Wholesale gas prices have hit an all-time high. This has led to warnings to factories that they could face shutdowns over the winter period, or they should start using more polluting fuels. The gas crisis has already caused a rush of collapsed smaller energy suppliers whilst leading to forewarnings of rising gas and electricity bills for households.
According to Industry Group Oil & Gas UK, wholesale gas prices are up 250% since January and have increased massively by 70% since August. But what’s causing this? A higher global demand, alongside maintenance issues and lower solar and wind energy being generated are all contributors to the price hikes. In the UK, we’ve seen lower winds which have resulted in lower renewable energy being generated and more non-renewable energy being used to supplement. Dermot Nolan, a former Ofgem Chief Executive stated, “The increases were the result of depleted stocks following a cold winter in 2020, as well as reduced supply from Russia, and increased demand for liquefied natural gas from the Far East.” All of these have put a strain on many industries that rely and consume a lot of gas and electricity to run.
What does this mean for the Construction Industry? In comparison to industries such as manufacturing, agriculture and transportation, the construction industry isn’t very gas intensive for their production and are more reliant on other fossil fuels. Although the construction industry uses less natural gas then some other sectors, producers of building materials use a lot of natural gas. Suppliers of materials such as cement, concrete, brick, and metals can be seen to use a lot of gas and electricity. “For instance, gas can easily account for one-third of the cost of a brick factory, as heating is an essential part of the production process.” If these increasing gas prices cause building materials disruptions this could be drastic for the construction industry. They’ve already experienced material shortages in the form of timber, and most recently pairing this with the HGV driver shortage where many building merchants had to pick up their own materials. So, with building material shortages, HGV driver shortages and the rising gas prices causing issues, is construction slowing?
Well the IHS Markit/CIPS UK Construction Purchasing Manager’s Index (PMI) gave the sector a score of 52.6 in September which is an eight-month low, compared to 55.2 in August and 58.7 in July. The rising prices, staff shortages and supply chain disruptions have paused the recovery of Britain’s construction sector. However, even with the decrease in figures, the PMI still considers this a sign of growth, with anything above 50 measured as positive.
This should be perceived as a win for the construction sector with so many issues causing the industry to slow off, they are still experiencing high demand for their services. “On the demand side, the outlook for the construction sector remains looking healthy.” Martin Beck, Senior Economic Adviser to the EY Item Club. He states that structural factors such as high demand for out-of-town properties and retail to residential conversions in cities will support new home building, whilst the maintenance and repair activities will gain from household’s appetites for home improvements and renovations still.
So, even with the issues the construction industry has faced over these past few years, the demand for their skilled work is still high. Is this the positive outlook the construction industry needed to keep going, even after the multiple knock backs, they’ve confronted?