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Covid/Brexit double whammy hits supply chain

Words:
Brian Green

Yoyo-ing lockdowns, unexpected home improvement surges and Brexit red tape have caused chaos in the materials supply chain. Where does that leave construction capacity?

Send a ripple through a modern supply chain and it tends to smooth quickly, perhaps after causing a few quirky effects. Send two earthquake-like shocks simultaneously and you might reasonably expect chaos and a host of major upsets.

Judged on that basis, the construction materials supply chain has so far proved reasonably resilient to the double impact of Brexit and coronavirus. But there have been complaints of shortages and, in late January, the Builders Merchants Federation warned of supply problems of some materials caused by hikes in demand and problems with imports.

So how and where should we expect problems to emerge that might restrict the supply of construction materials and hike prices?

First off, it is worth noting that supply chains in construction tend to be far from the lean, just-in-time systems associated with manufacturing. The diversity of construction firms and projects, by type, size, and location, and the diversity of sources of materials, complicates the supply of materials. The wide range of options afforded to designers and specifiers increases complexity. And the ad hoc way materials are often purchased makes it harder still to create a slick lean supply chain.

On the upside, this diversity adds a bit of resilience, with ready alternatives often available when shortages occur. Furthermore, the complexity leaves plenty of space for builders’ merchants which provide a distributed stock on the ground adding a bit more resilience against hiccoughs in supply.

The supply of construction materials rests on three broad factors: production, delivery, and stocks. All were disrupted by the pandemic. This consequently affected availability. But the biggest effects on availability appear to have come from the unexpected speed and scale of recovery in some sectors of construction after the initial lockdown. That pushed up demand for some products and materials causing shortages in supply.

No business connected with the construction supply chain could reasonably have prepared for coronavirus, given the uncertainty. Before the lockdown in late March, nervousness had set in. There were signs of work slowing. When lockdown was finally called, workloads dropped rapidly, to about half of what might have been expected for the time of year. Many builders' merchants closed their doors for most of April. Some manufacturers halted production. It was unclear when demand would pick up and how fast.

The intensity of the falls varied by sector, with housing projects, newbuild and improvement, shutting down hardest. When activity began to recover, the pace was very uneven. Infrastructure work remained strong and is now at historically high levels. House building quickly recovered most of its pre-pandemic momentum. The big surge was in housing repair, maintenance, and improvement work which in the fourth quarter this year was its highest since 2004. Non-residential repair and maintenance also surged to heights not seen since 2008. Most other sectors are running slower than a year ago, as we see in Chart 1.

Chart 1.
Chart 1.

The surge in households doing up their homes and gardens was one of the oddities of lockdown, although understandable with hindsight. This created a rush on landscaping and other related products, as both trade and DIY customers looked to lay decking and paving and erect fencing, ready to make the most of a potentially prolonged lockdown.

Chart 2.
Chart 2.

Chart 2 echoes this, showing the rapid recovery after a swift fall in the work undertaken by local builders. The Federation of Master Builders surveys point to housing repair, maintenance, and improvement as the biggest driver.

Chart 3 shows the impact on builders’ merchant sales, using monthly data from the Builders Merchants Building Index. Compared with a year earlier there was a fall of 43% in overall sales in the three months March to May. Over June to August sales broadly recovered, and through September to November sales were running around 6% ahead of a year earlier.

Chart 3.
Chart 3.

Chart 4 shows sector change in the BMBI and illustrates just how uneven the recovery was between types of materials. It compared activity over three three-month periods with corresponding activity in the previous year. Unsurprisingly, perhaps, work and safetywear were less impacted. Indeed, in February and March, as fears over coronavirus rose, sales jumped a third on the year earlier.

Chart 4.
Chart 4.

More pertinent was the rise in landscaping products and timber, and continued high levels of demand. These figures don’t show the rise in activity in the DIY retail sector. But we can turn to Kingfisher, which owns both Screwfix and B&Q. Its figures show sales on a like-for-like basis at B&Q were on a bit of a slide after May 2019, while Screwfix sales continued to grow. In its first quarter in 2020 (February to April) sales at B&Q plunged by 22%, reflecting the lockdown, with Screwfix sales dropping 5%. In Q2 (May to July) the picture looked completely different. B&Q sales were 28% up on a year earlier with Screwfix up 2.4%. Q4 sales at B&Q were up 24%, with Screwfix up about 13%.

