Compass International – The Global Construction Newsletter for April to June 2022:
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.
THINGS WE WILL SEE IN THE 2nd Q OF 2022:
USA, CANADA, and MEXICO are forecast to see between 3.5% & 4.4% GDP growth in 2022.
The USA has pledged to the European Union that it will supply at least 15 billion cubic meters or more of LNG this year, which should be good news for the US LNG industry.
Construction-related materials, such as copper (cable/pipe), structural steel, rebar, piping (PVC, CS & SS), lumber, and plywood, are rising once again in the last couple of weeks relating to the Russian/Ukraine war.
Is $5, $6, or $7 a gallon of gasoline on the cards for US motorists in the next month or two? Looks like it. In the US, as the warmer summer months arrive, there will be an increased demand for gasoline as families go on vacation. Look for European energy (oil/natural gas/electricity) prices to increase dramatically in the coming months, and the recent ban by the USA on imports of Russian Oil and Gas is bound to increase gasoline prices in the USA.
Some good news, it appears there will be more infrastructure-related projects in the US in 2022.
Unfortunately, the USA has seen more than 900,000- related deaths from the COVID pandemic.
Escalation in the USA is more than 8%, Canada is seeing an 18 year high at close to 5%, and Mexico is seeing 7%—a 20 year high. This could be a problem in 2022.
The Canadian and Mexican economies and construction sectors could be severely impacted by the ongoing war in Ukraine. It is difficult to forecast the long-term impact on both these economies.
Western and Eastern Europe is forecast to see minimal or negative GDP growth in the 2nd Q of 2022.
Russia is a major supplier of oil to Europe. It seems that European countries are in a tough spot.
The Russian invasion of Ukraine has been a wake-up call; it has revealed the susceptibilities of European energy sources.
The invasion also triggered Germany to stop the agreement on the contentious Nord Stream 2 gas pipeline from Russia.
In just 4 weeks, 5 + million Ukrainians, more than 10% of Ukraine’s 44 million population, have fled the country. This number could increase substantially in the next couple of weeks. Countries bordering or close to Ukraine, such as Poland, Moldova, Turkey, Bulgaria, Romania, and Slovakia could also face serious economic challenges with hundreds of thousands of refugees fleeing Ukraine.
European economies and their construction sector will face a challenging period in the months ahead.
The average cost of a liter of petrol in the UK has risen by more than 25% in the last 10 days. Will fuel prices keep escalating? Probably. Other European countries have experienced similar increases.
Escalation is surging in some northern European countries. Estonia, Germany, Latvia, Lithuania, Russia, and Poland are seeing rates in November ranging between 7% & 10% and energy prices have risen by as much as 25% in the last 6 months.
The ongoing Brexit trade “spat” will continue to impact European construction until it is resolved. The UK and the European Union continue to squabble over the terms and conditions of the so-called agreement. Some industry experts believe the UK will benefit at the expense of both France and Germany.
The COVID-19 virus issue appears to be improving, however, there remains the possibility of new COVID strains appearing.
The ongoing Russia – Ukraine hostilities will, of course, negatively impact the construction sectors of Germany, France, Italy, Spain, and the UK. The latest thinking is that these construction sectors will hopefully start to see an improvement in the 2nd half of 2022, if and when the Russia – Ukraine war can be concluded.
In a sign that the Russia – Ukraine conflict is really dangerous, Scandinavian historically-neutral countries, Sweden and Finland, are both now contemplating/exploring joining the NATO military pact.
The European economies and construction sectors could be severely impacted by the ongoing war in Ukraine. It is difficult to forecast the long-term impact on the European economies.
ASIA (Asian countries are projected to see 3.5% to 4.6% GDP growth in the 2nd Q of 2022)
China and India are the world’s most populated countries, accounting for 33% of the world’s population. Both countries are carefully watching and weighing up what is in their best interests, and what will be the long-term fallout from Russia’s invasion of Ukraine. India is poised to buy “cheaper” Russian oil that will benefit its economy. China has not figured out what to do yet. 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.
The impact of the Russia – Ukraine war on the construction sector has yet to be fully determined.
India appears to be recovering from the COVID pandemic, having experienced more than 0.50 million fatalities.
Construction-related escalation/inflation is increasing in Asia. India is up to 12.5% and Pakistan stands at 11.5%. The Philippines and Sri Lanka are both reporting 9.9% inflation rates. Look for these rates to increase in the next 3 months.
The Asian economies and construction sector could be severely impacted by the ongoing war in Ukraine. It is difficult to forecast the short-term and long-term impact on these economies and construction sectors.
AFRICA (African nations are set to see minimal, or in some cases, negative GDP growth in the 2nd Q of 2022)
Africa was a big importer of wheat and barley from Ukraine and Russia. With these products currently unavailable because of the ongoing war, prices have already started to rise. Experts are indicating that there will be a serious food shortage that will cause problems for many African nations.
Africa contains hundreds of millions of citizens that have not yet been vaccinated; this is a major issue that still needs to be resolved.
The African economies and construction sector could be severely impacted by the ongoing war in Ukraine. It is difficult to forecast both the short-term and long-term impact on the 50+ African countries.
