Supply and demand in the global energy market have pushed prices to a record high this month in what industry pundits are called a ‘perfect storm.’
Energy prices are now over 250% higher than they were in January, and will likely keep climbing.
Construction experts warn that these energy hikes will impact the costs of ceramic products, glass, steel, aluminium, and bricks, causing noticeable repercussions to the UK building industry.
For a sector already facing fuel, labour, and HGV driver shortages, these cost inflations will add further pressure, tipping some construction businesses into insolvency.
Cost Inflation in Energy-Intensive Industries
On 1 October 2021, British Steel announced a £30 per tonne price hike, saying it could no longer absorb rising energy costs alone. The move echoes one which is occurring in multiple industries whose profits margins are closely tied to energy prices
“This current situation shines a light on fragility at the heart of our supply chains”, comments insolvency practitioner Simon Renshaw.
“Most of our foundational industries are energy-intensive and have no choice but to raise their own prices when facing higher manufacturing costs. The building industry is, by consequence, one of the worst affected as they rely directly on products that must be fired, smelted or furnace-heated.
“The UK construction industry finds itself in a perilous position which will undoubtedly lead to more insolvencies over the coming months.”
4 Industries Already Impacted by Rising Energy Costs
Northern Irish glass company Encirc usually spends £40m a year on its energy bills. This year’s spike in gas prices means that it will have to spend nearer £100m.
“Generally we will have contracts for 12 months at a time, so we’re having to look at what contracts are offering… how we can pass these price increases on and how can we can protect our business in that regard” MD Adrian Curry told the BBC.
“There seems to be no cap to it and it’s continuing to rise on an almost weekly basis,” Mr. Curry said.
Commenting on recent power price spikes UK Steel Director-General, Gareth Stace said: “These extortionate prices are forcing some UK steelmakers to suspend their operations during periods when the cost of energy is quoted in the thousands per megawatt-hour; last year, prices were roughly £50 per megawatt-hour.
“Even with the global steel market as buoyant as it is, these eye-watering prices are making it impossible to profitably make steel at certain times of the day and night.
“As gas prices started to escalate we had to decide, do we continue to absorb those costs, do we slow down, potentially lay people off to save that huge increase in energy,” Kevin Preston, production director at Ketley Brick Company told Sky News. For now, to try to save jobs, the company has decided to raise its prices. From January, bricks will be sold for 10% more.
Dr Laura Cohen, from the British Ceramic Confederation based in Stoke-on-Trent, told the BBC her members had seen prices double since the energy crisis.
“We’ve got this triple whammy with this international competitiveness and the high prices are getting them considering scaling back production.
“As prices continue to go up and then the higher pricing extends, the other members are likely to be forced to stop production due to uneconomically high energy costs.”
Dr Cohen noted that if there was a national shortfall in gas, ceramic businesses could be “forced off the gas network” and if that were to happen, a “forced quick shutdown” can cause “severe damage to kilns, which might threaten business viability.”
UK Construction Sector Insolvencies Likely to Rise Significantly
“With the end of government support meeting the energy price crisis, it’s unsurprising the number of administrations and receiverships in the construction industry doubled to 34 during the third quarter of 2021”, comments Simon Renshaw.
“The construction sector has its hands full right now with wage inflation, supply-chain issues, and now a cost-increase that shows no signs of slowing down. Firms will need to re-assess their pricing very carefully, and manage risk as the winter progresses.”
“Nevertheless, we are likely to see increase corporate collapse in the coming months. This sector, critical to the health of our economy, remains vulnerable.”