UK Construction Market Report 4Q 2023
Global tensions/commodities
Key statistics:
Brent crude oil
price increase in Brent crude oil since June 2023.
Forecasts indicte that these price hikes will continue due to the Israel-Hamas conflict.
Natural gas
surge in gas futures since the Israel-Hamas conflict.
Cost of living
Consumer Price Inflation (CPI) as of September 2023.
It has reduced 4.4% from the October 2022 peak of 11.1%.
Metals
Copper
A recent poll conducted at a flagship event for the London Metal Exchange (LME) was decisive in naming copper as the metal with the most upside price potential next year — winning 53% of the vote over other base metals, according to Reuters.
Despite the potential, Citi expects copper prices to fall over the next few months as the European manufacturing sector is in recession due to energy prices and a slowdown of growth in the United States of America (US), which has all LME metals stuck in an industrial downturn.
In China, refined copper imports are still running below last year's levels but have been robust in the previous two reported months. S&P Global Copper Users Purchasing Managers' Index (PMI) provided positive readings for Asian markets. The global PMI fell, however, with only Asia-based firms recording an improvement in conditions. There was similar news for the new orders metric, which shows continuing growth.
The steeper contraction in US and European markets contributed to the overall deterioration in operating conditions. And against the new orders metric, Europe registered another rapid contraction while the US posted its fastest decline in 40 months.
Evidencing the weakening demand, ING reports that copper stocks held on the LME have more than doubled in the space of two months.
Aluminium
The LME poll indicated that aluminium expectations did not excite survey participants, as light metals face a considerable supply surplus over the next two years.
Though on a positive note for prices, China’s metal production is booming and importing more aluminium. S&P Global Aluminium Users PMI indicate an Asian market posting much more positive results than its US and European counterparts. The overall PMI contracted as Europe registered its steepest downturn since May 2020, whilst the US stagnated and China saw marginal improvement.
Asian-based firms drove the expansion of output in the global aluminium-using sector, although the US and Europe saw a decline. On new orders, there has been a third successive reduction, albeit modest. Similarly to other metrics, the US and Europe posted negative readings, whereas there was broadly no change in Asia.
Despite ongoing weakening demand from traditional industrial sectors, decarbonisation efforts in China are boosting the need for metals. ING reports that China’s new energy vehicles sector is growing rapidly, noting that production rose by more than 37% in the first eight months of the year. Furthermore, in the same period, China’s export of electric vehicles grew 61% compared to the first eight months of 2022.
Zinc
Reuters has reported that the International Lead and Zinc Study Group (ILZSG) significantly revised its estimated supply-demand balances at its October meetings. ILZSG's forecasts expect European demand to fall by 1.8% this year, bringing global usage growth down to 1.1%.
The previous revision anticipated a 45,000 metric tonne supply shortfall for 2023. The latest forecast is now a 248,000 metric tonne surplus, expected to rise to a 367,000 surplus next year.
Other forecasts from the group, reported by ING, expect global mine production to remain almost flat for the remainder of 2023 before rising in 2024. Furthermore, it expects global output to rise year-on-year for 2023 and into 2024, attributing the increase to China, where zinc usage will increase as metal production booms.
Nickel
In the LME poll, nickel did not perform well in terms of price potential, as reported by Reuters. Indonesia’s massive production surge has swamped the nickel market.
The country has caught the attention of metal markets in recent history, as ING noted its ban on nickel ore exports in one such example of countries tightening control over resources. The International Nickel Study Group has different expectations from other light metals, raising its demand forecasts for both years on the back of the recovery of stainless steel and the continuing battery boom.
Another ING article points out that challenging economic activity weighs on demand whilst the energy transition perks it up.
Food
The Russia-Ukraine conflict has led to losses of $3.2 billion this year for Ukraine. World Grain reported the war with Russia has had a severe detrimental impact on Ukraine, as one of the leading global agricultural producers and exporters, as production and logistics costs have significantly increased.
Ukraine no longer has use of ports on the Black Sea, as they have been blocked as part of the conflict. Opportunities to export only come from railways to countries in Eastern Europe or small ports on the Danube.
On one hand, the export issues are palpable; on the other, imports are equally causing prices to increase. As ports are limited, the export costs for fuel, seeds, fertilisers and machinery parts have grown.
Trading Economics has pointed to persistent concerns that Ukraine may be unable to export its growing crops as the reason behind rising prices. Russia is also targeting grain silos which will no doubt affect the output level Ukraine can produce.
Energy
Brent crude oil
The ever-evolving conflict in Israel and Gaza has had a significant impact on the already volatile oil markets. The following information is accurate at the time of drafting; however, the situation remains fluid as more external forces weigh in on the conflict.
As the markets re-opened on the Monday following the weekend which saw the conflict unfold, Investing.com reported that prices surged $3.50 a barrel — a 4% increase. Prices then fell on the Wednesday following a pledge from Saudia Arabia to stabilise the market, although not back to pre-conflict levels.
Reuters has reported that 20 October 2023 saw oil prices settle lower following Hamas’ release of two US hostages. The Middle East remains a significant focus on the market due to fears of region-wide conflict disrupting oil supplies.
Disruptions would result in higher prices, already supported by news that top producers — Russia and Saudi Arabia — are extending supply cuts until the end of the year.
A lot depends on the reaction of OPEC+, as ING predicts there would only be an adjustment to output policy if prices traded above $100/bbl. Such levels would bring about the potential of demand destruction.
The International Gas Union (IGU) has stated the global gas market remains in a fragile and unstable equilibrium. S&P Global reports supply risk and that geopolitical developments are driving price volatility.
The 2023 Global Gas Report, published by the IGU, highlighted that prices have decreased over the last year but remain above pre-COVID and pre-energy crisis levels. Prices have lowered due to strong stock levels, but the spikes caused by the decline in Russian pipeline exports significantly impacted liquified natural gas (LNG) supplies.
Trading Economics has UK natural gas futures surging at 30% since the beginning of conflict in the Middle East. The conflict has already led to the closure of a large gas field in Israel. There are also concerns for the safety of Qatari vessels passing through the straits in the region.
The weather will also influence demand and with a cold but dry El Nino winter forecast, there could be stronger demand for natural gas this heating season.
Much like the oil markets, gas markets are subject to daily volatile shifts. Forecasts expect UK natural gas to trade at 136.13 GBp/Thm by the end of the quarter but up to 178.67 in twelve months.
Energy price guarantee and energy price cap
Ofgem has announced the latest price cap, falling to £1,923 per year, down from £2,074 in July. This figure is £577 lower than last winter, although the consumers still feel the pinch due to the end of government support.
Forecasts also predict bills to begin rising again from January. Market researchers Cornwall Insight recently released its price cap forecasts for 2024. It expects the cap to be set at £1,996 in January, with little fluctuation throughout the year.
Charities will question whether the government is doing enough to support families and those on low incomes while the cost-of-living crisis shows little sign of alleviating. A separate Cornwall Insight report highlighted the six months of support for energy bills cost the UK government £30 billion.
The next six months look like they will be a turbulent time for businesses throughout the UK as the Energy Bill Discount Scheme will end on 31 March 2024. The scheme came into effect in April 2023 as a replacement for the previous Energy Bill Relief Scheme. Simply Business questions whether the November budget will see the unveiling of an extension to the scheme.
The continuing conflicts in Europe and the Middle East only strengthen the case for moving away from fossil fuels and towards more renewable sources. Such a shift would allow the UK to be less vulnerable and exposed to price increases caused by volatility in the international market.
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