UK Construction Market Report 1Q 2024
Global tensions/commodities
Key statistics:
Brent crude oil
price reduction in Brent crude oil since 2023's peak (September).
Going into 2024, the market has been concerned about a looming surplus in the first quarter.
Natural gas
the five-year average fullness of European storage.
Forecasts anticipate Europe will exit the heating season with storage somewhere between 45% to 50% full.
Cost of living
Consumer Price Inflation (CPI) as of December 2023.
A slight increase compared to November and above the Bank of England's 2.0% target.
Metals
Copper
Uncertainty regarding the global economic recovery currently looms over the copper market. London Metal Exchange (LME) copper prices are largely where they were a year ago, as prices have fallen throughout 2023. ING’s commodities outlook for 2024 points out that global monetary tightening has weighed on developed economies.
Short-term demand remains weak due to recession fears, China’s property sector slowdown and weakening global manufacturing activity. The slump in activity has been a significant headwind to copper demand in 2023, with residential building starts down more than 23% over the year, which is a key source of copper consumption.
Prices are expected to be supported due to a weakening US dollar, as well as some tensions and political risks in major copper mining communities in central and south America.
S&P Global Copper Users Purchasing Managers' Index (PMI) latest data for January indicates a challenging picture for the operating conditions at global copper users, albeit the overall purchasing managers index has risen above the neutral position of 50 for the first time since June 2023.
Metrics analysed saw output, new orders, employment levels and purchasing all grow in January, which contributed to the quickest growth eight months for the PMI.
Aluminium
Like copper, global economic uncertainty has weighed on the outlook for aluminium in the previous year and forecasts expect more of the same in 2024. That said, ING believes the growing adoption of electric vehicles and green energy infrastructure will cushion the slowdown of more traditional sectors.
China’s post-pandemic recovery has been slow, while European and US markets remain sluggish. The resultant drop in demand is partly responsible for the LME aluminium price dropping 7% in 2023. Building and construction remain weak compared to the norm in Europe and the US while manufacturing PMIs stagnate globally.
Higher borrowing costs and uncertainty over monetary policy will likely continue to weigh on demand. European demand was hit hardest in 2023 and is ultimately expected to be the primary reason behind weak growth in 2024.
S&P Global Aluminium Users PMI revealed operating conditions at global aluminium users improved for the first time in five months during January. Production levels grew amid solid growth in Asia albeit new orders fell for the seventh consecutive month, indicating further headwinds for global aluminium demand.
Zinc
According to Reuters, although China's giant manufacturing sector has contracted in seven out of the last eight months, its usage of lightweight metals shows little sign of abating. Zinc smelters in the country have been producing record volumes in 2023 because of new capacity and the easier navigation of raw material markets.
In addition to China's own production, imports are also booming. In 2022, 79,000 tonnes of refined zinc were brought into the country, whereas imports in the first 10 months of 2023 were far more than that, at 305,000 tonnes.
China's imports have supported zinc prices, which also rallied toward the end of 2023 due to a devastating fire at a Russian zinc mine. Forecasts indicated the mine to be the single biggest addition to global supply in 2024, diminishing the supply waves witnessed in 2023.
Nickel
With prices dipping by 45% in 2023, nickel was the worst-performing metal on the LME markets last year. ING pinpointed the weak macro picture and a sustained surplus as the cause, which it expects will continue to be the case in the near term.
Reuters notes the dip in nickel prices amid other metals churning sideways over the year's second half. Whilst it is not an issue of usage, it is undoubtedly one of supply surplus. Its application in electric vehicle batteries has increased its use; however, Indonesia's production has surged.
The US Department of Energy has labelled nickel as a critical material in the global electrification push. Due to this continued confidence in the requirement for nickel, despite the dip, prices remain elevated above the average prices seen before the LME nickel short squeeze, which followed the Russian invasion of Ukraine.
Food
The Russian invasion of Ukraine continues to weigh heavily on food markets; however, December export figures have provided some positivity.
Reuters reports that before the invasion, 6 million tonnes of food were exported via the Black Sea. 4.8 million tonnes were exported in December, which surpassed the maximum monthly volume exported under a previous grain deal brokered by the UN.
ING’s Commodity Outlook for 2024 looks back on last year as a period when grain prices came under significant pressure. They expect corn prices to weaken due to the supply surplus, which has seen key producers offsetting concerns over Ukrainian supply. Lower corn prices will likely increase demand, leading to an expected global rebound.