While B&Q has trade customers, the figures provide a good clue to the scale of the uplift in the DIY retail sector. And while some of the retail sales will have been related to, say garden furniture, there was clearly a big draw on the construction supply chains. B&Q’s financial data suggests the high level of activity has been sustained.

Chart 5.
Chart 5.

This supports the view that central to the problems builders face over the availability of materials is the shudder in the supply chain caused by a big rise in demand in some sectors. This tested a supply chain that had already been disrupted.

Even for products that may be less affected by demand running higher than normal, it will take a while to iron out the wrinkles created in some product lines. For instance, concerns over the availability of plaster and plasterboard reflect issues caused by factories closing in the first lockdown. This means that many builders who were used to walking into a merchant and getting materials off the shelve now need to order ahead if they want to guarantee getting what they want.

Interestingly, while there have been some headlines over shortages of bricks and blocks there have been fewer than might be expected, given the strong house building bounce back. This is despite a year-on-year decline in production, as we see in Chart 5, which shows production and distribution on a 12-month rolling basis. This illustrates the level of complexity in the supply chain and how hard it can be to predict where problems lie and what are the causes.

Chart 6.
Chart 6.

The pressures within the supply chain are reflected in price rises. Chart 6 takes indicative price data from the business department BEIS. The chart includes only those materials listed that have seen price inflation above 5% in the year December 2019 to December 2020. Timber clearly presents a problem, with prices up more than 11%.

Disruption to imports has been mooted as a possible cause of problems, with causal observers seeing the impromptu lorry parks caused by the combination of the pandemic and Brexit. But, again, the reality is less straightforward. Not least because many if not most of the imported building materials come by container ships to ports such as Harwich.

Imports account for about 24% of construction products and have for decades been equivalent in cash terms to 10% of construction output. But they tend to be concentrated on certain product groups, such as timber (13%), basic electrical products (15%) and heating, ventilating, and other services equipment (17%). The UK also imports a lot of its ceramics and some builders’ hardware items. Most heavy materials will tend to be produced as close to activity as possible to reduce shipping costs.

Chart 7 shows that the flow of imports in comparison to construction output. Intriguingly the patterns almost match. The dip in imports closely echoes the dip in construction, with the drop in imports broadly even across most material.

Chart 7.
Chart 7.

It seems that the problems lie more in globally traded materials and products. The shudder in the system caused by the pandemic resulted in global demand for timber falling and then surging. This has disrupted supplies of timber and steel. The US, which normally sources its timber from home sources, found itself dipping into northern European to feed its demand surge.

The IHS Markit/CIPS UK construction PMI for January noted that firms were reporting major delays in receiving imported products and materials from suppliers, with congestion at UK ports lengthening delivery times. And they were seeing rising steel and timber costs pushing input price inflation to the highest level for more than two years.

There is however a further issue. Shipping costs on key routes have risen sharply. The China/East Asia to Northern Europe route has seen container prices quadrupling between November last year and January. This is not a problem isolated to the UK. It is a global problem.

Many factors are at play. There is congestion at ports. The location of container ships was messed around during the pandemic. Ships from China facing a return without cargo, ramping up costs. Ships were mothballed reducing capacity. And some suggest that fear of chaos over Brexit may have led some shippers to put the UK lower on the priority list. Whatever the causes, there are likely to be some price rises in the pipeline to cover for the jump in shipping costs.

Looking at Brexit, there are issues with building materials supply for those in Northern Ireland, with the complications created by the protocol needed to avoid a hard border with the Republic of Ireland. That is, to allow it to operate within the EU single market.

However, for Great Britain, the longer-term effects are yet to emerge. The building materials industry is dominated by global players, with many companies operating as European businesses. They will in the wake of Brexit determine how best they can service the now separated markets of the EU and UK. The solutions will be based on what is best for their businesses. That could end up creating some odd outcomes.

Looking at the effects of the pandemic, it seems that the full impact of the disruption in the supply chains has yet to fully play out. So, until the distortions in the balance of supplies and demand are better resolved, frustration will remain for those looking to source key materials. They will need to plan well ahead and more cautiously, nailing down supplies further in advance than before the pandemic.

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