We all know the fundamental principle of supply and demand and how it affects price determination and availability. The simple premise that if supply is high but demand low, price drops and if demand is high but supply is low, price increases. In a perfect market the equilibrium would cross in the middle with demand equalling the supply.
However, we are also aware that all is not equal with current market conditions for the logistics & manufacturing sector and in the wider construction industry. The trend towards online retail advanced by the pandemic has upended the balance of supply and demand with the knock-on effect of demand for industrial and logistics space considerably higher than we have ever seen before with 112m ft2 of warehouse requirements logged by Savills in Q4 2020. In normal circumstances trying to keep up with this demand from a supply point of view would have been a big challenge, but add to it Brexit, Covid restrictions, both in terms of import of materials and skilled workers, and suddenly market conditions feel fraught.
The Challenges Ahead
The materials crisis
Demand is unlikely to slow with the Global Total Logistics market report 2021 revealing that the global logistics market is expected to grow by 4.7% through to 2024. We also know from discussions with the supply chain that the supply of certain materials such as concrete, steel and cladding in the next 12-18 months are likely to remain uncertain, with limited availability and several of the larger developers, key occupiers and contractors having secured large stocks of supply for existing & future projects and established public sector projects such as HS2. Closure of the Suez Canal exacerbated these problems and delivery of manufactured products especially from the Far East was also disrupted by a shortage of containers and capacity and disruption in ports as different regions entered lockdowns.
The skills deficit
And, what about labour? It has been estimated that one in four of European workers have left the UK construction workforce since 2020. Add to this labour shortages both at home and abroad as a result of the pandemic impacting labour available and the quarantines for many whose paperwork would have allowed them to return now being restricted further, how will we fill the skills gap on those projects where materials might be available but those with the skill base to apply are not? Challenges exist around availability of steel and cladding site labour as well as materials and the Road Haulage Association estimates there is now a shortage of more than 100,000 drivers in the UK adding to the labour deficit.
The energy challenge
The beginning of next year sees the ‘red diesel tax’ coming into the market with new costs to each build estimated at £0.55 per litre extra with no alternative at present. For those builds that include earthmoving and quarrying the additional cost will be monumental, with some in the supply chain predicting the cost for example to an earthmoving fleet of around 400+ units would increase by over £4m. This change from red fuel to white diesel will mean many contractors will need to increase current cut and fill rates to cover cost as an addition to any increase in material costs with analysis from one earthwork supplier showing this could add £0.55 per m3. With fuel now being waiting to be extracted in fields, this poses a security threat too, with a predicted increase in costs for misappropriation.
It is not only fuel costs that are affected by changes in environmental policy. In July 2015 carbon tax on lime for stabilisation was £0.32/t, by June 21 it has risen to £13.25/t and for projects requiring in excess of 2,000t of lime the full carbon tax of £36.25/t is applicable.
The challenges ahead seem to predict a bumpy journey the market to keep up with its own momentum with most project programmes being affected in some way. However, with necessity being the mother of invention alongside these challenges will always come the opportunities.
The Short and Long Term Solutions
For now, we are seeing those in the industry being creative in their planning with interim solutions including turning to substitute methods or mixing and matching cladding materials from different suppliers to meet the requirements.
In the longer term, current shortages are predicted to ease as manufacturers operating levels rise and logistics networks and global trading gets back to normal. Alternative forms of materials will emerge, possibly using models from our European /US/ Far Eastcolleagues such as increased use of pre-cast concrete elements, albeit we have concrete supply challenges here as well. And many will find different ways to provide the same end-solutions either by making their own materials or substituting scarce materials for others – eg copper cable for aluminium. These will help level out the materials crisis and bring the levels of supply and demand back to its equilibrium.
Thinking outside the box might also drive the sustainable agenda already heightened in the sector with contractors having to look at alternatives like timber or higher recycled content products as the short-term move to a carbon offset scheme becomes more expensive due to demand and regulation.
The materials labour and energy issues will make us literally take stock and look at our processes and procedures and how we work better in the future to minimise risk, be more productive and work more efficiently with the long term gain from the short term pain.
- Earlier supplier/key sub-contractor engagement is needed, and contractors and consultants will have to plan ahead with suppliers to meet key programme dates leaving leeway in programmes
- More moves toward contractor allocation/negotiation versus tendering (tender prices increasingly cannot being held for any significant time) to be able to secure/ reserve materials asap
- More early material reservations direct with key suppliers and earlier site deliveries
- Procurement & availability of materials will remain the key risk
- More reliance on mature/ trusted relationships with the supply chain the key to success.
The lack of skilled labour could drive construction higher up the stakes of education, training and employment attractiveness with the built environment suffering from the appeal factor over the last decade. The lack of non-UK labour could well kickstart a home-grown market and help boost employment rates in areas with large pockets of deprivation and social inequality driving the social value agenda for each project.
It might also move the industry further towards modern methods of construction with some smaller projects being built modularly, with robots and AI replacing human skills. And of course, it might lead to question of whether to build at all? With the latest news from Gap announcing that it will become an ecommerce only retailer in the UK by closing its remaining physical stock, the market might shift from new build to repurposing of estates.
As we move into the second half of 2021, we know some of the challenges that await us not only this year but into 2022. What we need to now be thinking about is how we work as not only a sector, but an industry to not only strive to meet the demand but to ensure that our supply solutions remain robust into the future.