While economists are debating whether or not consumer inflation is on the horizon, some parts of the real economy are already being jolted by price shocks. Raw materials are becoming more expensive, changing estimates for corporate balance sheets by the day.
The situation is so dynamic that companies are pausing projects they greenlit in December because they can no longer fit into the designated budget.
"Instead of the 10% profit margin we expected just a few months ago, we're now looking at a 20% loss. What's worse is that there is nothing we can do - either we give up and pay the penalties, or we continue with the awareness that we are losing money," a designer of an infrastructure project in water supply told Capital Weekly.
Prices of energy sources are on the rise too. For example, oil prices have returned to pre-crisis levels, and natural gas prices are double what they were at the beginning of the year, placing an additional burden on manufacturing costs and the price of services. Usually, the higher prices are quickly transferred to consumers.
Also, there's an invisible factor that will soon start to affect industrial prices - CO2 emission quotas, which have been rising steadily for the past month, setting new record highs. So far, the rise has not affected industrial prices directly as firms buy quotas with several months of delay but sooner or later they will become a driver of producer price inflation. Moreover, forecasts say that CO2 quotas' prices will continue to increase because of the EU's Green Deal.
More expensive raw materials
"Big traders and steel producers have been updating their prices every few days, always upwards. We expected that this would be a short-term trend, but that's clearly not the case," says Maya Pencheva, CEO of construction company Glavbolgarstroy. According to her, the tangible upward trend in the price of metals began in early December of last year. Since then, the price growth rate has been about 40% for iron, and almost as much for aluminum and copper, the latter of which reached a 10-year high in April. Consequently, prices are up for fitments, scaffolding, secondary aluminum cladding, copper, and aluminum cables. There has also been a significant increase in the price of insulation materials, and the price of timber has also risen significantly, pushing higher other intermediate goods like hydrophobic plywood and formwork elements like wooden girders.
All of this happened in just 6 to 8 months. As a result, the cost of construction works has increased by close to 20% for some sites. "Most striking is the increase in the price of fittings. Our contracts with the state, municipalities, and with private entities do not have a clause for higher prices of materials because they've been stable so far and there have been no problems," comments Rosen Koleliev, owner of construction company Roads and Bridges. This puts at risk the implementation of some projects, as in contracts with the state or local authorities there is no way to change the agreed-upon price offers.
Fuel prices leap
Because of the increase in fuel prices transportation costs and the price of materials are both rising. The costs in road construction, for example, are largely a function of oil prices. On the one hand, bitumen is among the primary materials used in the sector. On the other hand, transportation and machinery expenditures are dependent on the price of fuel.
"These two components alone make up about 20% of the costs of a project. For a large infrastructure project a price increase of just one cent per liter could lead to a difference of several million in the final price", says Todor Gochev, CEO of GBS Infrastructure Construction.
"Currently, ferrous and non-ferrous metals are rising rapidly, and some have reached levels we have not seen in years," Anton Petrov, chairman of the Bulgarian Association of the Metallurgical Industry, points out. According to him, there are at least two reasons for the price rise. "One is the recovery of construction and the renewal of inventories by large retailers, which leads to increased demand, more raw materials, and finished products. The other reason is the increase in electricity prices due to emission quotas, which increases the cost of production," says Petrov. Metallurgy is quite energy-intensive, and depending on the product the share of electricity costs in its final products can reach 30-35%.
An increase in the price of cement can also be expected in the medium term to compensate for the rising costs of its production. Companies' expenditures for electricity, raw materials, and labor have been on the rise for several years. So far, a price increase of cement has been delayed because of cheap imports from Turkey but the global trend of the past months shows that prices are set to increase in the near future.
Firms in industry are also looking at electricity prices with trepidation. They've been unusually high since April, and the outlook is that this won't be a temporary trend. With much of Europe's electricity still produced from coal and natural gas, power plants will continue to buy quotas for CO2 emissions. These quotas have doubled in price in the last six months and are now at historically high levels because of Brussels' decarbonization policy. The goal is to make the branches of industry that pollute the most unprofitable and force them to introduce renewable energy sources (RES) and energy-efficient machines.
However, until this transition is finalized, electricity will continue to be expensive, especially now when coal-powered plants are working at increased capacity since meteorological conditions do not allow RES to operate at full swing, and there are maintenance works at several nuclear power plants in the region.