UK Construction Market Report 3Q 2024
Commodities
Metals
Copper
In our previous quarterly report, we highlighted the rally in copper pricing, which reached a two-year high. A World Bank report attributes this rise to supply concerns and increased global industrial production, predicting a further 5% increase this year.
However, an article from ING suggests that supply concerns may be overstated due to weakened demand from China. The Shanghai Futures Exchange reports that copper stocks are at record highs, and exports of refined copper from China are expected to increase due to strong global prices.
Chinese smelters are already exporting large volumes to London Metal Exchange (LME) warehouses, with outbound shipments totalling 231,611 tonnes in May and June, setting new records. In July, LME inventory reached a three-year peak. Copper is one of the key metals for the transition to clean energy. The new UK government’s plans for increased wind and solar power should increase demand for copper, which is vital for the efficiency and functioning of wind turbines and solar PV. For context, a three megawatts wind turbine contains up to 4.7 tonnes of copper.
Aluminium
Aluminium prices are following a similar trend to copper, with supply disruptions driving prices to their highest level in two years.
According to an article from ING, total monthly aluminium output rose 3.3% year-on-year to 5.9 million tonnes last month, driven by higher production across all major producing nations. Cumulative production rose by 4.2% year-on-year to 23.7 million tonnes over the first four months of the year.
Chinese alumina producers are taking advantage of price rises by boosting output, which rose 5% year-on-year to 3.65 million tonnes in May, according to the latest estimate from the International Aluminium Institute. Output is nearing the record highs of last year’s annualised total of 43 million tonnes.
Supply concerns are also becoming sensitive to disruption in bauxite supplies, with China increasingly dependent on foreign mines. Additionally, Rio Tinto has declared force majeure due to restricted gas supplies at refineries in Australia.
Nevertheless, ING expects prices to move lower in the coming months as recent increases were investment-led and more profit-taking is now expected.
Zinc
According to the World Bank, major zinc producers are expected to reduce supplies this year. High energy costs are likely to keep some European smelters partly or fully idle following the closures in 2022.
The struggles in China’s real estate sector and subdued industrial activity in other major economies are dampening demand for zinc. The property sector accounts for up to 30% of China’s GDP and 30% of the country’s total steel consumption.
Consequently, the global zinc market is currently in surplus, with production estimated to have exceeded usage by 144,000 tonnes in the first three months of 2024, according to the latest assessment by the International Lead and Zinc Study Group. The World Bank expects prices to fall by 6% year-on-year. However, entering 2025, the push for low-carbon technologies could help demand partially recover for battery materials such as zinc.
Nickel
In our previous update, nickel prices continued their downward trend. However, in 2Q 2024, prices rose to their highest level in nine months, reaching $21,150 a tonne on the LME. This increase was prompted by political violence in New Caledonia, which disrupted production in a region that holds some of the world’s largest nickel deposits.
Global nickel demand is set to rise substantially this year, driven by stainless steel production and growing demand for battery materials and cleaner energy solutions. However, supply is still outstripping demand, with production showing no signs of abating in Indonesia, which accounts for more than half of global supply. Indonesian nickel continues to benefit from Chinese investment in its smelters, bolstered by government incentives and a 2020 export ban on nickel ores.
Benchmark Mineral Intelligence estimates Indonesia’s annual nickel output will grow to 3.02 million tonnes by 2030 — almost double 2023’s figure of 1.71 million tonnes — thereby accounting for 65% of global supply. Hopes are pinned on rising demand for electric vehicles and an appetite for nickel batteries, which perform better than lithium iron phosphate alternatives.
Food
Positive news on food markets emerged in July from the UN Food and Agriculture Organisation (FAO), where prices have fallen amid record grain harvests. The Food Price Index is 3.1% lower year-on-year and 24.7% below its peak in March 2022 following Russia's invasion of Ukraine.
The FAO has revised upward its global grain production forecast for 2024 to a record 2.9 million tonnes due to improved prospects for maize crops in Ukraine, Argentina and Brazil. The estimates for wheat production were also raised based on better prospects in Asia, particularly in Pakistan.
Data from the ONS shows that inflation rates for food and non-alcoholic beverages rose by 1.5% in the year to June 2024, down from 1.7% in May. This is the lowest annual rate since October 2021, marking the 15th consecutive month of easing. The figure for March 2023 was 19.2%.
Farmers are increasingly concerned about the impacts of climate change on yields. The Met Office's annual State of the Climate report points to the increasing frequency of wet weather and hotter days. Persistent rainfall last year — the seventh wettest on record — led to crop failure for some amid waterlogged fields.
Energy
Brent crude oil
Geopolitical tensions in the Middle East remain the key driver of price rallies. ING states that the market will likely factor in a larger geopolitical risk premium until tensions between Iran and Israel ease following the assassination of Hamas’ political leader on Iranian soil in July.
Adding to market concerns is the latest official Chinese data, which reveals that manufacturing activity fell to a five-month low in July as factories struggled to secure orders. ING highlights China's importance in the global oil market, as it is expected to account for more than half of global demand growth in 2024. Therefore, slower-than-anticipated growth in China could significantly alter the global oil balance.
In early August, OPEC+ ministers agreed to continue its output cut policy, which currently reduces production by 5.9 million barrels per day. The group plans to gradually phase out 2.2 million barrels per day of these cuts over the course of a year, from October 2024 to September 2025.
Gas
As with oil, the potential for further escalation of conflict in the Middle East poses a significant risk factor. The region is a key supplier of natural gas, with approximately 20% of global liquefied natural gas (LNG) supply passing through the Strait of Hormuz.
According to ING, European gas demand decreased by 2.4% year-on-year over the first five months of 2024. Although low prices are expected to lead to a mild recovery in demand, this is offset by strong renewable energy output and the availability of nuclear power, which apply pressure on thermal power margins.
In our 2Q 2024 update, we noted the possibility that Ukraine might not extend its transit deal with Gazprom, which expires at the end of this year. This situation could leave the EU searching for around 15 billion cubic meters of alternative supply. ING highlights another immediate risk: Gazprom could halt gas flows to Europe due to legal disputes concerning non-delivery of gas, damages owed and payments potentially diverted away from Gazprom as compensation. Europe’s continued reliance on Russian gas for storage purposes is evident, with supplies reaching their highest level of 2024 in July, up 5.7% year-on-year.
Cost of living
The latest ONS figures released for June 2024 show consumer price inflation at 2%, the same rate as the 12 months to May and the lowest rate in almost three years.
The largest upward contribution to the monthly change in CPI annual rates came from restaurants and hotels, where prices of hotels rose more than a year ago; the most significant downward contribution came from clothing and footwear, with prices of garments falling this year having risen a year ago.
With inflation at the Bank of England's target of 2%, it made its first interest rate cut since March 2020 in early August — down by 0.25% to 5%. After a prolonged inflationary period, consumer and business confidence could improve with the anticipation of cheaper financing and mortgages.
However, due to energy prices, inflation is expected to rise slightly again this year to 2.75%. Bank of England governor Andrew Bailey made clear that "we need to be careful not to cut rates too much or too quickly" to put inflation firmly in the rear-view mirror.
The UK has had one of the highest interest rates in the G7 and this cut follows the European Central Bank's decision in June to make its first interest rate cut in five years — from 4% to 3.75%. Eurozone inflation, however, remains sticky, having risen to 2.6% last month.
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