Brexit talks will impact ability to source building materials
Brexit talks are set to have a potentially damaging impact on the UK construction industry, according to the Royal Institute of British Architects. In a blog post, it warned that prices have already risen since the referendum decision in 2016, and average prices for raw materials could rise between 12% and 20%. The knock-on effect could force companies to buy cheaper alternative materials, while a bad Brexit outcome could impede the flow of goods between the UK and other countries, increasing pressure on the industry.

Top of the list for construction import and export are electrical wires. Credit: Shansekala Istock

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).

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.

Chart 1

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. Falling Sterling 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.

Table 2

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.

Chart 2