RUSSIA (Russia is forecast to see negative GDP growth in the 2nd Q of 2022)
The USA, European Union, UK, Canada, Japan, South Korea, and Australia have leveled tough sanctions/penalties on Russia with possibly more to come as a result of their hostilities against Ukraine. Russia will have to deal with the severe sanctions that could cripple its economy and construction sector.
The Russian economy, before the commencement of hostilities in Ukraine, was slightly smaller in economic terms than Italy. Look for the Russian economy and construction sector to contract by at least 10% to 20% in 2022, with price hikes, high inflation, and rising unemployment appearing to be in the cards within the next 3 months.
Russia and Ukraine are both large exporters of some specialty metals/minerals, such as palladium, titanium, and manganese/nickel, which most probably will cause shortages and price increases. Ukraine is also a large exporter of wheat (it supplies 35% of the world’s output). This is another issue to deal with.
Needless to say, 2022 will be a challenging year for the Russian l construction sector. The effect of the ongoing war with Ukraine has yet to be fully understood.
Russia is currently experiencing high inflation rates, between 8% and 14%. This could lead to higher construction costs or projects getting canceled in 2022.
Oil prices have increased by more than 35% in the last 3 months. This is somewhat good news for the Russian economy and construction sectors if Russia can sell its oil/gas products.
The Russian economy and construction sector will be severely impacted by the ongoing war in Ukraine. It is difficult to forecast the long-term impact on the Russian economy and construction sector.
SOUTH AMERICA (South America is predicted to see minimal GDP growth in the 2nd Q of 2022):
It appears 2022 will be a challenging year for the South American construction industry. The impact of the new COVID-19/OMICRON strain on the construction sector has yet to be determined as we move into 2022, plus the added challenge of ongoing Russia – Ukrainian conflict will put a damper on future economic and construction sector growth.
The impact of COVID/OMICRON is improving. The pandemic appears to be getting better in most South American countries.
Brazil’s construction-related inflation was 11% to 13% in March, the largest increase in more than 20 years. Chile, Peru, and Argentina are experiencing higher inflation as we move into 2022, and unfortunately, this will impact construction costs.
South America has millions of citizens that have not yet been vaccinated. This remains a serious problem that still needs to be resolved.
The jury is still out on the Russia – Ukraine conflict. Possibly in three to six months from now, we will have a clearer understanding of how we can get past this event and how it will impact the construction sectors of all the South American countries.
MIDDLE EAST (The Middle East countries will see positive GDP growth in the 2nd Q of 2022):
The Middle East economies and construction sector could be severely impacted by the ongoing war in Ukraine. It is difficult to forecast the long-term impact on these economies and construction sectors.
Some Middle East/North African countries such as Algeria, Libya, Iraq, Saudi Arabia, Iran, and some of the Middle East Gulf States (Qatar, Kuwait, and UAE) are likely to experience an economic windfall from the recent price spikes of their exports of oil and LNG products.
2022 will be a challenging year for some Middle East construction sectors. The effect of the ongoing war with Ukraine on the construction sector has yet to be fully understood. However, look for growth, particularly in the oil/refinery, energy petrochemical/industrial construction sector in 2022. Some economists are forecasting $125 a barrel of crude oil, which could increase energy/petro/gasoline prices by 50%.
The rising price and demand for oil could turn out to be a great boost for Middle East countries that could benefit future oil and gas construction projects.
We are starting to see signs the COVID-19 epidemic is starting to weaken in some Middle East countries, unfortunately, the OMICRON strain showed up in December, however, this problem appears to be improving.
Australia and New Zealand combined will see 2.5% to 3.3% GDP growth in the 2nd Q of 2022:
The Russia – Ukrainian war will challenge the Australian and New Zealand Construction sector, with increased inflation/escalation rates and construction material pricing spikes, and possible shortages.
It would appear that the Australia and New Zealand construction sector has weathered the COVID virus. That being said, it appears that 2022 will continue to be a challenging year for the Australia and New Zealand construction industry.
Construction is one of the top 5 industries in Australia and represents approximately 10% of the country’s annual GDP. The value of construction work each year is in the $350 to $400 million range and the industry employs between 1 and 1.25 million individuals.
Australia’s economic relationship with China has seriously cooled down in the last 12 months. This issue is related to China’s South China Sea territorial claims that Australia is criticizing. This dispute will impact Australian mineral exports and could impact future mining-related projects.
The recently announced AUKUSA nuclear submarine deal has upset China. While still in its early days for the AUKUS program, the pact will bring several key technological benefits to Australia.
Procuring overseas construction materials has sent the cost of imported lumber, plywood, copper, rebar, and other materials skyrocketing in both Australia and New Zealand, however, some of these price spikes are beginning to show themselves again, possibly due to the Russia – Ukraine conflict.
Contractors are experiencing material shortages. Delivery times on construction materials have increased from a normal 2 to 4 weeks to 6 to 20 weeks to arrive at the site and even longer in some cases.
Supply chain interruption issues look like they will get worse over the next couple of months.
Overseas – ocean freight costs have increased by more than 35% in that 15 weeks. This will impact imported materials into both Australia and New Zealand.
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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