan says with the implementation of CIPAA, contractors can officially stop a construction project should payment default occur.

Nevertheless, one of the latest challenges to confront builders is the amended Stamp Act. It was announced in the 2009 Budget that all loan agreements and service agreement instruments except for education loans, are to be subjected to ad valorem stamp duty rate of RM5 for every RM1,000 or part thereof, effective Jan 1, 2009.

Hence, from the previous RM10 levied on each agreement, the stamp duty is now charged at 0.5% of the project sum, says Kwan.

“The amended Stamp Act, which is supposed to apply to loan service agreements only, is now applied to all agreements. All supply chain is affected by the higher stamp duty. We may see many agreements signed overseas instead,” he says.

“Many professional bodies, such as Pertubuhan Akitek Malaysia, Real Estate and Housing Developers’ Association and the Institution of Surveyors Malaysia have written to the government to review this matter. We have met several government officials and will have more meetings soon,” he adds.

Industrialised building system
Kwan says while it is laudable that the government is promoting the use of industrialised building system (IBS), which produces better quality products besides saving time and cost, the government needs to stay consistent.

He says that in the past, the government had promoted IBS and then stopped. Subsequently, the promotion resumed but then it was halted again. As a consequence, many IBS factories have closed down.
“We hope that this technology will continue. In the beginning, IBS will be more costly because of the investment outlay. We are working with the government, and we need consistency and a long-term plan for it. Prices need to be controlled to make building materials affordable,” says Kwan, adding that IBS is good but needs to be executed well.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 756, May 25 – 31, 2009.