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March 9, 2022updated 27 Jul 2022 5:29pm

Materials prices facing renewed upward pressure following Russia’s invasion of Ukraine

Price pressures were not expected to ease significantly in 2022, owing to projections of continued high energy prices, but owing to the military conflict, further bouts of supply shortages.

By GlobalData

Russia’s invasion of Ukraine has already heavily impacted global commodities markets, and even if the military conflict proves short-lived, it will have far reaching consequences on the construction industry in the months to come, via the impact on steel, oil and energy prices. Construction material prices had already soared in 2021, owing to supply chain disruptions at a time of surging demand, as construction activity was ramped up following the easing of Covid -19 restrictions. Price pressures were not expected to ease significantly in 2022, owing to projections of continued high energy prices, but owing to the military conflict, further bouts of supply shortages, along with high transportation costs, will contribute to further upward price pressure. The EU is in a particularly precarious position given the significance of Russia’s exports to the region. Russia supplies approximately two-fifths of the EU’s gas imports, and nearly a quarter of its oil imports.

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Steel prices

Steel was among the most affected products in terms of soaring prices last year, with prices being approximately 60% higher in October, compared to the level at the end of 2020. Although prices have dropped back from these highs, reflecting improvements in the demand-supply balance heading into 2022, higher global energy costs were expected to keep upwards pressure on prices this year. The conflict in Ukraine is now expected to generate renewed pressure on steel prices. This reflects the likelihood of intense disruption in supplies from Ukraine, which is a key exporter of steel products and iron ore, with reports of steel mills being shutdown and transport links and freight services coming to a halt.

There is also the potential for disruption in the deliveries of steel from Russia, owing to logistical challenges, along with sanctions being ramped up, and restrictions being imposed on Russian banks in completing international financial transactions. According to data from the European Steel Association (EUROFER), of the EU’s 16.6 million tonnes of flat product imports in 2020, Russia accounted for 14%, and Ukraine for 8%. Of the 4.5 million tonnes of long products Russia was the leading supplier, accounting for 19% of the total, and Ukraine supplied just over 7%. Belarus, which is also facing sanctions given its supporting role in Russia’s invasion of Ukraine, also provides approximately 14% of the EU’s imports of long products.

Oil prices

Given tightness in the global oil market, crude prices trended sharply upwards during much of 2021, and although pressures eased in early December, Brent prices ended the year at around US$80 per barrel. Prices have since continued upwards, with prices reaching the US$100 mark at the end of February, pushed up by the market’s reaction to the escalation in Russia’s military deployment in Ukraine. In view of the likelihood of prices continuing to rise in the short term, transportation costs will soar, impacting the prices of materials delivered to project sites. Higher crude prices will also impact oil derivatives, including bitumen, which will notably contribute to higher costs for roads projects. 

Energy costs

In addition to the upward pressure on oil prices, energy costs in general were already set to remain high in 2022, reflecting mainly the tightness in the global gas markets. Given Russia’s significant position in terms of gas exports, the military conflict will compound existing challenges facing energy intensive industries. For construction, this will mainly be reflected in higher production costs for key materials, notably bricks, ceramics and plastics, which require high amounts of energy in part to extract required minerals and treatment. Major cement and building materials companies have been stating 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.

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