European builders face cost squeeze -report

LONDON Aug 16 (Reuters) - European construction companies face another tough 18 months, with costs driven higher by soaring commodity prices, and recovery held back by suppliers favouring Asia and the Middle East over Europe, according to EC Harris.

"Contract prices won't have increased (over the next 1-2 years), because that's the nature of the competition, but their costs will start to increase disproportionately, and that will create the pressure," said Mathew Riley, head of cost and commercial management at EC Harris, a London-based consulting firm.

Rising commodity prices, higher manufacturing output costs and wage inflation are all expected to hit building contractors over the next 12-18 months.

At the same time, fierce competition for deals will keep contact prices flat.

"The obvious impact is that it will squeeze operating margins," said Riley, though big-hitters such as Germany's Hochtief , Britain's Balfour Beatty , and France's Vinci and Bouygues will be better placed to control the impact than smaller domestic players.

"They will be able to manage or balance the impact across their businesses," he added.

Euroconstruct cautioned in June that it expected construction output in the 19 European countries it monitors to fall by 0.4 percent in 2011 compared with the 0.1 percent drop it had forecast in December.

Construction in Europe has fallen 15 percent since the onset of the financial crisis in 2007, reaching levels not seen since 1998, and is only expected to grow again next year, driven by demand for new houses following a deep property slump.

A second hurdle lurks on the horizon for European contractors when a recovery does eventually appear. Global supply chains have shifted their focus away from Europe during the downturn towards dynamic markets such as China and India, meaning that contractors will not be able to guarantee supply when they do start to ramp up activity.

"(Recovery) will coincide with the Middle East and Asia already having aggressively started to spend money on investment and infrastructure, so it will become even harder to secure supply and prices," said Riley.

"Certain commodities will only be available in finite volumes, so it is imperative that contractors work with the supply chain to get this long-term visibility of what will be required well ahead of schedule," he added.

"This is an unusual characteristic and not one we've faced before," he said.

Costs of construction in Europe remain the highest in the world, with Switzerland and Denmark having the highest construction costs for the second year running, according to the study by EC Harris that measures 55 countries against the UK.

The price of construction in Switzerland is 71 percent higher than the UK.

Australia and Canada were the only two countries outside Europe to feature in the 10 most expensive countries for construction costs. (Reporting by Lorraine Turner; Editing by Will Waterman)