UK Construction Market Report 3Q 2023
Russia-Ukraine war/commodities
Impact on commodities
Russia’s invasion of Ukraine has caused a massive humanitarian crisis.
Major supply disruption and significant price escalation were also seen for commodities.
Metals
Copper
Copper pricing hit a three-month high in July, as reported by MINING.com, as supply risks escalate in Chile and there is greater optimism that demand in China is increasing.
Despite weaker-than-expected July commodities data, as the top metals consumer there is an increased need for supplies to drive a reduction in Chinese government debt. Anticipation that more support policies will be announced to increase the adoption of electric vehicles (EV) is also proving to be a major emerging driver in copper demand.
MINING.com also went on to report that the signs of aggressive rate hikes in the US coming to an end have boosted sentiment across the markets.
With demand appearing to be on the rise, the focus will turn to supply. A “notably weak performance” in the last quarter by Chilean mining giant Codelco caused them to lower annual production guidance and raise cost estimates.
Reuters recounted that Goldman Sachs has noted that around two-thirds of the increase in global copper demand in 2022 was attributed to EV production. However, as these types of vehicles develop, copper usage could fall. Estimates suggest the amount of copper used per vehicle could fall to 65kg per unit by 2030, down from 73kg currently.
Aluminium
The International Energy Agency (IEA) notes that clean energy transitions drive the increased demand for aluminium. With global investment in clean energy on course to reach 1.7 trillion USD this year, an unambiguous uptick in demand for aluminium, among other metals, can be expected.
The prospect of rising metal supplies from China continues to counterbalance higher aluminium prices. As noted by Fastmarkets, China's aluminium production increased by 3.4% during the first six months of 2023 compared to the previous six-month period.
Trading Economics explains that the easing of power curbs in the Yunnan region has increased the activity of aluminium production. In the first half of the year, imports rose by 10.7%, perhaps due to the curtailing of power usage in that period.
Zinc
Zinc prices have been subject to much fluctuation of late.
In 2022, there was strong demand from Western countries for China’s supplies, which at the time was a first.
Investing News informs that the closure of Europe’s largest zinc mine is one of several macroeconomic factors causing volatility in this commodity market.
Due to stimulus measures from their government, Chinese demand is expected to recover partially in the coming months; however, any intervention will likely stabilise the market rather than encourage growth.
Nickel
Fastmarkets has reported higher nickel prices in the medium-to-long term following low prices during the summer months.
There does, however, remain concern that demand for nickel may not benefit from the growing demand for Li-ion batteries like other metals will, as China are opting for a nickel-free lithium iron phosphate battery.
Food
Food prices have generally been reducing throughout 2023. However, Reuters reports that global wheat prices are spiking again due to Russia’s targeting of Ukraine’s ports and grain infrastructure and its decision to abandon the fragile Black Sea grain deal.
There have recently been calls from Pope Francis, amongst other religious leaders, for Russia to reinstate the deal and let the grain move freely once more to prevent hunger in poorer countries. Moscow defended its decision, putting it down to their demands to ease sanctions on its grain and fertiliser not being met.
The debate around global warming has also intensified due to the record temperatures witnessed in southern Europe in July. Financial Times has warned we could see impacts on food production within a decade and reports that maize production could drop by 24% by the end of the century. There is also the danger that grains may be less nutritious than they used to be because of limits on soil nutrient-carrying capacity.
Energy
Crude oils have had a good run of late. As reported by Investing.com, both benchmarks, US Crude and Brent, traded 10% higher over the course of July. Sentiment soon stabilised following data from the US Energy Information Association (EIA) recording the largest drop in stock since 1982, when records began.
Global supplies remain in somewhat of a delicate state and an upcoming Organisation of Petroleum Exporting Countries (OPEC) meeting is expected to focus on supply cuts. Investing.com, referring to Saudi Arabia as “the de facto leader of the cartel”, reports that the one million barrel per day supply cut will likely extend into December.
Due to these concerns, Trading Economics highlights expectations of trading at 87.25 USD/bbl by the end of the quarter and 94.78 USD/bbl in a year's time.
Volatility has returned to European natural gas pricing. In June, the Wagner Group rebellion in Russia and maintenance on large gas fields stoked fears of supply interruptions. Despite July’s heatwave driving the use of natural gas-intensive cooling equipment, pricing slumped from June levels due to an industrial slowdown.
Stockpiles in Europe are high and on track to be full sooner than anticipated. The EU has set a target of 90% full gas storage by November 2023 and Morgan Stanley forecasts 100% storage could be reached by early September.
With the weather being the major contributing factor, the adequacy of these stockpiles is important. OilPrice.com predicts that a mild winter could cut Europe’s natural gas supply prices in half. On the other hand, if winter is colder than average, gas prices could spike to significantly high levels.
Energy price guarantee and energy price cap
July has seen the energy price guarantee, a limit set on the maximum amount suppliers can charge for each unit of gas and electricity used, drop to £2,074 per year. Whilst this is a step in the right direction, excitement may be short-lived as it also signals the end of the Energy Price Guarantee discount households have been receiving, funded by the government.
According to Cornwall Insight, an independent energy research firm, 80% of households remain on variable tariffs although fixed tariffs and collective switching are making a return to the market. The consumer market will now watch closely and ponder whether to stick or twist their energy deals. Forecasters predict further reductions, but the price cap will likely remain around £1,900 per home until March 2024 — some way off of October 2021 when it was £1,277.
In the aftermath of British Gas’ eyewatering announcement of an 889% profit increase, many will continue to feel aggrieved by the energy price crisis for some time to come — and those frustrations will be directed to the government and regulators.
Business owners will similarly be watching closely. Currently, businesses can receive discounts through the Energy Bills Discount Scheme until March 2024; however, many feel this is inadequate compared to the Energy Bill Relief Scheme it replaced. Without a cap on non-domestic energy costs, many businesses will suffer and risk eventual failure.
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