As we write this, the USA has bombed Iran, Israel and Iran are still trading fire and the future direction of the conflict is unclear. Will they de-escalate or will hostilities widen? Iran’s parliament has voted to close the Strait of Hormuz. This would create a huge amount of disruption, but what would the impact be on the UK construction industry and developers?
The Strait of Hormuz connects the Persian Gulf with global markets. Approximately 20% of the world’s oil passes through the Strait, exported by countries including Qatar, Saudi Arabia and the UAE. Vessels transiting the strait provide the UK and other countries with oil, aluminium, copper and other materials important for construction.
Disruption in the Strait often results in delays and pricing volatility within the global supply chain. The oil price has already spiked to above $80 a barrel and is likely to go above $100 if oil flows through the Strait are disrupted.
The IMF estimates that a 10% rise in oil prices raises inflation in developed economies by 0.4%. That could take UK inflation to north of 4%, twice the Bank of England target.Â
A closure of the strait would have a significant, albeit mainly indirect, impact on the UK’s construction material supply chain. The UK mainly sources its construction materials from China, Europe or through domestic production.
For example, Timber tends to come from Sweden, Latvia and Finland, and bricks are produced domestically as well as being imported from Belgium and the Netherlands. Only a small amount of imports in this sector come through the Strait. These imports mainly consist of steel, aluminium, cement additives, and energy-intensive products like construction plastic, and in many cases, these can be sourced elsewhere.
The more significant impact on the supply chain would be the rise in prices and import delays. Transportation prices will rise as goods will have to be redirected around Africa or other routes avoiding the Strait, resulting in higher costs and longer waiting times.
Prices will rise for energy-intensive products as less oil will be available to manufacture them. Availability of these products may also become an issue, resulting in price rises and further delays. This in turn will result in increased or overspent budgets and construction delays, slowing the development of housing and other important infrastructure throughout the country. Â
What can developers do to mitigate the impact of any closure of the Strait? Given the situation is fast moving, perhaps not much. If possible, they should look to diversify their sources of materials and imports. Keeping a stock of key materials should also be considered (albeit serious stockpiling may create other supply issues).
This will reduce delays to construction timelines and slow the impact of the problems within the supply chain. Over the medium term we should look to invest more in domestic production, albeit this ties into the UK’s broader industrial strategy and will require the industry to engage with Government.
Parik Chandra is partner and head of private credit at Downing
