The title for this writing most unambiguously shouts out a question that started echoing along cerebral pathways, beginning in the morning hours of February 28. By now, that rather predictable initial pronouncement will have reverberated beyond what used to be deemed a normal news cycle, as the question gets repeated ad infinitum.
And while pundits and prophets haggle ceaselessly over the whys and wherefores concerning the current conflict, a more objective summation of the inevitable impacts, specifically those impacts that relate to the construction industry, seems imperative here. And while certain wartime effects might intuitively register on the negative side of the ledger, evidence may emerge that paints a broader picture.
Although the severity of construction effects will depend on the duration of the conflict, certain aspects are sure to affect overall volatility, regardless. Currently, the Middle East War is negatively influencing trade in several construction sectors. The usual suspects are energy and material, but shipping has now become an additional critical factor, as lane closures threaten the integrity of already-delicate supply chains.
Rising inflation is boosting talk of a coming global recession, which chills prospects for further development and ongoing contracts become subject to question. It has become an all-too-familiar vicious cycle in which rising oil prices increase transportation costs, which in turn fuel material cost increases, and so on.
Predictably, the economic pressures of war are rapidly and dramatically coming to bear on commercial, industrial, and residential sectors of the industry. Spiking oil and natural gas increases have inflated the cost of producing and transporting materials that are vital to regular commerce. The triad pillars of building production—steel, aluminum and concrete—have fallen prey to immediate price surges, while petrochemical-based products, such as building insulation, and energy intensive products, such as drywall, are swiftly following suit.
And while international conflict of any sort is bound to disrupt vital supply chains, this war renders commerce even more vulnerable due to the geographic position of regional shipping routes. The dual chokepoints at the Strait of Hormuz and the Suez corridor have effectively halted a lion’s share of all maritime traffic. As much as 20% of the world’s crude oil and natural gas passes through these bottlenecks—20 million barrels a day—which have been blocked by the threat of attack by Iran. The consequence has been startlingly swift. Market petroleum prices escalated ten percent a mere one day after the outbreak.
The negative cycle continues with higher financing costs. Fears of fluctuating rates of inflation drive interest rates up which in turn will certainly increase financing costs for projects, which can, in turn, divert resources from critical high-tech (read, AI) ventures. Moreover, inflation will undoubtedly increase mortgage rates, reducing affordability for homebuyers and slowing and already struggling residential construction market.
Yet the upshot of all this speculation lies with the likely duration of the ongoing conflict, which may be defined by three possible scenarios:
Scenario one—rapid regime collapse and quick normalization. The maritime blockade is dissolved, regular shipping resumes, supply chains are repaired and reconstituted, and petroleum prices are stabilized. Unfortunately, as of this writing, this is the least likely outcome. Sustained retaliation by Iran continues with no sign of capitulation.
Scenario two—conflict is prolonged, but the Strait is mostly opened to maritime traffic. This is the most likely scenario to date, with the United States and Israel clearing the blockade and providing security and chaperon support as necessary. Yet anxiety among shippers remains high (as do insurance costs) as some sporadic attacks will inevitably occur. Pricing of petroleum and attendant materials continues to fluctuate.
Scenario three—the conflict continues to extend into months instead of weeks. Catastrophic tail risks ensue, and the specter of a global recession looms over the economy.
Yet with all the gloom and doom associated with ongoing conflict, one must also recognize certain positive ramifications that are bound to develop. A prolonged conflict will certainly increase federal spending on defense infrastructure. Construction and expansion of military bases and related facilities will undoubtedly ensue, while defense contractors are already expanding their manufacturing facilities to meet the demand for replenishment of munitions. Commercial and industrial contractors are keenly aware of the benefits government contracts.
But perhaps the most encouraging prospect emerging from the current conflict lies with positive projections for the recovery and reconstruction of a post-regime Iran. The economic and humanitarian benefits for such a scenario are certain to reflect prosperity on a global scale.
Meanwhile, construction managers and estimators will hunker down and defend their pricing until the smoke clears.
Vince Bailey is an estimator/project manager in the Phoenix area.
