23Rd Sept Market Research Bulletin

Market Research Bulletin: HS2 Plans to Overhaul its Procurement Strategy

CONSTRUCTION

  • TfL commissioner Mike Brown has warned the Government that ending the HS2 line at Old Oak Common in west London would be the "Ryanair option". Amid rocketing costs, the Government is considering whether to halt the line eight miles west of its intended terminus at Euston - or abandon the scheme altogether. Mike Brown said:

“In my judgment, if it stops at Old Oak Common, it will never go to Euston in my lifetime.”

Mike Brown, TFL
  • Mace has said that a no-deal Brexit would “significantly damage the construction industry” as tender prices would be dragged down by a slump in demand. It said the construction industry would be damaged by large drops in house prices and commercial real estate, which would result in a “sizable reduction in investment”. Steve Mason, managing director of Mace’s cost consultancy arm, said:

“The likely impact of a no-deal Brexit will put more pressure on the supply chain. As the combination of potential reduced demand with further increases in material and labour costs will inevitably affect margins, tender prices will feel a downward pressure.”

Steve Mason, Mace
  • According to the Ministry of Housing, Communities & Local Government, more than two years after the fire at Grenfell Tower there are 324 buildings (up to 24,800 homes) still clad with ACM cladding. In its latest building safety update the Government said there are 111 high-rise residential and publicly owned buildings in England that have completed remediation works to remove and replace ACM cladding systems:
Buildings Graph
  • In an effort to attract bidders, HS2 is finalising plans to overhaul its procurement strategy by the end of the month. During Phase 1 (London to Birmingham) several firms shunned deals, including the job to build the railway’s main station in Birmingham, due to concerns over the amount of risk they would be taking on. Work is expected to be split up into several packages to encourage more firms to bid as well as opening it up to smaller firms. The relaunched Curzon Street station contract will now use a two-stage procurement route, with a target price agreed at the end of stage one, giving bidders the chance to price risk in under the second stage of the tender.
  • After intense lobbying, the Government agreed to delay the implementation of domestic reverse charge VAT for construction services by a year (until October 2020). Construction companies warned they were not ready for the change, saying that customers paying VAT directly to HM Revenue & Customs instead of to the service supplier would have a disruptive impact on contractors' cashflow, for which they needed more time to prepare.
  • Recent ONS data shows that UK construction output increased by 0.5% in July 2019 compared to the previous month - partly reversing a 0.7% decline in June. Weak repair and maintenance work has acted as a drag on output in 2019. New work output has performed slightly better but spending decisions continue to be put on hold, resulting in largely flat output growth in 2019.


UK Construction Output: Volume Seasonally Adjusted (All Work) (Source: ONS)

  UK Construction Output: Volume Seasonally Adjusted (All Work)


UK ECONOMY

  • The Bank of England (BoE) signalled that prolonged Brexit uncertainty will keep interest rates lower for longer. The BoE kept interest rates on hold at 0.75% and indicated that the UK would avoid falling into recession this year. However, policymakers said that a no-deal would weaken growth, cause higher inflation and lead to a further drop in the value of the pound.
  • According to the ONS UK retail sales unexpectedly dropped by 0.2% in August compared to the previous month. However in the three months to August retail sales grew 0.6% compared to the previous three months with online sales providing the biggest driver.
  • UK inflation (as measured by the Consumer Price Index) dropped in August to its lowest level since December 2016. Consumer prices were 1.7% higher than the previous year, down from 2.1% in July. In the context of widespread economic uncertainty, low inflation and high wage growth have provided a boost to consumer purchasing power. However, many economists believe CPI inflation is set to rise back to and then slightly exceed the Bank of England’s 2% inflation target in 2020.
  • Ministers are poised to overhaul the UK’s new planned schedule of tariffs in the event of a no-deal Brexit. The earlier draft schedule that was published in March will be tweaked after opposition from several industries, such as the haulage and textile industries. Under the revised schedule tariffs would still apply to 13% of goods brought into the UK in order to protect key domestic industries.
  • The UK is fleshing out plans for an all-Ireland economic relationship which would aim to replace the disputed backstop. In recent weeks Mr Johnson has considered the idea of reducing the presence of a post-Brexit border across the island of Ireland by promoting a common zone for agriculture and foodstuffs, a common electricity market and maintaining a common travel area. However the “all-Ireland” economic relationship would take this a step further, making Northern Ireland a special economic zone inside both the UK and EU.


