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Materials Prices, Interest Rates and Defense Spending: Major Impacts of the Invasion of Ukraine

March 2, 2022

The Russian invasion of Ukraine will have three first-order impacts on the U.S. construction industry. The first relates to materials prices, which are already sky-high and have induced some project owners to delay project start dates.

The Russians are significant producers of a number of key metals, including copper, aluminum, palladium, platinum and nickel. Russia produces about 10% of the world’s nickel, a key input into stainless steel. Contractors have used stainless steel in construction for more than a century. Steel mill product prices are up more than 110% over past year according to government data.

Approximately 40% of the world’s palladium is produced in Russia, a key input for catalytic converters and microchips. To the extent this invasion crimps the movement of palladium, existing microchip shortages could expand and vehicle and heavy equipment prices will be pushed higher.

The Russians are also significant producers of oil and natural gas. An increase in energy prices would exacerbate already-high transportation costs, pushing commodity prices even higher. In addition to rising international shipping rates, the cost of moving freight by truck in the United States is up more than 22% since pandemic onset. Further price increases would put significant pressure on already diminished contractor margins as construction input prices are already elevated, having risen nearly 24% during the year ending January 2022.

The second major impact relates to monetary policy. Coming into the crisis, the perception has been that the Federal Reserve would tighten monetary policy significantly in 2022. In the weeks preceding the invasion, markets were predicting the equivalent of seven to nine quarter-point rate hikes for the year. While the fed will raise rates this year, the economic dislocation and uncertainty generated by the Russian assault on Ukraine may eventually take one or two rate hikes off the table.

Lower interest rates are positive for construction, all things being equal, since it reduces the financing costs for project owners. They also help contractors keep debt service low as they finance equipment and other purchases.

The third impact relates to the nation’s defense sector, which will receive a significant bump in orders. Orders for planes, tanks and other forms of armament are already pouring into the likes of Lockheed Martin and General Dynamics from governments near and far.  Increased production often translates into industrial facility improvement and expansion. America is already in the midst of implementing a major infrastructure bill, and rapid growth within the nation’s defense sector will offer contractors additional work.

That will create both opportunities and challenges. Contractors are already wrestling with massive skills shortages. Ironically, the Russia-Ukraine conflict could result in even more work going forward, creating additional labor market strains in the process.

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