Autumn 2022 UK Market Report
Materials
Just over 30% of respondents to our Autumn survey said that materials price increases are starting to settle, reflecting our Summer survey.
The Department for Business, Energy and Industrial Strategy’s (BEIS) ‘All Work’ construction materials price index slowed over the summer, following the surge seen following Russia’s invasion of Ukraine.
Many commodities have been stabilising or reducing in price.
The cost of iron ore, a key steel ingredient, has decreased. Reporting by Bloomberg suggests that the reduction is related to the slowing down of the Chinese economy. It highlighted that the start of China’s peak construction season is usually in September and October, but there has not been a resurgence in iron ore pricing due to a downturn in housing, as well as COVID-19 lockdowns.
Timber saw cost escalation, coming out of the COVID-19 pandemic in 2021, following strong demand. Overall timber pricing has been reducing from the highs seen, but the picture is complex as different timbers encounter different rates of change.
Research from Timber Development UK, published in July, said there is a mixed picture on costs although currently “relative calm” after the steep rises in 2021. It highlighted that economic uncertainty and a decline in consumer confidence due to the rising cost of living would likely impact house purchases and building.
Many price increases were seen in materials and products that are energy-intensive to produce.
Energy prices increased following Russia’s invasion, but prices were stabilising at a higher level.
On 27 July, Gazprom reduced gas supplies through Nord Stream 1 to 20% of capacity, leading to renewed price increases for natural gas. Supplies through the pipeline were stopped altogether at the end of August, which caused price increases for natural gas once again.
News that the EU hit its gas storage target ahead of its deadline led to natural gas prices reducing. However, energy-intensive materials have seen price increases.
British Steel announced a £100/t price increase in August due to the surge in energy prices and significant impact on steel-making costs. A further £150/t was announced on 6 September with immediate effect “due to extreme energy prices and the direct impact on steelmaking costs”.
While there was previously talk of further steel price reductions amongst European steelmakers, this now seems unlikely as energy costs remain elevated. Some are already limiting production to align with forecast demand reductions and mitigate increased production costs.
There are also reports of production shifting to night time when there is a lower demand for energy although this impacts output and may lead to reduced availability.
ArcelorMittal has suspended production at one of its Polish operations. A blast furnace was also paused at US Steel Kosice in Slovakia.
Overall, it is generally recognised that European steel mills cannot reduce prices further due to rising energy costs if they continue selling at above production costs.
High energy costs are also likely to impact production more widely. For example, there have been warnings that European plants producing glass are anticipating reduced output due to uneconomic energy costs. Price increase notifications for bricks and landscaping products, such as paving, have been received.
Due to high energy costs, the closure of two large smelters in Slovakia (aluminium) and the Netherlands (zinc) were announced in August. These closures have ramifications for the wider European economy, particularly as it seeks less reliance on imports in strategic sectors including steel, defence and aerospace.
One tonne of aluminium takes about 14,000 kW hours to produce — enough to supply electricity to the average UK home for almost five years, thus demonstrating the impact of high energy prices.
It is expensive and timely to reopen a smelter; production halts will likely be permanent.
Pricing is a balancing act between reduced production and depressed demand due to the threat of recession and COVID-19 lockdowns in China, along with increased costs.
The Construction Leadership Council highlighted that softening demand has slightly moderated product price inflation although fears remain over energy cost inflation for manufacturers who have already hedged energy costs.
Greatest concerns are for energy-intensive products such as bricks, blocks, steel, cement and ceramics.
As well as cost escalation, there have been issues with the availability and delivery of materials and products.
Nearly 50% of survey respondents feel that the situation is improving. Generally, respondents felt that the situation was essentially unchanged — there are still extended lead-in times and some availability issues but problems are better established, with workarounds being found.
The Construction Product Availability statement from the Construction Leadership Council on 17 October said, “As we move into the fourth quarter of 2022, all regions are reporting the best product availability in two years, both in the range and volume of products available and delivery/lead times.”
However, the restricted supply of semi-conductors continues to have an impact. With rising interest in products related to energy saving and renewable energy production, storage and heating, there are further concerns over availability and price escalation.
Collaboration in the form of early engagement with suppliers and early orders is still recommended.