WORLD NEWS

  • The OECD has said that leading economies need to ease trade tensions and take action to prevent a descent into a low-growth trap. With an increasingly fragile and uncertain economic outlook, the organisation said evidence is accumulating that the effects of trade tensions are greater than previously thought. OECD chief economist Laurence Boone said:

“The danger is that we get into a vicious circle of lower trade, investment and higher uncertainty.”

Laurence Boone, OECD
  • The Federal Reserve has cut US interest rates by 25 basis points to a range of 1.75-2%. It was noted that trade policy and slowing global growth warranted the cut. However, despite this Fed Chairman Jay Powell painted a positive picture of the US economy saying that only modest adjustments to monetary policy were required.
  • Industrial output from Chinese factories fell to a fresh low in August – rising by just 4.4% year-on-year during the month. The reading, which was the worst since February 2002, is an indicator of how the US-China trade war and slowing economic activity are impacting China’s economy.
  • A recent YouGov survey assessing the attitudes of 28 countries towards climate change has found that the US is a clear outlier in terms of public scepticism. 15% of Americans believe either that the climate is not changing at all, or that it is not changing due to human causes, according to the poll. This figure is the highest of any country in the world, almost three times the global average, and five times as high as fellow big carbon emitters China and India.
  • In an attempt to revive flagging Eurozone growth, the European Central Bank (ECB) has announced the biggest package of rate cuts and economic stimulus in three years. Interest rates were cut further into negative territory, lending terms for Eurozone banks were eased, and the ECB revived its €2.6tn programme of buying bonds for an unlimited period.


COMMODITIES & MATERIALS

  • Oil prices jumped 20% on 16th September after attacks on Saudi Arabia’s oil facilities suspended production of 5.7 million barrels a day (roughly 5% of the world’s total daily crude oil production). Prices subsequently stabilised with Brent crude easing back to $69 a barrel to end the day 15% higher.
  • Data published by Department for Business, Energy & Industrial Strategy (BEIS) shows that construction material price inflation is easing. In the year to July 2019 construction material prices rose by just 1.4% according to the ‘All Work’ index - the lowest annual growth rate since 2016. Softer demand for materials over the summer has helped dampen material prices.
  • Shares of US Steel plunged as much as 15% on 19th September after the company gave a bleak profit forecast amid diminishing demand for flat-rolled steel and deteriorating market conditions in Europe. Declines in steel prices and steady raw material costs have hurt US Steel's margins in Europe as they compete with Chinese steel producers who are unable to sell in the US due to the current trade tariffs.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • Kier has reported a £245m pre-tax loss in its results for the year to June 2019. Exceptional items of £341m (primarily related to its restructuring) sent the firm nosediving into the red from a £106m pre-tax profit the year before. Kier said that the sale of Kier Living was “progressing well”, and that it is exploring options to accelerate the release of capital from its property business.
  • WSP has confirmed that it will be re-bidding for work it was carrying out to manage the upgrade of buildings set to contain MPs’ offices in Westminster. The firm, which has been on the job since 2017, said the amount of work now required has increased significantly, meaning the job is being re-tendered to comply with four-year-old rules about public contract regulations.
  • Balfour Beatty and its JV partners have formally signed the deal with HS2 to build the £1bn Old Oak Common station. Balfour will begin working off-site imminently and expects to get on-site in the first half of 2020. Clearance has now been completed at the Old Oak Common site but enabling work contractors still need to carry out ground remediation.
  • The University of Manchester has formally begun the search for an investment and development partner to help it create a £1.5bn “innovation district” on an 18-acre site next to the city’s Piccadilly station. More than 4m sq ft of mixed-use space is available for development and the university’s Grade II Listed Sackville Street Building could also be re-purposed.
  • The Government has announced that it is looking to reduce the height of buildings which will require sprinklers from 30m and above, to 18m. Before launching the consultation, an earlier call for evidence showed that a large majority of respondents, including the National Fire Chiefs’ Council and the London Fire Brigade, were in favour of change. The lower height proposals tie in with the ban on combustible cladding materials on buildings over 18m.

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