Major Australian building products group, Boral Ltd, has revealed a series of price rises that won’t please the Reserve Bank as it meets tomorrow to consider interest rates and the economy.
Boral is Australia’s biggest building products group and the surging cost of oil and fuels has forced it to boost the prices of its biggest selling products: concrete, cement and aggregates. These increases have occurred nationally, and in the booming Queensland construction market which now accounts for 25% of Boral’s business and 32% of the country’s cement market.
The knock-on effect of these price increases is what central bank fears because price pressures generated by the surging oil price are being transmitted directly into sectors of the economy that lack capacity and can afford to pay and pass them on: resources and infrastructure.
They have the capacity to keep costs in the busy resources and infrastructure businesses higher than they should be, while the cost of roads, housing and other projects will rise as a result. It could see Australian consumer price inflation, currently running at 4.2%, rising at a much higher rate in the months ahead and have the RBA reaching for the interest rate lever.
The price rises will not be affected by sluggish demand for building products from the housing sector: these increases are aimed directly at exploiting the booming resource and infrastructure industries. The Reserve Bank and other policymakers discount what they call volatile food and energy costs (as do monetary policy authorities the world over) when working out the so-called core inflation rate.
In a briefing in Brisbane last week, Boral’s chief executive, Rod Pearse, directly linked price increases to price pressures for rising energy costs in his group’s cement, concrete and quarrying businesses. Cement prices have been boosted in Queensland where Boral subsidiary, Blue Circle Southern Cement, operates the Sunstate Cement joint venture with another cement group, Adelaide Brighton.
Blue Circle Southern has lifted its cement prices in the sluggish NSW and Victorian markets and Boral has boosted its aggregate (rock) prices from its quarrries across the country, while prices have been lifted nationally for its ready mixed concrete businesses.
Pearse provided this justification for the rises:
Energy costs are moving at unprecedented levels. In December 2007 diesel was trading at around US$100/barrel. In recent weeks it has been at highs of around US$170/barrel. In Boral, we use some 160 million litres of diesel a year and in concrete around nine litres for every delivered cubic metre. Cleary we have had significant and largely unanticipated cost increases over the last six months. General inflation for those of us exposed to the resource sector is also impacting.