The Office for National Statistic’s (ONS) most recent data indicates food price inflation has fallen to its lowest level since April 2022. Food and non-alcoholic beverages inflation is at 8%, which signifies prices continue to rise, albeit not with the sharp rises seen over 2022 and 2023. Statistics show almost four in 10 adults in Great Britain say they spent more than usual to get what they usually buy when food shopping between the 17 and 28 January 2024.
Energy
Brent crude oil
Oil prices dropped over the last quarter of 2023. Going into 2024, the market has been concerned about a looming surplus in the first quarter. ING reports that it is anticipated that the first half of 2024 will see some balance before moving into a deficit in the second half of the year.
The main risks remain the tensions in the Middle East and OPEC+ predicted supply cuts. The group of producers, particularly Saudi Arabia, is keen to support prices and has adapted supply in the past year, and its approach will likely remain the same in 2024. With US supply growth slowing, OPEC+ members can continue with cuts with minimal risk to their market share.
ING also considers that the bulk of supply risk in 2024 will be from the potential for sanctions on oil-producing countries. The events in Israel and Gaza may cause the US to begin enforcing sanctions already imposed on Iran, something which has been largely ignored by Iran and not punished by the US due to supply concerns since Russia’s invasion of Ukraine.
Reuters notes that oil demand is an ongoing concern exacerbated by Europe’s weak economic outlook. The European Central Bank Vice President has said that prospects will remain weak while the eurozone remains in recession.
Gas
January saw a cold snap sweep the UK; however, after gains in the first weeks of the new year, investors are coming to terms with the fact that gas supplies remain abundant.
Trading Economics notes that despite plummeting temperatures, ample pipeline gas and liquefied natural gas (LNG) compensate for the high demand with no concerns of any shortage throughout the heating season.
ING reports a similar story for the wider European storage levels. The winter cold spells are drawing on supplies, but this has been at a relatively slow pace. The confidence in levels results in a flatter front end of the futures curve.
The overall balance sheet suggests Europe will exit the heating season with storage somewhere between 45% to 50% full. Although expected to be below last year — which exited with 56% capacity — it is well above the five-year average of 34%.
Reuters has highlighted that US gas production hit record highs in October 2023 but has since decelerated progressively. Similarly to oil, gas production responded to the fall in prices seen since 2022 and Europe’s reorientation from reliance on Russian supplies. The issue with this is that the gas market has no OPEC+ equivalent to balance out adjustments in production and prices.
Energy price guarantee and energy price cap
The higher-than-expected gas reserves in Europe could create positive news for households and businesses in the UK. Energy market researcher Cornwall Insight has cut its short-term power market price forecast by 12%.
Average costs for 2024 are now predicted to be £113 per MWh, which is a £16 drop from the last quarterly forecast. Despite the fall, it is still some distance from the historic average of £50 per MWh. The sanctions imposed on imports from Russia and Europe’s dependence on LNG’s have been cited as key factors.
The medium-term expectations show that higher-cost fossil fuel technologies moving towards more affordable renewables will see power prices trend downwards. However, due to the growing demand for electrification of the economy and increased exports to Europe, prices are expected to stay above pre-2021 levels until the end of the decade.
A separate insight from the same market researcher anticipates the price cap to fall 14% in April 2024. As a result, a typical dual fuel consumer can expect to pay £1,660 per annum, down from January forecasts of £1,928 per annum.
Rising cost of living
The latest ONS figures released for December 2023 show that consumer price inflation rose to 4.0%, albeit up only from 3.9% in November. Alcohol and tobacco contributed the largest upward contribution to the monthly change in annual rates, while food and non-alcoholic beverages contributed the most significant downward trend.
Despite the fractional increase in inflation, it is the first increase since February 2023. The Bank of England's target rate for inflation is 2%, which indicates prices are rising doubly as quickly as they should.
In the mortgage market, BBC News reported that competition has intensified among lenders, relieving some facing higher bills. Two of the UK market's largest lenders, Barclays and Santander, have announced significant cuts. Despite this respite, the impact of high mortgage rates is still being felt and will likely bring down house prices in 2024.
In the short term, predictions indicate cuts to the Bank of England's interest rates, even as the Guardian reports that UK wages are still rising. The Bank of England finds itself in a confusing situation; however, policymakers believe the employment outlook is weak enough to bring down interest rates without adversely impacting inflation.
The UK's inflation rates remain well above those of other major economies. According to Eurostat data, December saw annual inflation at 2.9% in the Euro area. In the US, the US Bureau of Labor Statistics recorded CPI for all items at 3.4% year over year.
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