UK Construction Market Report 2Q 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
Metals
Copper pricing rose significantly in the aftermath of Russia’s invasion of Ukraine. However, concerns of global economic weakening reducing demand, as well as lower resource use from China from its lockdowns in response to its zero-COVID-19 policy, saw significant reductions in the middle part of 2022.
Towards the end of the year, there was an uptick in pricing and the beginning of 2023 saw a marked rise. Expectations are that copper pricing will remain elevated during the year and reach a new high as demand increases and supply constraints bite.
Copper will play a vital role in the transition to net zero carbon as renewable power generation requires large quantities to distribute electricity from wind and solar farms to its place of use. It is also needed to produce electric vehicles (EVs) and battery storage.
The Financial Times recently reported that global metal inventories have dropped to their lowest seasonal level since 2008. With the Chinese economy continuing to rally, this leaves little buffer.
Goldman Sachs forecasts that the world will run out of visible copper inventories by the third quarter of 2023 if demand in China continues at the pace seen in February, when Chinese copper demand was up 13% year-on-year.
Whilst other metals such as aluminium, zinc and nickel have not seen the same level of increase as copper at the beginning of 2023 due to broader financial weakness affecting demand, several commentators and traders have said that the prices of commodities are failing to sufficiently reflect market expectations of supply deficits.
The International Energy Agency (IEA)’s ‘The Role of Critical Minerals in Clean Energy Transitions’ report, published in 2021, found “high relative importance” and “moderate relative importance” for these metals for the following clean energy technologies:
Aluminium
- High relative importance:
Solar photovoltaic, concentrated solar power, electricity networks, EVs and battery storage
- Moderate relative importance:
Wind, hydro, bioenergy and hydrogen.
Zinc
- High relative importance:
Wind
- Moderate relative importance:
Hydro, concentrated solar power and bioenergy.
Nickel
- High relative importance:
Geothermal
- Moderate relative importance:
Wind, concentrated solar power and nuclear.
With significant investments planned worldwide for clean energy transition, the demand for metals will likely grow significantly over the course of the decade.
The European Union (EU) accelerated and increased some of its targets in 2022, spurred by the need to reduce its dependence on Russian fossil fuels. It targets 1,236GW of renewable energy generation capacity by 2030.
Massive investment is planned in the US through the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022:
- The IIJA is a major infrastructure plan with $550 billion of new spending to improve the country's roads, bridges, airports and other critical infrastructure systems over five years
- As well as changes related to tax and healthcare, the IRA makes the single largest investment in climate and energy in American history, with a $369 billion investment in modernising the American energy system. The spending intends to lower energy costs and increase cleaner energy production
- The CHIPS and Science Act provides $52.7 billion for American semiconductor research, development, manufacturing and workforce development, with a large pipeline of advanced manufacturing projects.
Many economies are investing in infrastructure and energy projects to support the transition to net zero carbon, improve energy security and affordability, in addition to promoting economic growth.
Food
Although food prices have reduced following the extension of the Russia-Ukraine grain deal, prices remain volatile.
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, with this further extended in March 2023. However, it was unclear how long the March lengthening would last, with Ukraine pushing for 120 days and Russia saying it would last for 60 days.
On 13 April, Russia said there would not be a further extension of the deal beyond 18 May. Russia is looking for the softening of Western sanctions to allow its producers to export food and fertiliser. Although not specifically targeted, Russia says restrictions on payments, insurance and shipping limits its exports.
Energy
Brent crude oil pricing decreased at the end of 2022 and started 2023 steadily. However, in early April, the Organisation of the Petroleum Exporting Countries (OPEC), excluding Russia, unexpectedly announced a cut in oil production by nearly 1.2 million barrels a day.
Whilst increased production elsewhere will partially offset the decrease in output, the IEA forecasts a 400,000-barrel gap between supply and demand this quarter in its April 2023 Oil Market Report.
The initial days following the announcement saw a rise of approximately $5 per barrel. Goldman Sachs Research increased its forecast for Brent crude oil to $95 per barrel by the end of 2023, up from $90.
There is concern that energy prices could rise, impacting global inflation just as it showed signs of moderation.
Natural gas prices have continued to decline further. Europe ended its heating season with a record volume of gas in storage. Gas Infrastructure Europe data shows that stocks in the EU and UK amounted to 632 terawatt-hours (TWh) on 31 March — 350 TWh, or 80%, above the seasonal average for the previous 10 years.
Demand has decreased thanks to many factors, including additional wind and solar power capacity, high prices reducing usage in industrial sectors and increasing building efficiency via retrofits and replacing gas boilers with heat pumps.
A milder-than-average winter has also helped, along with reduced demand for liquified natural gas (LNG) from China due to lockdown restrictions.
However, the market is showing some nervousness regarding next winter’s European gas supply. Bloomberg analysis reveals that while near-time contracts fluctuated, December futures gained 9% in the first half of April.
There is an awareness that LNG usage is likely to rise in Asia — especially China, due to the reopening of its economy — which will increase competition for supplies and likely elevate costs for spot cargoes.
The weather may be less favourable next winter and there is also concern about the impact a dry summer would have on alternative energy production methods.
Energy price guarantee and energy price cap
The energy price guarantee protected households from surging energy prices, limiting electricity and gas bills for a typical household to approximately £2,500 per year. The limit was due to increase to £3,000 a year from April, but the government announced that it would remain at the current level for a further three months.
The guarantee is scheduled to remain in place until April 2024, when the energy price cap will return. Set every three months by Ofgem, it confirms the maximum price suppliers can charge households per unit of energy on a standard tariff.
With the recent reduction in energy prices, Cornwall Insight analysis forecasts that the energy price cap will fall to £2,024.58 for 3Q 2023. This would be below the energy price guarantee level and household bills would revert to the price cap level.
Although the energy price cap is likely to significantly reduce from the highs seen in the past year, pricing remains elevated — in October 2021, the energy price cap was £1,277.
Until the end of March, the government’s energy bill relief scheme limited energy bills for businesses. Firms now get a discount on wholesale prices rather than capped costs. Energy-intensive sectors like glass, ceramics and steel receive larger discounts.
