Market Research Bulletin

Market Research Bulletin: Timber prices set to bounce back in 2020 amid shortages and supply delays

Construction

  • In a recent trading update Kier confirmed that its cost-cutting exercises were not spooking customers as the group continues to be awarded new contracts. The group expects to deliver a headcount reduction of circa 1,200 by 30th June 2020 and annual cost savings of at least £60m in the financial year ending 30th June 2021 and is reviewing further cost optimisation opportunities.
  • Timber prices are set to rise in 2020 after falling in 2019. A combination of pre-Brexit stockpiling and bark beetle attacks in central Europe (which meant that affected trees had to be quickly felled and processed) led to over-supply and falling timber prices last year. Now there is a risk of timber shortages and supply delays as the yield of logs being harvested has fallen as a result of the deteriorating quality of the logs. Tighter supply is likely to push prices higher.
  • A report from the Wildlife Trust has condemned HS2’s eco mitigation measures as amateurish, paltry and in the wrong places. The report says that current proposals will significantly affect wildlife refuges, sites of special scientific interest, local wildlife sites and nature reserves as well as irreplaceable ancient woodland. The report says that HS2 engineers’ proposals for mitigating and compensating these losses are “frequently inadequate and inappropriate”.
  • Construction output rebounded in November, increasing by 1.9% after a 2.2% fall in October that was put down to bad weather. However, the gap between construction new orders and output continues to widen. Possible explanations for this could be due to the fact that new order estimates exclude projects under £100,000 whereas output data captures such projects. It could also indicate that new order estimates are not capturing the value by which projects are finally completed. Regardless, further divergence between the two data sets is a worrying trend, potentially indicating a tough year ahead with completed projects not being replaced with new ones.
West End V City Office Take Up
  • A report produced by Advanced Industrialised Methods for the Construction of Home (AIMCH), an Innovation Consortium set up to modernise house-building, aims to help the housebuilding and wider construction sector use data to demonstrate the value of modern methods of construction. The report examines eight key construction productivity metrics with the aim of helping the industry evaluate productivity and respond to future demands. Professor Malcolm Horner, research lead said:

“The key recommendation is that partners use this report and the guidance to evaluate and select the metrics objectively. Partners should look at metrics in terms of simplicity, widespread use, cost and how well they relate to their strategic objectives and conditions.”

Professor Malcolm Horner
  • The UK’s construction PMI (an indicator of market activity in the sector) fell to 44.4 in December from 45.3 in the previous month. This was the eighth successive month of falling construction activity - the longest period of contracting activity recorded by the survey for almost a decade:

The survey found that:

  • Civil engineering was the worst-performing category, with activity falling at the fastest pace since March 2009
  • Job shedding softened and input cost inflation was the lowest since February 2010
  • Business confidence rebounded to a nine-month high, as greater clarity in relation to Brexit had the potential to boost order books in 2020

UK Construction PMI (Source: IHS Markit)

  PMI   Baseline


UK Economy

  • Consumer price inflation (CPI) fell to 1.3% in December 2019 - its lowest annual growth rate since December 2016 and undershooting the Bank of England’s (BoE) inflation target of 2%. Declines in the inflationary measure come amid the backdrop of a stalling economy and a tough Christmas trading period. The BoE’s Monetary Policy Committee recently said that inflation could fall to as low as 1.25% in early 2020, however with Brexit-linked uncertainty improving and wage growth outstripping inflation, CPI could soon creep closer to its target.
  • Market odds for an interest rate cut jumped to 60% on 15th January, as traders ramp up expectations that the BoE will cut rates to 0.5%. Recent comments from policymakers and new signs of weakness in the UK economy have led many to believe that a rate cut is imminent unless the economy improves over the coming weeks.
  • UK Prime Minister Boris Johnson has said that agreeing a trade deal with the EU before the end of the year was “epically likely”. However, he conceded that he had some doubts by saying that, “you always have to budget for a complete failure of common sense”. European Commission chief Ursula von der Leyen has warned that the prospect of concluding a comprehensive deal with Britain in just 11 months after Brexit on January 31st is highly unlikely and that both sides should consider the need for a longer transition period.
  • UK labour productivity (in terms of output per hour worked) rose slightly (0.1%) in Q3 2019. However, although productivity grew, on the year growth has been stagnant for more than a decade, with UK productivity growing just 0.3% in the past decade.


