Summer 2022 UK Market Report
Russia-Ukraine war
Impact on commodities
Aside from the massive humanitarian crisis caused by Russian’s invasion of Ukraine, other far-reaching effects include major supply chain disruption and significant price escalation.
Following spikes in commodities pricing in response to the Russia-Ukraine war, fears of a global recession have pushed down some values whilst stabilising others.
Metals
Notable reductions in pricing include copper and aluminium.
Copper prices fell to a 16-month low in June, reflecting concerns that demand will reduce because of central banks increasing interest rates as well as lockdown policies in China.
Aluminium prices also significantly fell, along with zinc and nickel.
There is greater stock availability than anticipated, thanks to tempered Chinese demand and higher-than-expected Russian supply.
Analysts at Morgan Stanley said that “after two years of excess profits underpinned by supply shocks and buoyant demand, we argue that the industry’s returns are bound to normalise.”
The impact of soaring energy prices on production may counter the reduction in demand.
US producer Century Aluminium, which produces 200,000 tonnes per year, announced that it would idle its Kentucky smelter and pause operations for 9–12 months when it hopes that energy prices will have moderated. The company says that the unprecedented rise in global energy prices arising from the Russian war in Ukraine has more than tripled the power cost of running the facility over a short period.
Other production cuts anticipated in Europe could lead to a rally in prices.
Food
Food price indices began stabilising thanks to the seasonal availability of new harvests in the northern hemisphere, improved crop conditions in some major producers, including Canada, and reduced import demand.
Although prices have steadied, there was great concern about a looming global food crisis as grain exports from Ukraine were blocked.
A landmark deal was reached between Russia and Ukraine on 22 July to release 20 million tonnes of grain stuck in Ukraine’s ports under the mediation of the United Nations (UN) and Turkey. It is valid for 120 days unless extended.
Antonio Guterres, UN secretary-general, said that the agreement was a “beacon of hope on the Black Sea” and would help to “bridge the global food supply gap and reduce the pressure on food prices”.
The International Committee of the Red Cross described the pact as “nothing short of life-saving for people across the world to feed their families”.
There was caution about implementing the agreement and barely 12 hours after the mirror agreement was signed, Russia targeted Ukraine’s main port of Odesa, through which the grain shipments would be made, with cruise missile strikes.
The UN “unequivocally condemns” the strikes, stating that the grain is “desperately needed to address the global food crisis and ease the suffering of millions of people in need around the globe” and that “full implementation by the Russian Federation, Ukraine and Turkey is imperative".
Energy
Like other commodities, energy prices have stabilised, albeit higher than before the conflict and with warnings of further increases.
A further significant increase to the price cap is expected, effective from October. Analysts at Cornwall Insights estimate the price cap to reach £3,244 a year before climbing again to £3,363 in January 2023.
The prediction is £400 worse than was forecast by regulators in May and means that bills will have climbed by more than 150% over 12 months.
The EU relies on Russia for approximately 40% of its natural gas, with some states more reliant than others.
An EU regulation has passed requiring member states to fill at least 80% of their storage capacity by 1 November 2022. As of 20 July, underground gas storage facilities were approximately 65.2% full, according to data from Gas Infrastructure Europe.
Meeting the 80% target is challenging, with Russian gas deliveries reducing.
On 20 July, the European Commission (EC) urged member states to cut gas usage by 15% until March as part of the "Save Gas for a Safe Winter" plan so that the continent is ready if Russia cuts off or further reduces supplies. The aim is to safeguard supplies to homes and essential settings such as hospitals.
National energy plans must be submitted to the EC by the end of September and updated every two months. Countries requesting support with gas supplies will need to demonstrate the measures taken to reduce domestic demand.
The legislation is proposed to be voluntary but would grant the EC the power to declare an alert on the security of supply and impose a mandatory gas demand reduction. Agreement was reached on 26 July after concessions were agreed for island nations and those little connected to the European gas network.
Gas shipments were resumed through the Nord Stream 1 pipeline on 21 July, after closure for ten days for scheduled maintenance.
Before the maintenance, flows had reduced to 40% of capacity and supply had stopped to several European countries and energy companies after they refused to defy European sanctions and pay for gas in rubles.
Gazprom, the Russian state-controlled energy company announced it is halting operation of a turbine due to the “technical condition of the engine”. Daily gas deliveries through the Nord Stream pipeline will reduce to about 20% of the pipeline’s capacity from 27 July. The German economy ministry said that “according to our information, there is no technical reason for a reduction in deliveries”. Volodymyr Zelenskiy accused Russia of waging a “gas war”.
Ben van Beurden, CEO of Shell, warned of a "really tough winter in Europe" ahead, with energy prices set to see "significant" rises and the potential for energy rationing.
The UK will not be as severely impacted by supply disruption as the EU, due to less reliance on Russian gas. Still, it won’t be immune as demand for alternative supplies will push up global energy prices.
Switching from gas to other energy sources, prioritising renewables and cleaner energy
Rising cost of living
Surging energy costs and rising prices for motor fuels and food has caused the Consumer Prices Index (CPI) to reach 9.4% in the 12 months to June 2022, up from 9.1% in May, according to data from the Office for National Statistics (ONS).
Modelling from the ONS suggests that “the CPI rate would last have been higher around 1982”.
The Bank of England has raised interest rates by 25 basis points five consecutive times and expects inflation to reach 13% later in the year. Central banks worldwide are sharply raising interest rates in response to soaring inflation.
The European Central Bank made its first interest rate increase in 11 years as CPI in the eurozone hit 8.6% in June, up from 8.1% in May.
CPI is higher still in some eurozone countries: in Greece, it is 12%, Belgium 10.5%, Spain 10% and the Netherlands 9.9%. In the Baltic states of Latvia, Lithuania and Estonia, which border Russia, CPI is 19%, 20.5% and 22%, respectively.
Forecasts point to further inflation in the coming months — German annual producer inflation hit a record peak of 33.6% in May.
The Monetary Policy Committee agreed on a 50 basis point hike in August, the most significant single increase in UK interest rates for nearly 30 years, as it focuses on a return of inflation to its 2% target.
Many factors increasing inflation are global issues, and with wages rising as workers demand money to cope with cost increases, there are fears that the situation will not be short-lived.
The cost of living crisis puts significant pressure on the UK’s consumer-led economy. ONS data shows that the volume of retail sales in June was 5.8% lower than a year earlier.
A Deloitte survey of chief financial officers in the UK shows a 63% probability assigned to a recession within the next year.
Central banks are facing the same dilemma as the Bank of England: between raising interest rates timidly, guaranteeing further inflation or aggressively increasing interest rates which tip the economy into a recession.
The International Monetary Fund (IMF) warns that the outlook for the global economy has “darkened significantly” and the world faces an increasing risk of recession in the next 12 months, with the forecast remaining “extremely uncertain”.
The threat of further natural gas supply reductions could plunge many economies into recession and trigger a global energy crisis. The IMF will downgrade its growth forecasts for global growth for both 2022 and 2023.
Impact on the construction industry
The Russia-Ukraine war is severely impacting the construction industry, pushing up prices, reducing availability of specific materials and disrupting supply chains.
In a trend started during the COVID-19 pandemic, collaboration on projects is increasing to overcome the impact.
Of respondents to our survey, 81% of contractors said they actively recommend and source local materials to overcome supply chain disruption, mirroring a trend seen more widely of increased localisation to respond to defence and security challenges.
It is interesting that the data indicates that architects and other designers are less likely to specify local materials, but when the contractors feed into the design they are very likely to change the specification to help them with delivery.
