UK Construction Market Report 2Q 2024
Global tensions/commodities
Key statistics:
Brent crude oil
price increase between December 2023 and March 2024 (World Bank data).
Natural gas
price reduction between December 2023 and March 2024 (World Bank data).
Cost of living
Consumer Price Inflation (CPI) as of March 2024.
Metals
Copper
In our previous quarterly report, we noted the short-term copper demand fears due to the slump of China’s property sector and that prices could increase amid tensions and political risks in major copper mining communities.
An article from ING indicates that copper has been trading at its highest level since the middle of 2022. The primary catalyst for the price rally has been the unexpected tightening of supply. One mine in Panama alone has removed around four million tonnes from the world’s annual supply.
Simultaneously, China’s property market continues to be in a period of slower activity and has been a major headwind for demand. It is anticipated prices will rise in the second quarter before peaking in the fourth quarter, remaining volatile thereafter.
The longer-term picture anticipates ongoing demand from traditional sectors like property and construction. The green energy sector continues to expand and presents opportunities. With copper being a crucial component in everything from electric vehicles (EVs) to wind turbines and power grids, and with very limited alternatives, demand and prices will grow.
Aluminium
In the previous iteration of our quarterly report, we commented on the uncertainty in the aluminium market, which was expected to continue into 2024. Manufacturing PMIs were stagnating on a global scale and weak building and construction markets in the US and Europe reduced demand.
A report from Reuters now indicates that a number of metals — gold, silver, copper, zinc and aluminium — have begun the quarter with a surge in prices thanks to signs that global manufacturing activity has reached its lowest point. Investors are particularly optimistic about European activity, with a notable revival in German construction, for instance, which will boost prices.
Despite a challenging start to the year, ING reports that investors are maintaining a bullish outlook for aluminium prospects. This prediction is mainly due to the resilience of production in China, which is rising at a rate of 4.2% year-on-year as smelters in Yunnan province have resumed activity.
Zinc
Last time out, our quarterly report focused on a strong-performing zinc market due to China’s use of the lightweight metal within its EV production industry. China was also importing zinc in vast amounts. These factors have been supporting zinc prices.
Continuing the trend from early 2024, a tightening supply chain continues to strengthen pricing. Another example of increasing prices is the recent news that benchmark zinc smelter treatment charges have fallen sharply.
The charges cover prices paid by Canadian miner Teck Resources to Korea Zinc for them to convert its zinc concentrate into refined metal. Reuters reports that the annual terms negotiated by the two companies have, in recent years, been the benchmark for the rest of the industry. The treatment charges rise during times of material surplus and slide during periods of shortfall.
Nickel
Our 1Q 2024 report highlighted that nickel was the worst-performing metal on the London Metal Exchange (LME) in 2023. Despite its criticality in the global electrification push, a production surge from Indonesia resulted in a surplus and a subsequent price drop.
The current picture shows that although nickel prices took a momentary pause from the long-term downward trend in early March, they returned to the downside and ended with a 5.56% month-on-month fall (Oil Price).
Prices had been supported recently amid speculation that the US government could impose sanctions on nickel from Russia, triggering a short-covering rally. However, as ING reports, Russian nickel escaped sanctions from the US Government.
Indonesia’s continued dominance of the nickel market and supply boom is forcing several mines in other countries to close. An over-reliance on the Indonesian product presents supply and pricing risks as they can exert more influence on buyers.
Food
In the 1Q 2024 update, Russia's invasion of Ukraine had weighed heavily on the food markets. Corn prices had lowered, leading to expectations of increased demand. In the UK specifically, food price inflation had fallen to its lowest level since April 2022, albeit with prices still rising.
The current state of play shows that food inflation continues on a downward trend. ONS data indicates inflation rates for food and non-alcoholic beverages was 5% in February 2024, followed by 4% in March 2024. This decline is consistent with an update from the Organisation for Economic Co-operation and Development, which has food inflation at its lowest level in 15 months after peaking at 16.2% in November 2022.
Despite this encouraging news for consumers, at supply level, the impacts of climate change are now having severe consequences on crop yields. Wet weather in northern Europe has caused widespread shortages, causing the price of potatoes, carrots, parsnips and cereal crops to go up, while British farmers have reported increased fatality rates for lambs due to high rainfall.
ING noted that crop shortfalls not only mean that the global market will see its third consecutive deficit, but the 2023/24 season will see the largest deficit in more than half a century.
