The UK industrials sector faces a renewed energy shock in 2026, driven by the Iran conflict, with underlying dynamics that bear a striking resemblance to the 2022 energy crisis. The combination of structurally high electricity prices, globally interconnected gas markets and the UK’s heavy reliance on gas‑fired power generation once again places manufacturers and transport operators at the centre of the pressure.

What happened last time: the 2022 energy crisis

ONS analysis shows that between 2021 and 2023, UK non‑domestic electricity prices almost doubled, rising from 14.81p/kWh in 2021 Q1 to 28.39p/kWh in 2023 Q4, before easing only slightly in 2024. Gas prices surged even more sharply, nearly tripling to a peak of 7.18p/kWh in 2023, and even after moderating remained more than double pre‑crisis levels.

Because gas rates normally set the marginal electricity price in the UK, the sharp rise in wholesale gas costs translated almost directly into higher electricity prices for industrials. Energy‑intensive manufacturers bore the brunt. The ONS reports that output across basic metals, chemicals, paper products, glass, ceramics and other non‑metallic minerals fell by around one‑third, reaching its lowest level since the early 1990s.

What’s different now: the Iran conflict and the impact on energy prices

The conflict in Iran is again sending oil and gas prices rising sharply but with crucial differences.

Physical damage to energy infrastructure

Iran is targeting regional energy facilities, some of which could take years to repair, meaning supply constraints (and high prices) may persist long after hostilities end. This contrasts with 2022, where constraints were geopolitical rather than physical.

Lagged pass‑through, but deeper vulnerability

Most UK industrials firms are on fixed energy contracts, meaning the price surge will feed through over the next 6–12 months as contracts reset. That will be from a position where costs never returned to pre‑crisis norms. Fixed contracts may delay the impact, but they won’t reduce it.

No price cap protection

Households benefit from Ofgem’s cap, but industrials businesses do not and instead face the full price rise as soon as their contracts roll over.

Weaker macro conditions

Unlike in 2022, demand is already softening, which will make passing on cost increases more challenging. In practice, this means UK industrials businesses face a combination of higher costs and weaker end markets. As a result, companies may need to reduce internal cost bases or accept reduced margins.

Sector-by-sector implications for UK industrials

Basic metals (steel, aluminium)

With extremely high energy intensity, even a modest rise in gas or electricity prices has an outsized effect on this vulnerable subsector. The 2022 crisis caused near‑50% output losses, and with spot electricity now around 50% higher than pre‑war levels, a similar or worse pattern is likely.

Glass, ceramics, cement and other non‑metallic minerals

A high level of energy intensity means firms rely heavily on continuous, high‑heat processes that are not possible to shut down cheaply. In 2022, many businesses in this subsector cut shifts to save on costs, and temporary shutdowns are likely again.

Chemicals (especially basic chemicals)

Chemicals businesses face dual exposure as energy is both a production input and a feedstock, meaning firms get hit twice. High gas prices in particular increase both energy and material costs.

Paper and pulp

A large electricity and gas consumer, this subsector was heavily exposed in 2022 and likely to be again. High energy intensity combined with thin margins makes it highly vulnerable to price shocks.

General manufacturing (food, machinery, automotive)

General manufacturing faces more moderate exposures as energy intensity is lower than the subsectors above. Higher energy costs will still squeeze margins but are less likely to trigger output cuts unless demand weakens significantly.

Transport (road freight, rail, aviation, logistics)

Rising diesel and petrol prices will rapidly feed into operating costs for transport: the most energy intensive industrials subsector. Aviation fuel prices have already risen sharply. Every £10/bbl increase in crude oil materially raises logistics costs and therefore upstream manufacturing input costs.

What’s next for UK industrials

The Iran‑driven energy shock is hitting the same pressure points as the 2022 crisis but from a more fragile starting point. UK industrials, particularly basic metals, chemicals, glass, cement, paper and transport, face a renewed period of elevated costs, squeezed margins and rising risks of production cuts. Without significant easing in energy markets, the sector could see a repeat of 2022’s steep declines in output, with broader economic consequences spreading through supply chains and the labour market. For more information, please contact Emily Sawicz or your usual RSM contact.

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