Strong pipelines in the month ahead are a cause for optimism

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  • The BEIS’ latest building materials and components data shows the ‘All Work’ material price index rose by 4.5% in July 2021 compared to the previous month – the largest monthly increase since the series began. The ‘All Work’ index has now risen by more than 20% over the past year, hitting a record high as the sector struggles with supply chain disruptions. The rising costs of imported sawn or planed wood (which increased by 22.7% between July and June alone) and steel (up 6% month-on-month) loom over the sectors’ recovery as businesses worry about cost overruns and project delays.

  • According to Glenigan the value of new project starts fell 14% in the three months to the end of July 2021 compared to the previous quarter. There was also a slowdown in the number of planning consents, which fell by a fifth compared to the previous quarter. However, the recent slowdown – a result of a perfect storm of external supply chain events – is modest and not as serious as many predicted. Strong pipelines in the months ahead are a cause for optimism, which should calm the nerves of firms concerned about a post-COVID slump. Glenigan’s forecast predicts that project starts will see a return to pre-COVID levels in 2022, helped by the likelihood of the Government announcing a major retrofitting programme in the coming months.
  • Business secretary Kwasi Kwarteng said the publication of the Government’s long-awaited hydrogen strategy “marks the start of the UK’s hydrogen revolution”. The new strategy sets out the approach to developing a thriving hydrogen sector, outlining how it can meet production capacity targets. The plan includes grants to help construction firms shift from fossil fuels and ministers have earmarked £105m to support polluting industries to eradicate carbon-intensive fuels (eg red diesel) from their operations.
  • Construction vacancies continue to rise as the endemic skills shortage intensifies. According to the ONS there were 38,000 vacancies in the sector in the three-month period between May and July 2021 – the highest number of vacancies in 20 years. However, the sector’s figures were in keeping with the wider economy where job vacancies across the UK also hit a record high. The number of people employed in UK construction has started to respond to the rising vacancy levels but a substantial gap between the two data series remains. Labour shortages have brought about a 14% rise in construction average weekly earnings in the year to June 2021, putting significant upward pressure on construction costs.

  • The Civil Engineering Contractors Association (CECA) and six other industry trade bodies want the new tax break for machinery purchases to be extended to those that hire the equipment. The Chancellor has been asked to widen the eligibility criteria for the recently introduced super deduction allowance (SDA). Under the SDA, until April 2023 purchasers can claim 130% capital allowance against qualifying new plant purchases. It was designed to stimulate business investment and incentivise the replacement of old polluting machinery, but CECA think that companies choosing to lease rather than purchase their machinery should be able to benefit from the temporary tax allowance. CECA director of external affairs Marie-Claude Hemming said the SDA doesn’t reflect the practices of many civil engineering firms on the ground. In construction, where plant and machinery is highly specialised, around 70% of it is hired on a project-by-project basis. She added:

“If the Chancellor were to extend the super deduction allowance to include short-term hire and leasing, it would provide an added incentive to firms to use the newest plant and machinery, with obvious environmental benefits, as well as feeding through to efficiencies in project delivery.”

  • According to Mark Farmer there is still (just about) time for the construction industry to modernise rather than die. In a recent article Farmer suggested that the industry’s underlying weaknesses are now more exposed than ever. A declining resource resiliency, logistics failures and reduced availability of labour are a “further salutary wake-up call” to the industry. Farmer suggested that construction’s continued reliance on traditional methods and site labour intensity, its inability to wean itself off sub-contract and casual labour, its non-UK worker dependence plus its failure to get organised in addressing the industry attraction and training challenges that we have been moaning about for years now mean that the industry should in reality be putting itself on a crisis footing. Farmer added that unless the current labour model is addressed:

“Construction output will naturally start to decline as clients face growing cost viability, predictability or performance challenges – work will simply stop being commissioned. This should be a real wake-up call to those looking forward to a period of post-pandemic growth.”

Client & Contractor News

  • Laing O’Rourke announced that it is planning a stock exchange listing by 2024, once a successor for founder Ray O’Rourke has been secured. If listed in London, the UK’s biggest privately owned contractor will join competitors such as Balfour Beatty, Kier and Morgan Sindall. The company added that “it may not list in the traditional way”, but no further details were provided. The firm’s results in recent years have been blighted by various problem contracts, including a disastrous PFI hospital contract in Canada. The company made a £45.5m pre-tax profit in its 2020 financial year on revenues of £2.4bn, after suffering a loss of nearly £220m four years earlier. But with £600bn of post-pandemic government spending commitments on infrastructure projects over the next five years, its outlook is far brighter prompting Ray O’Rourke to suggest that “By 2024 we will be in good shape”.
  • Costain chief executive Alex Vaughan has said that the introduction of the UKCA certification system that is set to replace the existing CE mark for products will need to be delayed for a second time. The UKCA mark is now due to be launched on 1st January 2023 but Vaughan has been pushing for a further delay amid concerns relating to testing capacity in the UK. He added that testing on products needs to be done properly and that the Government couldn’t afford to take shortcuts. While he argued that the extension is a positive step and shows that the Government is listening, thousands of products need to be tested to make the new regime work. The CPA also admitted that “We are not in fact wholly convinced that one year will be enough time to address all the challenges at hand.”
  • Severfield, the UK’s biggest steelwork contractor, has reported that its forward order book has hit a record level. In a recent trading update, the firm said that wins on Everton’s new £500m stadium and bridge packages for HS2 have helped push its order book value to £376m – up from £301m reported in June. Around 90% of its order book is for jobs in the UK and £291m (or 77%) of its orders are for delivery over the next 12 months. The company said that it is well-positioned and has a strong future workload for the remainder of the 2022 financial year and beyond. It added:

“We continue to be very encouraged by the current level of tendering and pipeline activity across the Group. We remain well-positioned to take advantage of further significant opportunities, including in the industrial and distribution, transport infrastructure, commercial office (including in London), nuclear and data centre sectors, providing us with extra resilience and the ability to drive future profitable growth.”

