Scott Smyth, Soben Founder and Group CEO, shares his thoughts on how the ongoing conflict between Russia and Ukraine is affecting the supply chain and cost of materials in the construction industry…
In September 2021, Ukraine’s President Volodymyr Zelensky met with Apple CEO Tim Cook on a visit to the US to talk about building an Apple data center there. Ukraine had high ambitions for the high-tech sector. As well as manufacturing 70% of the world’s neon, used in semiconductors, there, the Ukraine Government had recently launched its Diia City initiative, designed to attract IT companies with a special tax regime.
Just six months later those plans are in turmoil and the terrible destruction in Ukraine is not only affecting neon and semiconductor supplies. Global supply chains are feeling the impact, as existing material shortages and cost pressures are amplified.
With sanctions applied, rocketing crude oil prices, constraints on commodities and disruption to shipping and air routes, the Russian-Ukraine conflict is compounding problems that began during the COVID pandemic. Those leading construction projects must take a fresh and more diligent look at all the links and legs of their supply chains and consider re-addressing contracts and risk allocation.
National lockdowns and supply chain interruptions caused by the pandemic meant that once the world started to operate more normally again, materials shortages and price hikes ensued. In construction markets around the world, tender price inflation of around 5% was par for the course in 2021, sometimes even higher; up to 7.5% in the UK, for instance.
With the situation in Ukraine, prices are rising again. An EU ban on Russian steel products combined with demand that is outstripping supply, is taking its toll; European steel prices are hitting an all-time high. There’s a similar effect in the US, where pig iron from Russia and Ukraine have accounted for 60% of its imports since 2018.
Ukraine and Russia are also important suppliers of other construction materials. As well as neon, Ukraine is a major producer of uranium, titanium, manganese, iron, and mercury ores. Russia controls around 10% of global copper reserves and is a significant producer of platinum and nickel alongside aluminium and lithium.
Since Russia supplies 30% of Europe’s gas and 35% of its natural gas, it is no surprise that the price of Brent crude oil has been rising since the conflict began. Shipping rates have risen and, if there are more military movements in the Black Sea, that will only continue.
As well as increasing the cost of transporting materials and products, rising energy costs will also lead to hikes in energy-intensive materials such as bricks, plasterboard, and glass. Prices of products derived from oil, such as plastics and bitumen, will follow on behind crude’s trajectory.
Shortages or weaknesses in any part of a supply chain will cause waves up and down that chain. Contractors have already been caught out by pandemic-induced materials price inflation leading to insolvencies such as Midas in the UK and Probuild and ConDev in Australia.
Project leaders should take a risk-based approach to identifying those weak spots in supply chains. The first step should be to revisit due diligence with an in-depth look at supply chains – and their supply chain – to identify potential problems caused by raw materials shortages, rising prices, sanctions, or supply routes.
Where risks are identified, look at ways to mitigate them. This could include finding different sources for products or materials, perhaps closer to home, or resequencing elements of a project or programme. Involve suppliers earlier where possible so that danger points can be identified, and alterative solutions considered.
Take a realistic view of construction costs and risk allocation and consider revisiting contracts. Using a tender price submitted in Q4 last year in Q2 this year could introduce more risk to programme and budget. Beware of tender prices that come in significantly lower than others; those bidders could be either unaware or desperate to generate turnover; neither is desirable.
Finally, it is important to act now. Plan ahead to lessen the impact of the blows that will almost inevitably come. Think about how disputes will be handled and resolved, introduce robust risk management process which include regular reviews of mitigation strategies, and consider how to better support valued supply chain members; insolvencies are costly and disruptive for everyone.