Merko Chief Sees Baltic Builders Fighting ‘Toughest’ Year

May 11, 2011, 5:33 AM EDT By Ott Ummelas

May 11 (Bloomberg) -- Builders in the Baltic countries of Estonia, Latvia and Lithuania will have their toughest year yet in 2011 because of an “uncontrollable” increase in costs of raw materials, according to AS Merko Ehitus, the region’s largest listed construction company.

Tallinn, Estonia-based Merko is urging the government to share the costs of rising raw material prices in public tenders to avoid further financial problems for cash-strapped builders, Chief Executive Officer Tiit Roben said in an e-mailed response to questions yesterday.

Building volumes in Estonia, Latvia and Lithuania fell a combined 16 percent last year, following a 47.5 percent slump in 2009 as demand remained low and competition intensified following the deepest recession in the European Union, Merko said in its annual report published last month.

“There are sad examples of builders’ bankruptcies every month,” Roben said. “2011 will be the toughest yet for construction companies. This concerns Estonia, as well as Latvia and Lithuania, despite some peculiarities in every market.”

Merko, which competes with Tallinn-based Nordecon International AS, and the local units of Sweden’s Skanska AB, NCC AB and Finland’s YIT Oyj, in February reported a widening fourth-quarter loss, citing a faster-than-expected increase in construction prices. Still, the company reported a net profit of 1.2 million euros ($1.7 million) for 2010, while Nordecon had a loss of 11.8 million euros last year.

Harju County Court, located in Tallinn, last month rejected an application by AS Koger & Partnerid, an Estonian construction company, to seek bankruptcy protection, weekly newspaper Eesti Ekspress reported on April 21, citing court documents.

AS Water Ser Louna-Eesti, an infrastructure building company, filed for bankruptcy on April 20, citing inability to reach agreements with creditors, according to its website.

Growth in input prices, mainly from oil products and metals, is the biggest risk for builders in the region, Roben said.

Brent crude prices in London have gained 44 percent in the past year, while the price of copper has risen 26 percent and aluminium 23 percent, according to the Standard & Poor’s GSCI Total Return Index of 24 commodities.

“We see a need for public institutions commissioning a project to also bear the risk of input prices along with the builder,” Roben said. “For an educated contracting authority, it is clear that this is a process the builders can’t affect. But if this is just cynically monitored from the sidelines and all the risks are left to the builder, several important objects could still remain unfinished.”

--Editors: Douglas Lytle, Ross Larsen

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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