UK Construction Market Report 1Q 2023
Russia-Ukraine war
Impact on commodities
Russia’s invasion of Ukraine has caused a massive humanitarian crisis.
Major supply disruptions and significant price escalation were also seen for commodities.
Metals
China’s forecast economic recovery increasing demand
Towards the end of 2022, there were reductions in metals pricing due to concerns of a global recession and lockdown policies in China cooling demand.
In 2022, China’s economy slowed due to its zero-COVID approach. Official data records gross domestic product (GDP) as 3%, significantly behind the 5.5% target and 8.1% growth recorded in 2021. Recovery is likely to be fuelled by the relaxation of COVID-19 policies in 2023, although there are some notes of caution that further outbreaks could hamper progress.
China’s real estate sector has also faced significant challenges because of interventions made in 2020 to constrain rampant borrowing and speculation. These measures led to reduced real estate sales and many developers facing difficulty.
However, revival across the sector is expected. In November 2022, Reuters reported that a minimum of $162 billion of new credit was pledged to property developers by China’s largest commercial banks, rallying property shares.
Forecasts indicate that China will invest heavily in infrastructure to meet its growth ambitions. The revival of its economy will also draw on resources.
Metals key to achieving climate targets
Due to the transition to net zero carbon, significant demand is forecast for metals such as copper, zinc and aluminium, as well as minerals, as these are crucial in producing renewable energy and electric vehicles.
For example, The International Energy Agency (IEA)’s ‘The Role of Critical Minerals in Clean Energy Transitions’ report, published in 2021, found “high relative importance” for copper for the following clean energy technologies: solar photovoltaic, wind, bioenergy, electricity networks, electric vehicles (EVs) and battery storage. Nickel was identified as very important for geothermal technology, hydrogen production and for EVs and battery storage.
Significant investments are planned worldwide for clean energy transition: the European Union (EU) announced the REPowerEU plan in 2022 to reduce dependence on Russian fossil fuels and accelerate the shift to green technologies, targeting 1,236GW of energy generation capacity by 2030, with 320GW of solar photovoltaics installed by 2025 (double existing levels) and over 600GW by 2030.
Supply threats
Political unrest in Peru has impacted copper production, with its third-largest mine, Las Bambas, not dispatching copper concentrate since 3 January due to security concerns and Glencore’s Antapaccay mine also facing restrictions. Together, the mines account for 2% of global stock.
There is a balancing act of timing between supply and demand.
Food
Food prices have remained stable following the extension of the Russia-Ukraine grain deal.
The landmark agreement between the United Nations (UN), Russia and Ukraine was first signed in Istanbul in July 2022 to resume grain exports from three Ukrainian ports, which paused after the start of the Russia-Ukraine war.
A four-month deal extension was agreed upon in November 2022, which Volodymyr Zelenskyy, the Ukrainian President, called a “key decision in the global fight against the food crisis.” The move prevented a price shock, although threats such as drought and weakening currencies continue to cause concern.
Antonio Guterres, UN Secretary General, said that the UN was "fully committed to removing the remaining obstacles to exporting food and fertilisers from (Russia)" — Russia has said this is critical for further deal renewals.
Energy
Brent crude oil prices also decreased in the latter part of 2022 due to fears of a global downturn.
However, forecasters are predicting higher prices to come in 2023. Reuters reported a seven-week high on 23 January thanks to a stronger outlook for top oil importer China.
The EU’s move to ban sea-borne crude oil imports from Russia and the insurance and financing of the transport of Russian oil, along with the imposed price cap, is also impacting the market. There will be further implications when restrictions for other refined petroleum products are implemented from 5 February 2023.
Some traders are concerned that as diesel supplies are already tight, higher demand from China could cause price spikes, renewing inflationary pressure. Others highlighted that replacement sources would come from further afield, meaning European buyers would compete with physically closer ones.
Others are more optimistic, believing the oil market is now used to quickly adapting to events following the pandemic and the Russia-Ukraine war. These analysts expect the measures will impact Russia as intended, with discounting seen for refined Russian fuels as per crude oil.
The Centre for Research on Energy and Clean Air estimates that the EU crude oil ban and price cap are costing Russia an estimated €160 million a day. The measures implemented in February will contribute a further reduction of €120 million a day.
Further escalation in natural gas pricing was seen in the summer as Russia constrained and eventually stopped supply through the Nord Stream 1 pipeline. EU countries were also racing to fill gas storage before the winter heating season, targeting reserves to be 80% full by 1 November 2022. Achieving this aim early allowed the target to be extended to a minimum level of 90% full by the agreed date. Ultimately, storage reached 95% full, surpassing the goal.
Higher energy bills led to reduced use and milder weather, which broke temperature records across Europe, also helped the position. European gas storage levels were recorded at 83.5% on 1 January 2023. As a result, gas pricing has lowered from the highs seen in summer 2022.
Reporting from the World Economic Forum, with analysis from the IEA, indicates that whilst ‘immense progress’ was made in 2022 to reduce reliance on Russian gas supplies and to ensure sufficient storage, threats remain across three areas:
- 60 billion cubic metres of Russian natural gas was delivered to the EU in 2022, despite the supply disruption. Levels are likely to reduce further in 2023
- With China’s economy opening up, following the easing of COVID-19 restrictions, competition for liquified natural gas may increase
- The mild weather which has benefitted the position may not continue.
Gas prices remain elevated compared to before the conflict, but the current position appears more stable.
Energy price guarantee
The initial plan was for the energy price guarantee to cap prices at £2,500 for an average household for two years, this was subsequently scaled back to end on 31 March.
The Autumn Statement saw the energy price guarantee raised to an average of £3,000, which will last for 12 months, with additional support for those who are vulnerable or those using liquefied petroleum gas (LPG) or heating oil.
Although prices have fallen, they remain elevated when compared to pre-invasion levels. For instance, looking at the domestic energy cap, energy consultancy, Cornwall Insight, has predicted that typical annual household energy bills will have fallen from £4,279 now to £3,208 by April, then will ease to roughly £2,200 for the remainder of the year. This is £300 a year lower than previously indicated, however, the energy price cap before gas prices started to escalate was £1,138.
For non-domestic customers, the Energy Bills Discount Scheme will replace the existing assistance from April 2023. The government outlined that eligible consumers will receive a per-unit discount for 12 months, with the saving calculated as the difference between the wholesale price associated with an energy contract and the price threshold. The reduction will phase in when the contract’s wholesale price exceeds the floor price.
For energy-intensive users, a higher level of support is available, subject to a maximum discount applicable to 70% of energy volumes.
The new scheme is less generous than the current one, although the government says it will strike a balance between supporting businesses and limiting taxpayer’s exposure to volatile energy markets.
However, some businesses fear for their survival. An example from This is Money says, “Under the current scheme, a pub could receive up to £3,100 a month in support, depending on energy use. Under the new scheme, they will get just £190 a month, according to Treasury estimates.”
