Industry response to the Ukraine Crisis

INTRODUCTION

This note has been developed as the first of a series by the Construction Leadership Council to support the response of the UK construction industry to the impacts of the Ukraine crisis. The CLC is monitoring the situation carefully and, working with government, will determine appropriate responses as developments occur. The CLC’s Product Availability Group (PAG) has increased the frequency of its meetings to fortnightly in anticipation of rapid changes in materials markets.

PROBLEMS AND CONSEQUENCES

At time of publication (week commencing 28th March 2022), the timescale and extent of disruption associated with the invasion are unknown, and the potential for knock-on effects affecting industry capacity, logistics networks and client demand. What is becoming clear is that significant Ukrainian industrial capacity has been destroyed during the conflict. This means that there will be some long-term market impacts, such as reduced availability of steel in the mainland European market.

The situation is evolving very quickly and is being influenced by an even wider range of factors. The recent fall in energy prices for example has been influenced by an anticipated short-term slowdown in China triggered by Covid-19 lockdowns. It is recommended that all businesses regularly monitor key market indicators including energy and commodity prices to keep informed of developments.

DIRECT IMPACTS

Materials: In the UK, it is anticipated that the withdrawal of materials and products sourced directly from Russia, Ukraine and Belorussia will have a limited impact on markets. The total share of construction material imports is less than 2%. However, there are some critical categories – the most important of which are bitumen, cast iron products, rebar and timber.

Energy: Wholesale energy prices in the UK have been directly affected by supply constraints to Europe and other issues associated with the operation of the European energy market. These are having a direct impact on the costs of manufacture of energy intensive products including steel, cement, bricks and blocks and glass. Energy markets are also being disrupted by sanctions affecting energy trading intermediaries.

INDIRECT IMPACTS

Indirect impacts resulting from disrupted raw material and energy supply chains can already be felt and are expected to have a more serious impact. Some raw materials produced in Russia, including copper and timber, are processed in Europe and enter the UK supply chain via firms within the EU

• Disruption to established supply chains: Locating raw materials from a tight market that has lost capacity as a result of sanctions/buyer preference limiting sourcing from the conflict zone (e.g., iron ore and pulverised coal, timber).
• Loss of access to fixed price agreements and hedges: Disruption to pricing models and short-term requirements to secure raw materials at spot market prices.
• Reduced production volumes: Manufacturing shutdowns due uneconomic operation due to high energy costs.

The potential implications of both direct and indirect impacts on the UK construction sector are significant. Construction enterprises at all scales, from the largest tier one contractor to the smallest R&M specialist are being affected. The materials supply and distribution segment is also at risk. The main challenges are:

Rapidly increasing costs affecting the viability of projects or pain/gain share on target cost projects.

Unexpected cost increases affecting bids and projects on-site, which could result in losses if fixed price protection is not in place.

Inflexible or imbalanced commercial terms, such as very short, fixed price periods preventing suppliers, sub-contractors and main contractors from obtaining fixed price protections in bids and change orders.

Potential for survivalist behaviours and perhaps even business failure as a result of product availability issues, increased costs and other commercial pressures. Any of these outcomes could result in less obvious safety and quality compromises that are often associated with projects that are facing financial difficulties.