  • The green light has been given for a new three-block passivhaus development near Canary Wharf. The mixed-use development at 2 Trafalgar Way consists of three towers of 28, 36 and 48 storeys that will rise from a four-storey podium and provide nearly 1,700 student accommodation units, 68 homes, over 4,000m² of commercial space and 1,200m² of retail space. Architect Apt included a “sky bridge” as part of the design, linking student amenity levels in two of the three towers. The project is targeting a BREEAM ‘Outstanding’ rating and the scheme could become the largest passivhaus scheme in Europe, providing a high level of occupant comfort while using very little energy for heating and cooling.
  • Thames Water has appointed SGN Commercial Services and CNG Services to design, construct, operate and maintain biogas processing installations at its sewage works. With the water sector committed to reaching net zero by 2030, Thames Water plans to increasingly use ‘gas-to-grid’ technology (rather than anaerobic digestion facilities that use gas to generate power through combined heat and power (CHP) engines) and will work alongside SGN and CNG to deliver these gas-to-grid installations. The initial project will be at Thames Water’s Deephams sewage treatment site in Edmonton, London. Sewage will be used to create biomethane as a heat and power alternative, which will help offset more than 8,000 tonnes of carbon dioxide from entering the atmosphere each year. The eight-year framework has an estimated contract value of £70m.

Materials & Commodities

  • The Construction Leadership Council (CLC) and Builders Merchants Federation (BMF) have warned that a shortage of lorry drivers is forcing builders’ merchants to pick up orders from some suppliers as the material crisis continues. The CLC’s product availability working group noted that Scotland and the South-West were being particularly affected by the lack of availability of haulage drivers. The problem, however, isn’t construction-specific and the haulage issues are affecting the wider distribution network with no apparent short-term fix. According to the CLC’s latest Construction Product Availability Statement:
  1. The overall supply situation has not changed substantially but did temporarily ease in August
  2. Some domestic customers are delaying or cancelling projects due to higher cost uncertainty
  3. Timber, cement, roofing products, bricks, blocks, insulation, steel and cable management systems remain the products in shortest supply
  4. Although product and material price inflation has slowed, indications are that it will be 2022 before prices stabilise, with some manufacturers still to implement double digit price increases to recover current and future cost inflation
  5. The Department for Transport is engaging with the freight sector and hauliers to look at both interim and longer-term solutions, which require collaboration between government and the sector
  6. Container shipping continues to affect imports. Key ports in China are suffering reduced capacity due to COVID, but the backlog extends beyond China throughout distribution centres worldwide.
  7. Shipping container prices are high due to limited capacity but rates are not sustainable and are expected to reduce when demand signals change
  • Building materials company Kingspan reported that pre-tax profit grew by 67% in the first half of 2021 compared to the same period last year. The firm said it has “experienced unprecedented demand, coupled with increasingly acute supply constraints and an inflationary curve never experienced before”. This helped drive revenue and trading profit to record levels. The firm said that despite inflation in its input costs, effective price management has helped increase trading margins, particularly in its largest division – insulated panels. However, order intake and delivery growth was achieved in almost all of its markets. While boding well for Kingspan, the company anticipates further disruption to its supply capability due to some critical raw material constraints.

UK Economy

  • A survey by Lloyds Bank has revealed that business confidence in the UK is at a four-year high. The bank’s business barometer showed overall confidence rose by six points to 36% in August, marking its highest level since April 2017 and offsetting a slight dip in July. Firms in all three major sectors of the economy were optimistic that the economic recovery would continue but there was caution among companies about inflation and staff shortages. The rebound in sentiment in August was widespread across the UK, with nine of 12 regions and nations reporting improving confidence.
  • The UK economy grew 4.8% in Q2 and output in the final month of the quarter (which expanded by 1%) was just 2.2% below the level in February 2020. Economists suggest the economy is on track to return to pre-pandemic levels of output before the end of the year providing the virus remains under control. However, with output growth expected to slow in the third quarter Yael Selfin, chief economist at KPMG, said “...there is a growing risk that a slowing pace of output growth could coincide with even higher levels of consumer demand in the short term, leading to an unwelcome burst of inflation.” BoE officials estimate that inflation may peak at 4% this year – double its inflationary targets.

Global Economy

  • The gap between output from Eurozone manufacturers and the orders they receive widened to a 24-year record as a result of supply chain disruptions. According to IHS Markit’s monthly purchasing managers index (PMI) survey, these supply issues are feeding into higher prices for manufactured goods, which increased by 2.7% in the year to August, and contributed to a recent surge in Eurozone inflation to 3% - its highest level in a decade. Europe’s export-focused economy is being held back by supply bottlenecks and bit manufacturers have reported that these problems are likely to continue into next year but should mostly fade away once the economic rebound flattens out and the supply of key materials increases.
  • Chinese manufacturing activity contracted for the first time since April 2020. The Caixin China General Manufacturing PMI, an independent survey of factory activity, came in a 49.2 in August, dropping below the 50-mark that separates monthly expansion from contraction. Grappling with weaker export demand, high prices of raw materials and a cooling property sector, both supply and demand in the manufacturing sector shrank as Covid-19 outbreaks disrupted production. The gauges for output, total new orders and new export orders all dropped into negative territory but inflationary pressure remained high due to rising transportation costs and raw material shortages.