Prices in many industries have been volatile and may continue being that for the time to come. This is an effect of multiple forces, reaching from changes in global trade and global supply chains which range from trade conflicts, interruption of supply chains to new environmental and labour regulations. We have been looking at B+L GmbH in the construction supply industry, where you currently see some spectacular price increases in some material classes, like wood prices, which skyrocketed. For example, currently, OSB is plainly not available anymore in wholesale. Martin Langen, the CEO of B+L GmbH did a webinar on April 30th looking at the dynamics in different material classes and updating his customers on price data.
We continuously explore practical ways to build models for the construction supply industry. For 2 reasons: firstly, to understand the drivers and secondly to quantify changes. One speciality discipline became the prediction of infliction points in the market and quantifying timeframes and probabilities. Of course, these all go back to supply and demand equilibrium. However, the classical textbook models proved to be not very useful in practice. For example in some material and product classes, you now see that dealers speculate on increasing prices by increasing inventory. In others, for example, wood, you see increased demand from the US, which Canadian sources cannot supply fully and impacts Europe.
We decided on a hybrid approach in building the models. This means we extract the relevant value chain and supply chain of a client’s product class, identify cost and topline margin drivers in the industry, rate their impact, connect them additively and finally connect data from our databases to do the quant. You can do this in a workshop format for yourself and get very far even without quantitative input.
Construction material has some specifics, which you have to keep in mind when you try generalizing the approach, Like, for example, the customer is often not the end-user but the developer or architect. Then also the material cost is not the major cost driver for construction, but land cost, planning and labour are often more dominant. And then, of course, some things just have to happen to proceed with a project, no matter how much the price of a certain supply increased, as a project delay would be far more costly.
For illustration, please find an example slide of drivers along an idealized value chain in the construction material industry. If you like to use the slide for your own company or workshop, please feel free to download it by clicking here. If you want to know more, especially on the quantitative modelling side, please feel free to get in touch or download the colleagues at B+L GmbH.
