With the industry importing nearly a quarter of its products, how will Brexit uncertainties change cost and supply for construction?
For the working life of most architects in practice today, imported products have formed a large part of what they have eventually specified. Somewhere between 20% and 25% by value of the materials used in UK construction come from abroad.
It’s not just specialist items that you can’t get at home that are imported. It’s not just exotic or fancy stuff. Sure, we imported £100 million worth of glazed ceramic tiles from Spain and £33 million of unglazed ceramic tiles from Italy in 2016. And timber makes up a large slice of what’s imported, which is fair enough as we don’t grow enough in the UK.
Intriguingly though, the biggest building material category for imports is electrical wires. More than £1.7 billion worth was imported last year. China sells us the most (17% by value in 2016), but it comes from all over the world, Italy, Turkey, Germany, Poland, USA, Netherlands, even Egypt. And we see the stuff all over the world too. £720 million worth of electrical wires was exported.
Lamps and fittings came in as the second largest category imported, at just under £1 billion, followed by sawn timber (thicker than 6mm) at £840 million. Steel and aluminium structures, paints and even relatively cheap stuff for its weight, like bricks and concrete blocks, are imported. The top 25 imports and exports of building materials can be seen in Table 1 (a and b).
In cash terms the total amount of building materials imported is estimated at £15.5 billion for 2016, which is what you’d expect if you followed the historic trends. Construction’s demand for imported products is longstanding and relates directly to output. More or less, in each of the last 40 years, for every £10 of construction output roughly £1’s worth of building materials is imported. Not all is used by the construction industry, however, some will go to DIY stores and in-house maintenance teams.
The closeness of this relationship can be seen in Chart 1. It seems extraordinary that it has held so tight for so long given that over time there will have been significant variation in the mix of imports, what we build, the nations from which we imported, the costs of production of products and exchange rates.
Leaving for another day curiosity over what binds this relationship so fast, the big thing that all the above shouts is that the UK’s construction industry is tied intimately into global trade.
So what does this all mean for architects?
Unless there are extraordinary (although what defines extraordinary today?) U-turns made in many quarters, from April 2019 onward the UK’s trade relationships will be fundamentally changed. The transition to a post-EU trade regime may all go smoothly. But there are distinct signs that there will be plenty of hiccoughs on the way. This may spell both temporary and long-term problems for those sourcing materials.
Meanwhile, in the shorter term UK firms have to deal with the consequences of the sudden fall in the value of the pound in the wake of the EU referendum. The effect has been to create large inflationary forces as the price of imports rise when paid for in Sterling. Chart 2 illustrates the scale of the fall in the pound relative to both the US dollar and the Euro.
Working out the impact of weaker Sterling on import prices is far from straightforward. The data are a bit hit and miss and the speed at which inflation finds its way into the system is far from evenly paced within product streams, let alone between them. Terms of purchase will vary, some firms will hedge, while others will have bought well in advance. And the materials will be sourced from a range of countries operating in a range of currencies.
Still, armed with some data kindly supplied by the Construction Products Association showing the volumes and values of imports of building materials in recent quarters, collected by HMRC, we can make a stab at gauging the overall jump in prices since the plunge in the pound.
There are a number of ways we might do this. We could take averages (mean) for products over the latest two quarters, Q4 2016 and Q1 2017 to get an indication of roughly where prices stand three to nine months from the referendum and compared these with the average over pre-referendum quarters, for which we have six. Note we will ignore Q3 2016. We could possibly use the median of the six pre-referendum quarters to avoid volatility effects. Or we could do a straight Q1 2017 versus Q1 2016, which might take out some seasonal effects.
These are all crude in purist terms but they will yield some indication, although we should note that there will always be some volatility in import prices, both up and down, for individual products categories, especially when they are linked strongly to energy prices.
The three different approaches come up with different answers, but they all say the same thing. There has been a steep rise in prices since the EU referendum. You’d expect some inflation over what is effectively 15 months within the calculations. The Eurostat data tracks materials costs in local currencies for residential building. It shows the Euro countries experiencing inflation below 4% in construction materials. The UK saw rises of about 6%, significantly higher. If the differential is mainly down to imported materials this suggests the big leap in prices.
Taking the Euro area as a base for expected rises, we might reasonably expect to see rises of below 5% in the imported materials. Among the top 20 most imported material categories when comparing means two, glazed ceramic tiles and structural units of steel, over the period. 12 of the 20 categories came out as experiencing double-digit inflation, with air conditioning units up by between a quarter and a third in price.
Comparing average prices before the referendum with those in the latest two quarters suggests, if we look at just the top 20 import categories, an average increase of 12%. Comparing first quarter 2017 with the same period in 2016 suggests a rise nearer 20%.
Before taking this as proof, we have to note that price rises cause changes in purchasing. The mix in the quality of products within each tonne will vary, although with the larger categories the chances are that the quality will be more stable quarter to quarter. There is a chance with higher prices of imports that there has been substitution for home grown products, which could alter up or down the average quality of that imported. Equally there may have been substitution of expensive imports for cheaper imports to ease cost pressures, which would mean the average import was of lower quality. Without forensic investigation it’s hard to know.
So, clearly this is not hard and fast. But these quick sums do indicate a sharp rise in the price of imported building materials following Sterling’s slump. This will in many cases put pressure on specifiers to seek alternatives that are cheaper.
However, the bigger problem facing architects and other specifiers probably lies in the future. They will have to keep close tabs on where UK trade deals are going, most importantly tracking how we will be trading with the EU post-Brexit. About 15% of the materials used in construction are imported from the EU.
If the UK ends up with a dog’s breakfast of a Brexit agreement which stalls the flow of goods, it will disrupt construction and add an extra dimension to the risks associated with specification. It may add price, but it could also add uncertainty of supply.
With many, if not most, of the major players in the building materials industry multi-national companies, their ability to smooth supply and demand across the whole of Europe may be compromised. Were this to be the case, it could have two irritating consequences for UK construction. The first and most obvious is a price premium in the UK. The second could however prove more expensive – more erratic supply.
For those that might argue that this new trading environment may encourage greater production in the UK, there is a stark warning in the import-export figures (see Chart 1). While imports have grown with construction output, exports have remained flat and the trade deficit has grown.
This suggests one of two things. Either we are better employed in other areas of the economy than the production of building materials so are happy to leave it to others, or we are not as competitive.
For those who scout for building materials it seems appropriate to follow the motto ‘Be prepared’.