As one of the biggest distributors of building products in the UK, SIG has a good overview of what’s happening in terms of availability and pricing. SIG commercial director, Andy Williamson, gives a summary of what to expect over the next few months.
The last two years has seen enormous changes in availability and price across pretty much every product group for the building industry. The next few months are likely to be even more volatile. Further price rises are inevitable while pressure on supplies of specific product groups is likely to continue. It’s a challenging picture.
Firstly, pricing. We are currently experiencing a significant degree of price inflation pretty much across the board. The biggest – although by no means only – cause is the rising cost of gas. Most affected are the products whose manufacture is very energy intensive: insulation, steel and cement, for example.
The degree of price inflation will depend on how much of any individual manufacturer’s gas has been hedged in advance – most will have fixed prices for at least a percentage of their gas into the next quarter and beyond. If energy costs remain high, then the full impact of high gas costs will be felt in continued price rises over coming months.
The CEO of Weinerberger was recently quoted as saying that spiralling energy costs were causing smaller manufacturers to close their kilns already – so we may even find some consolidation among manufacturers or some casualties.
It’s difficult to see energy costs tumbling in the short term. If there is any positive aspect to this situation, perhaps it will be to focus the minds of manufacturers more closely on decarbonising their processes and
accelerating a move towards renewable energy sources. However, for now, pricing remains hugely volatile and we are seeing producers able to guarantee prices for as little as 24 hours. Fixed price contracts are going to be very difficult to support and we can see the already slim margins of many contractors being squeezed even further.
Supply problems ease
On the supply side, there is better news. Stocks of some staple products, such as plasterboard, are growing and lead times shortening as a result. There were significant problems in many product groups as demand spiked in 2021, but manufacturers have responded with increased production volumes and this, combined with a slightly slower first quarter than anticipated, has eased supply pressures.
There are still see pinch points in the system – bricks and some roof tiles, for example, are still problematic, but overall, for UK manufactured products, the situation is improving.
Pressure on timber
The next pressure on availability is likely to be driven by the current awful situation in Eastern Europe. We are expecting timber to become increasingly difficult over the next few months. All timber coming out of Russia and Belarus is now considered to be “conflict timber” and the Forest Stewardship Council (FSC) has suspended all trading certificates in both countries, effectively blocking all sourcing.
The UK is, perhaps surprisingly, the second largest net importer of forest products in the world (after China). Although we do not import a significant volume directly from Russia or Belarus, increased competition for lower global volumes of timber products will undoubtedly impact the UK market.
Unexpected consequences
The full impact of disruptions to trade will take time to be felt, but it is also unpredictable. Global supply chains are common among product manufacturers: for example, Italian porcelain manufacturers source much of their clay from Ukraine and finding alternative sources will be costly.
Russia is the second-largest producer of aluminium, responsible for around 6% of global supplies. Nickle too, is a significant issue, with Russia providing around 10% of the global market. Most manufacturers will hold stocks of both products, but these are unlikely to support full production for long.
This all adds up to some challenging headwinds for the construction sector and we are surely going to see some changes to business practice. Quotes for complete jobs simply cannot be guaranteed and anyone agreeing to a fixed price tender right now would be brave indeed.
One Brexit factor
What may yet throw another curved ball into this volatile market state is the still unresolved issue over UK product certification. One deadline for ending reliance on European product tests has already been passed, with an extension to current arrangements allowed until December 2022. Without a really dramatic development of UK testing and certification services, however, it is difficult to see how this particular issue will be resolved even by the revised deadline. The radiator industry has been particularly vocal on the potential impact of this problem, but it will not be the only sector to be affected.
Demand pressure
And what of demand? We saw a slightly softer first quarter than had been anticipated and there is much discussion around the impact of rising prices on consumer confidence and buying power. While we haven’t seen a significant slow down in demand for new homes there is perhaps a bigger question mark over discretionary RMI spending. However, there are no current indications of a dramatic fall in commercial property development or cuts to current infrastructure projects, so demand is likely to remain strong.
SIG, with a pretty comprehensive view across the building products sector, cannot see much stability returning to the market this year. In common with most businesses, our response is to remain flexible and agile, continually reconstructing our business model to keep pace with rapid shifts in supply and pricing.