World Economic News

  • Eurozone industrial production shrank by more than expected year-on-year in November as output of capital and intermediate goods and energy continued to fall and the trade surplus was slightly smaller than predicted. Industrial production in the 19 countries sharing the Euro rose 0.2% month-on-month for a 1.5% year-on-year fall.
  • The US and China have signed a ‘phase one’ deal that effectively pauses the trade war. Although limited in scope and leaving many of the greatest sources of contention unaddressed, the agreement does include stricter rules on IP in China, a pledge by Beijing to purchase at least $200bn in US goods and services over the next two years, as well as a commitment by China not to manipulate its currency. The deal leaves the vast bulk of US tariffs on $360bn of Chinese goods in place while avoiding the threat of further escalation providing the commitments aren’t violated.
  • Chinese export growth slowed to a three-year low in 2019 as exports grew by just 0.5% (compared to 2018’s increase of nearly 10%). Trade tensions and weak global growth took their toll, along with weak consumer spending, rising unemployment and issues with its banking sector. These all had a negative impact on China’s economic growth in 2019, which grew at its lowest rate since 1990 at 6.1%.


Commodities & Materials

  • Oil prices have been gradually rising since October 2019, reaching a three-month high of $70.74 a barrel on 6th January 2020 following the killing of Iranian general Qassem Soleimani in a US air strike. Although prices have since fallen back to around $64 a barrel.
  • Copper ended 2019 strongly, hitting a seven-month high in mid-December of $6,000 a tonne after reports that the US and China were closing in on a limited trade deal. Although demand for copper was generally weak last year, a string of supply disruptions helped put a floor under the price. The price of copper is expected to continue to rise now that a limited trade deal has been agreed between the US and China. A pick-up in China’s economic activity in 2020 is likely to support higher prices as China consumes roughly half of the world’s copper.


Announcements in the Construction Press

  • Wates has committed to produce zero waste from its on-site operations and to become carbon neutral by 2025. Its five-year sustainability plan also includes a core target of making a positive impact on nature from all operations, enhancing the natural environment wherever it operates. To achieve this Wates will switch to an all-electric commercial vehicle fleet, eliminate single-use plastic from its operations and supply chain, invest in sustainable building techniques, organise sustainability placements for graduate and apprenticeship staff, plant 5,000 trees a year and ensure that all sites or frameworks deliver at least one nature enhancement project, such as local conservation work.
  • Skanska is working with partners, including Volvo Construction Equipment, to develop artificial intelligence to better coordinate the movement of heavy machinery on construction sites. The company said that currently, excavators, loaders and haulers can waste up to 40% of their time idling while operators wait for their slot to work and that optimising the deployment of machinery through AI would cut emissions, cost and boost productivity.
  • The Department for Education has announced which firms have secured spots on its £3bn offsite schools framework. The framework, which will see around 30 schools a year being built over the next four years, has been split into two lots by size of project, with the department appointing five contractors to each. Lot 1, which is worth £2bn, will cover secondary schools and blocks across England with an internal area of more than 6,000m2. Primary schools will be covered in lot 2 (worth £1bn) which will also include secondary blocks with an internal area of between 750m² and 6,000m² throughout England.
  • Plans have been submitted for a unique mixed-use development which would transform Chiswick and provide a 'fully integrated experience-led urban environment'. 'The Fourth Mile' will comprise four main elements: (1) technology showcase - designed to house 15-25 tech companies (2) three residential blocks with a total of 258 apartments, 47% of which to be affordable PRS units (3) retail and leisure including a boutique cinema, gym and spa and (4) a 14-storey, 210-bed five-star hotel. The ultra-modern development will also include a roof passenger drone landing pad on the showcase building. G&T is providing Cost and Project Management services on the proposed scheme.
  • The UK Green Building Council has released new energy performance targets for offices aiming for net zero carbon status. Offices looking to achieve this will be expected to first meet these targets and then try to use renewable energy for as much of the building's energy demand as possible, before offsetting any remaining carbon emissions. The targets start with current best practice and then tighten every five years up to 2035, by which time offices using them should already be operating at the energy performance standards required by 2050.
  • It is widely expected that Sajid Javid’s Budget on 11th March 2020 will include details of the new government’s construction strategy and national infrastructure spending pledges for the regions. The Treasury is expected to change its method of evaluating the economic benefits of spending after years of complaints that the current system favours London and the South East. It is anticipated that the themes of productivity, modern methods of construction and net-zero carbon emissions will feature heavily.