Conflict in Ukraine: assessing the impact on European construction

Further global disruption is now being seen as a result of the war in Ukraine. This humanitarian crisis is having ripple effects far beyond the country’s own borders, and domestic and international markets are now grappling with the displacement of Ukrainian people, the fallout from the raft of political sanctions on Russia and the rising prices for energy and commodities.

All of these are having a direct and indirect impact on industry. Given the reliance on potentially vulnerable supply chains, construction in Europe needs to be prepared to adjust to this disruption. Here are some implications for the market and programme delivery that we need to play close attention to.

Constrained growth

Clearly, the impact of war upon the EU economy and its construction industry will depend on the extent to which the conflict, and the severity of sanctions and economic disruption, escalates and how long it lasts.

However, the latest forecast for EU construction by Euroconstruct indicates that the industry is expected to grow over the coming three years, albeit at a slower pace than recorded in 2021 and lower than pre-Ukraine conflict levels.

In 2022, construction output is forecast to increase by 3.6 percent before decelerating further, with 1.5 per cent and 1.2 percent growth in 2023 and 2024 respectively.

Reduced demand could shape the market. As time progresses, increased costs and supply-chain dislocation may well translate into reduced demand within construction, which could lead to the postponement and cancellation of projects. This may even happen in the short term as schemes become unviable and projects currently in flight become untenable.

Inflation affecting supply chains

As a result of war in the Ukraine, material costs are set to increase further from an already high base and this will be exacerbated by rising energy prices.

Materials with energy-intensive production processes including bricks, ceramics, cement, plastics and steel, which require high volumes of energy in part to extract required minerals and manufacture, are at high risk of further cost escalation.

Major cement and building materials companies have stated that they will be passing higher materials costs on to customers, which will in turn feed into higher project costs, and a squeeze on contractor margins. This then could lead to rising costs being passed more readily up the supply chain.

Higher crude prices will also impact oil derivatives, including bitumen, which will notably contribute to higher costs for highways projects. Rising energy and fuel prices are also feeding into increased site operating costs and higher preliminaries, with fixed costs increasing and overheads moving.

Steel squeeze driven by sanctions and energy costs

After China, Ukraine and Russia are the world’s second and third largest steel exporters and in 2020 they accounted for over 70 million metric tonnes of supply. Data from the European Steel Association indicates that, of the EU’s 16.6 million tonnes of flat product imports in 2020, Russia accounted for 14 percent, and Ukraine for 8 percent.

A high proportion of Europe’s long steel products are also supplied by Russia, Ukraine and Belarus. Around 4.5 million tonnes of long products come from Russia, which was the leading supplier, accounting for 19 percent of the total, with Ukraine supplying just over 7 percent.

Belarus, which is also facing sanctions given its supporting role in Russia’s invasion of Ukraine, also provides approximately 14 percent of the EU’s imports of long products. The supply of steel is not only being constrained by the disruptions in production, but also because steel mills across Europe have had to shut down due to the surges in energy prices.

Because of this, steel buyers are now looking to Asia, Japan and China to supply their needs, increasing the lead in period due to the extended time to procure and shipping time.

A new era of trade regionalisation

Many global commentators are now highlighting that we are entering a new era of deglobalisation. There are a number of factors: from the war and the rise of populism, to more businesses realising during the pandemic that supply chains are too long, and often too reliant on one supplier or indeed one country.

These factors are driving the trend for reshoring manufacturing, and businesses are adding ‘what if’ resilience to their operations. The impact is that we could start to see a greater regionalisation of trade, and time will tell how this shapes construction programmes across Europe.

Long-term geopolitical impacts

Russia’s war on Ukraine has set the tone for an uncertain future in Europe. Rising energy prices and further supply-chain disruptions are likely to lead to general price increases - above currently high levels. For the EU economy and its construction industry, tender prices are increasing, material and component availability decreasing and lead times extending.

This will potentially culminate with lowered construction output as time progresses. Yet the influence of the Ukraine conflict will be variable by location, sector, asset class and product. While the inflationary impact may be felt in the medium term, the geopolitical shifts are likely to have long-term impacts which could shape new regionalised trade models.