Executive Summary:
On February 24th, Russia launched a large-scale invasion of its neighbor Ukraine. The consequences of this war are significant to the Global Construction Sector. Russia’s full-scale hostilities on Ukraine have resulted in strong, international measures focused on punishing Russia. The sanctions and current restraints on Russia also put difficulties on numerous other countries in Europe and around the world.
Russia’s invasion of Ukraine and the international sanctions that have been imposed will have a serious impact on the global economy in 2022 and possibly beyond.
Russia is a very significant supplier/exporter of oil, natural gas, and metals. Elevated prices on essential materials/metals/commodities have started to trigger major price spikes around the world. Between the supply of up to 35% of the world’s wheat and barley requirements and countries in the Middle East and Africa being major importers of these crops, prices have risen by more than 40% with both Russia and Ukraine unable to export these products.
More than 6.5 million people have fled Ukraine since the start of Russia’s invasion, over 2.5 million people have escaped to neighboring Poland, while around 650,000 have looked for shelter in Romania, and approximately 4000,000 have moved to Moldova.
The civilian death count in Ukraine has exceeded 1,400 since the start of Russia’s invasion. The invasion of Ukraine has caused considerable damage. Many ports, rail/bus stations, and airports have been closed or destroyed and numerous private and public buildings, roads, and bridges have been destroyed.
The Russian invasion of Ukraine has raised energy, oil, natural gas, and some commodities such as minerals/metals and wheat prices to record levels that could seriously weaken the economies of the vast majority of countries around the world, including the larger economies of the USA, Western Europe (Germany, UK, France Italy, etc.), China, India, Japan, and South Korea.
On the other hand, perhaps a dozen or more countries, such as Australia, Brazil, Canada, Nigeria, Algeria, Iraq, Mexico, Norway, Venezuela, Saudi Arabia, Iran, and some of Middle East the Gulf States (Qatar, Kuwait, UAE), are likely to experience an economic bonanza from their exports of oil, gas, timber products, wheat, and metals such as platinum, nickel, bauxite, tungsten/wolfram, lithium, and other minerals.
The inflation/escalation spikes we have experienced in the last 3 to 6 months present major risks and challenges to the Global Economy and Construction Sectors:
US construction costs are the highest in over 50 years. Contractors/owners are feeling the effects of increased construction costs related to steel, metal siding, copper (cable and piping), roofing, plumbing, drywall, timber products, process piping, and valves and electrical components.
In just 4 weeks, the Global Economic outlook has turned negative while fighting rages in Ukraine. It appears that Russia is intensifying its war effort on Ukraine. How long will this war last? Will other countries get involved?
The rapid price increase of oil and gas products brought about by the Russian attack on Ukraine will impair the recent global recovery as the full economic effect grows in the coming months.
US inflation escalated to 7.9% in February over the previous year, the largest increase since 1982, 40 years ago. The increase reported by the US Labor Department on March, 3rd 2022, did not include the recent oil/natural gas and gasoline price surge that followed Russia’s invasion of Ukraine. We’re estimating inflation will soar dramatically in March and April.
US oil producers are challenged; they are unable to ramp up oil production in the short term. Look for gasoline prices to increase big-time! One month into this crisis and oil is up to $117 a barrel. Where will it be in the next four weeks? Nobody knows, stay tuned.
Major Western oil companies have abandoned partnerships, joint ventures, and some ongoing CAPEX projects; this action will impact Russian oil production. The US, UK, and Canada have stopped imports of Russian oil that could amount to between 15% and 20% of Russia’s oil exports.
Surging inflation/escalation of construction costs will translate to increased costs, possible project delays, and cancellations. Inflation has become a financial strain for just about all nations around the world, with prices up in just about every category. USA inflation in January surged at the quickest rate in 40 years, and the Russia/Ukraine crisis will compound this issue. Economists warn inflation/escalation is likely to get worse in the next 3 to 6 months. US construction costs are up by 7% to 9% in the last 12 months, and the crisis could intensify this increase. Construction costs would likely increase by 10% to 15% in the coming months.
