Russia’s invasion of Ukraine could push up the price of materials used on UK construction projects, analysts have warned.
Graham Robinson, global infrastructure and construction lead at forecasting business Oxford Economics, told Construction News that the war could add to cost inflation for contractors.
A number of countries have imposed strict sanctions on Russia in response to its decision to invade its neighbour, causing the rouble to slump in value.
Robinson said there would be some supply chain disruption as a direct consequence of the war currently raging in Ukraine. But he added that by far the greatest impact on UK construction would be from an expected spike in oil and gas prices.
While the UK does not import a huge amount of either commodity directly from Russia, its near neighbours do – for now.
German chancellor Olaf Scholz last week ordered the withdrawal of a key document needed for certification of the highly anticipated Nord Stream 2 pipeline, prompting warnings of spiralling gas prices. Meanwhile, fears that the EU will slash oil purchases from Vladimir Putin’s nation has sent petrol costs up sharply.
Robinson said: “We don’t take a lot of Russian gas ourselves but the inflationary impact on the global market will be felt across Europe and that does start to impact the UK. We source a lot of materials, products and components from the Western European market and there will be a higher and more prolonged inflationary impact.”
Many materials used in construction contain petro-carbons or are very energy-intensive to manufacture, he explained, meaning they are soon likely to soon cost even more to create and supply.
The inflation warning comes after the pandemic had already tightened supply and ramped up costs. Construction material prices rose in 11 of the 12 months of 2021, according to an index published by the government, with contractors paying on average a fifth more for vital products and components at the end of the year than they were at the start.
“The wider inflationary effects in construction are a problem anyway,” said Robinson. “Layering [the impact of the war in Ukraine] on top could be quite damaging especially if the Bank of England’s Monetary Policy Committee decides to put UK interest rates up quicker and harder than already planned.
“If they go too hard you will get stagflation, a drop in output alongside a prolonged period of inflation. That is the danger to the sector – it will choke demand.”
The situation in Ukraine is extremely unstable and Robinson had a further warning for UK contractors.
“If Europe decides it is no longer going to take Russian gas, then the oil price will rise even higher and have a sharper impact on inflation,” he said. “Contractors and their supply chains need to discuss their response. Higher prices need to be passed on as the sector can’t absorb any more increases.”
Robinson added that discussions will be needed with clients and throughout supply chains as to who shoulders the cost of this inflation. He said: “If main contractors are squeezed in the middle, then it will have a direct impact on their levels of profitability and there are not huge margins on projects – I don’t think the slack is there to take up increased costs.”
DRS Bond Management managing director Chris Davies agreed that rising inflation coupled with the widespread use of fixed-price contracts will be problematic for some contractors.
“There will be supply chain casualties as a result of this, that is not in doubt,” he said. “There is no good news for those that were already in trouble.
“If it was hard getting resources before, a war in Europe is not going to make it any easier. After COVID you’ve got a huge amount of demand for building to happen, not enough resource in terms of labour and big increases in material prices.”
Progressive Equity Research analyst Alastair Stewart also echoed the view that inflation for materials and commodities is set to rise with increasing pressure on margins. He said: “Investors might also think I’ve got a great idea for a new shed or an office but am I going to press the button right now, when people are worrying about other buttons being pressed? There was already a lot to suggest people [clients] were sitting on their hands, even before the crisis but I think a lot of investment decisions may be postponed.”
He noted that those working on defence projects may find their workloads increasing.
European Construction Industry Federation director-general Domenico Campogrande said the conflict would “certainly further exacerbate” material price inflation across the continent and “constitute a serious obstacle to the implementation of the investments foreseen under resilience and recovery plans”.
The Federation issued a statement calling for peace.
President Thomas Bauer said: “The development of the EU has shown that countries with very different political and economic situations can prosper together and jointly overcome difficulties through dialogue and cooperation. We therefore wish to Confederation of Builders of Ukraine (CBU), our member federation from Ukraine, and to the country, that this conflict can end as quickly as possible so that the people of Ukraine can live again peacefully and without fear.”
Build UK called on contractors to look out for individuals affected by the war.
“The industry should be looking to provide support for any Ukrainians in the workforce, many of which will have family in Ukraine and are likely to be extremely worried for them,” said chief executive Suzannah Nichol.
“We are suggesting to our members that they check in with any Ukrainians they employ or have on their sites, make sure they are OK and offer support where they can. This may be reassurance and moral support, or more practical advice such as access to Skype or phone facilities or support with extending work visas.”
Nichol also expressed “concern” that further increases in energy prices would “directly impact the cost of materials and products bought by the supply chain” leading to “inflation on top of inflation”.
The 1,200km-long Nord Stream 2 pipeline would take gas from the Russian coast near St Petersburg to Lubmin in Germany.
Energy and Climate Intelligence Unit analyst Jess Ralston last week said Germany’s decision to put a halt to the scheme meant the “gas crisis” looked likely to “last for years, not months”.
She added: “The [UK] government will increasingly feel the pressure to shield households in the long-term by insulating more homes, speeding the switch over to electric heat pumps and getting on with delivering the net-zero policies that will wean us off volatile gas and protect us from future crises.”
Construction Products Association director of government relations Jeff May said there would be an impact from the crisis on energy and metals commodity costs, “particularly for construction products such as aluminium and steel”.
He said: “It is worth noting that most of these manufacturers work on energy forward contracts and hedge to a certain extent so there tends to be a lag between energy cost rises and the impact on product costs.
“As a result, the price rises on construction products such as aluminium and steel are likely to be greater and more prolonged than we initially expected 12 months ago.”
Melanie Leech, chief executive of the British Property Federation, said she was “extremely concerned” about the situation in Ukraine. Asked about the federation’s policy on avoiding working for illicit funds linked to Russia, she said: “I expect that businesses will be reviewing their own investment and decision-making frameworks to see whether they feel any action is justified in line with their approach to good governance.”
