The UK’s construction industry is facing rising costs and weaker demand 100 days after conflict broke out in Iran, according to new research.
Published this morning (8 June), a new study from the Building Cost Information Service (BCIS) shows higher oil and gas prices have pushed up the cost of transporting materials and running construction equipment.
According to the research, diesel prices were 38% higher in April than a year earlier, increasing costs across the construction supply chain.
Some building materials have also become more expensive. Aluminium prices climbed from just under $3,000 per tonne in January to almost $3,800 by late May, helping to drive up the cost of products such as windows and doors.
Dr David Crosthwaite, chief economist at the BCIS, said: ‘The conflict is no longer simply a commodity market story. The longer it continues, the more its effects are spreading.’
‘Construction is being affected through multiple channels simultaneously,’ he continued. ‘Higher energy costs are increasing pressure on supply chains and materials, while inflationary pressure and uncertainty around interest rates are weighing on confidence, investment decisions and demand.’
Although inflation fell in April, economists predict higher energy and transport costs to continue feeding through to businesses and households in the coming months. At the same time, uncertainty over future interest rate cuts has added to concerns about investment and growth.
Residential construction is expected to be among the sectors most exposed because of its reliance on mortgage lending and consumer confidence.
Crosthwaite added the current situation was different from previous shocks. He said: ‘Previous shocks have often been characterised either by strong inflationary pressures or weak demand. Today we are seeing both forces at work simultaneously.
‘During the height of the Russia-Ukraine conflict, significant cost inflation was accompanied by relatively strong demand conditions, enabling higher costs to feed through more readily into tender prices.
‘By contrast, the current conflict is unfolding against a backdrop of weaker economic growth, subdued construction activity and declining confidence. It also differs from the Red Sea shipping disruption, where impacts were more heavily concentrated on logistics and freight.’
Industry experts said the cost of steel and other building materials is rising, with insulation, PVC and roofing products also expected to become more expensive.
Despite this, weak demand has limited the extent to which contractors have been able to pass on higher costs.
‘The longer the conflict continues, the greater the risk that higher energy and commodity costs become embedded throughout supply chains,’ Crosthwaite concluded. ‘The key question for the industry is not whether rising costs will affect tender prices, but how far those pressures can feed through in a market where demand remains so weak.’
Image: H&CO/UnSplash
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