The Global Economy was just starting to recover from the COVID / OMINCON-produced crisis; a strong job market was getting underway. This current Russia/Ukraine crisis will stymie that recovery. Global supply chains struggling to recover from the 2 year COVID pandemic must be prepared for the continuing problem of shortages and delays of construction materials and associated related capital equipment. Supply chain interruptions and construction material price spikes/shortages are a big challenge forecasted to continue in the 1st half of 2022. Supply chain interruption issues look like they will get worse over the next couple of months.
Look for transportation/ocean and domestic freight costs to increase substantially.
COVID / OMICRON is still an ongoing problem in many countries.
Consumer goods/food/groceries show no sign of declining. A key inflation metric, the Consumer Price Index, rose 7.9% from a year ago. Unfortunately, this crisis will increase this rate.
A major global recession could increase unemployment rates and could be the event that causes many construction projects to be canceled or delayed.
None of us have experienced an event/crisis like this before. Unfortunately, a full-blown war (WW3) between NATO and Russia could develop. Let’s hope for the best.
Other clouds on the horizon include the USA/NATO getting embroiled in hostilities with Russia, the China/Taiwan problem, and North Korea’s continuing belligerence and recent IBM missile testing.
The bottom line is that construction material costs will increase in the months ahead.
Let’s hope this war ends as soon as possible and common sense triumphs before this crisis becomes an uncontrollable disaster.
2nd Q of 2022 Construction Outlook for Major Countries:
Countries | 2nd Q 2022 % GDP Growth | 2nd Q 2022 Inflation % | 2nd Q 2022 Unemployment % | Comments on Construction in 2nd Q of 2022 Future Spending Activity |
USA | 4.2 – 4.7 | 8% to 10% | 4.1 | The ongoing Russia – Ukrainian war will be another challenge for the US Construction industry, with rapidly increasing inflation/escalation rates and construction material pricing spikes/shortages and increased energy costs. The impact of the new COVID-19/OMICRON strain on the US construction sector is improving. Increasing construction materials prices is a major issue, brought on by pent-up demand after the Covid slowdown, the ongoing war in Ukraine, and the current USA housing boom. Oil and gas owners/operating companies are taking a second look at their 2022 CAPEX budgets with the recent strong rise in oil prices. Several CAPEX-related petrochemical, energy, and power projects could move forward in the 2nd Q of 2022. |
CANADA | 3.4 – 4.1 | 4.6 – 5.7 | 6.4 | The Russia – Ukrainian hostilities will test the Canadian Construction industry, with rising inflation/escalation rates and construction material pricing spikes/shortages in the next 3 months. Continuing higher oil prices will positively impact Canada’s oil patch. New RFQs/bidding opportunities on commercial-type projects should present themselves as we move further into 2022. |
BRAZIL | 3.9 – 4.2 | 10.7 – 11.3 | 11.7 | The impact of the new COVID-19/OMICRON strain on the Brazilian construction sector is starting to improve. The ongoing Russia – Ukrainian war will challenge the Brazil Construction sector, with skyrocketing inflation/escalation rates and construction material pricing spikes/shortages. Brazil has suffered from extremely high inflation and unemployment rates for the last 7 years. 2022 will see the same situation. |
THE UNITED KINGDOM | 5.1 – 5.6 | 4.3 – 5.5 | 4.2 | The Russia – Ukrainian conflict will challenge the UK construction sector, with increasing inflation/escalation rates, petrol, and energy prices, together with construction material pricing spikes and construction material shortages. BREXIT terms and conditions remain a problem. Once the COVID-19 pandemic is resolved, in say 3 to 6 months, the UK economy and construction sector could be set for a growth spurt if we can get beyond the problems in Ukraine. |