Energy
Brent crude oil
Our last report covered the concern over a surplus in the first quarter of 2024, which would move into a deficit in the year's second half. Risks remained around supply prices due to OPEC+ countries imposing cuts and a slowdown of growth in US supply. We also noted the US's lesser imposed sanctions on Iran due to supply shortages and pondered whether we would see these applied more as a consequence of involvement in the conflict between Israel and Gaza.
Recent reports from ING suggest that the sentiment in the oil markets remains subdued, with various oil types trading flat on 10 April 2024.
The US Energy Information Administration (EIA)'s short-term energy outlook foresees a small global oil supply deficit for 2024. The US could see a record year for production volumes from a demand perspective.
On 19 April 2024, oil prices experienced a surge, primarily due to unverified reports of explosions in Iran. ING's article explains that as concerns of further escalations mount, so does the apprehension that we might be edging closer to a scenario where oil supply risks translate into actual supply disruptions.
As noted previously, geopolitical risks have boosted oil prices, but this comes at a time when the market was already likely to tighten. The deficit could now be at risk of growing as several OPEC+ member countries announced they were rolling over their supply cuts into this year to support prices (Reuters).
Gas
Gas storage levels were reported as remaining abundant in our 1Q 2024 report despite a cold snap sweeping the UK. Expectations at that time predicted Europe would exit the heating season with 45% to 50% capacity.
The steady picture for gas prices continues to paint an optimistic outlook. ING's report confirms that Europe exited the 2023/24 heating season with record natural gas storage at 58% capacity, a significant increase from the 41% five-year average and 56% last year. The milder weather in February and March has also contributed to a less-than-expected drawdown in storage.
Higher demand in winter months did little to cause any major concern, especially given the lack of any significant disruption in pipeline gas flows into Europe. Norwegian gas flows overcame some unplanned outages to deliver more gas in the first quarter of the year compared with the same period from the previous year.
Disruptions to remaining Russian pipelines remain a risk. With the current Gazprom deal set to expire at the end of the year, Ukraine has no intentions of extending it, which puts around 50% of the remaining Russian supply flows at risk. That said, ING expects any potential losses to be manageable for Europe.
Energy price guarantee and energy price cap
Medium-term expectations in our previous quarterly report noted that higher-cost fossil fuel technologies moving towards more affordable renewables would see power prices trend downwards. It also cited a prediction that the price cap would fall 14% in April 2024.
The new Ofgem energy price cap level for April to June 2024 started from 1 April 2024. This saw the energy price cap reduce from £1,928 to £1,690 per year, which represents a reduction of around 12%.
Now that the energy price guarantee and energy bill relief scheme for businesses has ended, reflecting upon the government's intervention highlights that the status quo is unsustainable, as energy market researchers Cornwall Insight put it. The caps were a reactionary measure taken by the government to protect consumers.
Due to the time the government had to react, the support was very widely spread and cost the national budget dearly. Now that it is concluding, a risk has arisen as there is no apparent replacement for vulnerable customers who would have affordability issues should another crisis occur.
With a Westminster election on the horizon, eyes will be on the party manifestos and policies to see if plans exist to protect those most in need.
Rising cost of living
At the end of 2023, consumer price inflation was at 4.0%. Our previous market report noted this, as well as movements in the mortgage market. Some of the largest lenders had announced cuts, although rates remain high and are predicted to lower house prices this year.
The latest ONS figures released for March 2024 show that consumer price inflation was down to 3.2%, a modest decrease from February when it sat at 3.4%.
The largest upward contribution to the monthly change in annual rates came from motor fuel prices, while the most significant downward trend came from food metrics.
Consumer price inflation has fallen sharply in the year. In March 2023, it sat at 10.1%; however, the rate of the fall has slowed in the last six months. Although the reduction in inflation has its positives, it remains almost double the Bank of England's 2% target rate for inflation.
In the mortgage market, Nationwide notes that activity as of March 2024 has picked up from weak levels toward the end of 2023, albeit the number of mortgage approvals is still 15% below pre-pandemic levels. Similarly, mortgage rates have retracted from the peak in mid-2023 but remain well above the low rates that prevailed in the wake of the COVID-19 pandemic.
In comparison, the UK's inflation rates remain above the Euro area. March saw annual inflation at 2.4%, according to Eurostat data. The UK is at similar levels to the US, as the US Bureau of Labor Statistics recorded CPI for all items at 3.5% year-on-year.
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