GERMANY | 1.2 – 1.7 | 4.1 – 5.1 | 3.3 | The Russia – Ukrainian war will challenge the German Economy and Construction sector, with skyrocketing inflation/escalation rates and construction material pricing spikes/shortages. Russia is a major supplier of oil and gas to Germany. It seems that Germany is in a tough spot until it can solve its energy needs. Germany has decided to increase its defense spending since the Russian advance on Ukraine. The German construction sector has experienced three difficult years; 2022 appears to be another problematic year. |
FRANCE | 3.7 – 4.6 | 2.9 – 4.2 | 7.1 – 7.7 | The ongoing Russia – Ukrainian confrontation will cause serious problems for the French Economy and Construction sector, with spiking inflation/escalation rates and construction material pricing increases/shortages. The challenges related to COVID-19/OMICRON strain appear to be improving. France has struggled with high unemployment since 2008. The ongoing war in Ukraine is an additional challenge to the French construction sector. Engineering and architectural firms are reporting a significant fall off of RFQs/new orders as we move into the 1st Q of 2022. |
RUSSIA | 0.7 – 0.9 | 8.9 – 10.7 | 4.8 | The Russia – Ukrainian war will negatively impact the Russian Construction sector and could cripple the industry, sanctions, closure of export markets, skyrocketing inflation/escalation rates, and construction material pricing spikes/shortages will be in place for possibly many months. Let us all hope this war ends as soon as possible. |
JAPAN | 0.7 – 1.2 | 0.5 – 0.8 | 2.3 – 2.9 | The Russia – Ukrainian ongoing war will impact the Japanese Economy/Construction sector for at least the next six months, with sudden rising inflation rates and increased construction material shortages and pricing spikes. Japan is a big importer of oil; rising oil prices puts a big strain on the Japanese economy The Japanese economy and construction sector are still underperforming. |
CHINA | 3.6 – 4.6 | 1.2 – 2.2 | 5.1 – 5.5 | The ongoing Russia – Ukrainian conflict will impact the Chinese Construction sector, with increased inflation/escalation rates, construction material shortages, and price increases. China has not figured out what to do yet with Russia and the rest of the world (help Russia or call for an end of hostilities). China’s economic trade with Russia is minimal compared to the huge trade it has with the USA, Japan, UK, Canada, South Korea, Australia, and the 27 members of the European Union. China’s economy and construction sector have recovered quickly. Painstaking lockdowns and population tracing policies checked the spread of the COVID-19 virus. The Chinese economy and construction sectors are starting to see decent growth again. China’s real estate house of cards could be brought down by real estate company Evergrande, the world’s most indebted company. This could send ripples throughout the global financial market. |
INDIA | 6.2 – 7.6 | 6.6 – 8.5 | 8.5 | India is poised to buy “cheaper” Russian oil that will benefit its economy. The Russia – Ukrainian war will negatively impact the Russian Construction sector, sanctions, closure of export markets, skyrocketing inflation/escalation rates, and construction material pricing spikes/shortages will be in place for possibly many months. Construction-related escalation is increasing significantly in India. This could be a serious problem for the construction sector. India continues to purchase advanced fighter jets and weapon systems for possible future problems with China and Pakistan. India has been hard hit by COVID-19, resulting in many deaths. Prime Minister, Narendra Modi, has earmarked a $2 + billion fund to mitigate the effects of the Coronavirus Pandemic on the Indian population and industry. India now ranks #5 in the economy league table, larger than both the UK and France. Where will it be in the next 10 years? |
2nd Q 2022 Prices at a Glance:
- Forecast Cost of a barrel of Crude Oil $125 – $145
- Forecast of Euro/US $ Exchange Rate 1.08 – 1.13
- Forecast of UK Pound/US $ Exchange Rate $1.30 – $1.40
- Forecast of Copper per pound $4.70 – $4.85
- Forecast of Aluminum per pound $1.15 – $1.25
- Forecast of Gold per Ounce $1,850 – $2,100
- US Construction Material Inflation (Basket of 10 construction materials) 6.9% – 9.9%
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