International Construction Intelligence

Tom Wiggins
Our experts from around the world present latest data and intelligence about international trends for the construction industry.

Global Construction Outlook

Commodity prices during 2014 have remained weak and are expected to continue to fall through the majority of 2015. Recent political and economic tensions in Russia, the Ukraine and the Middle East could affect future growth rates. Metal prices are expected to fall yet again but not to the degree of the declining levels seen in 2011. A slowdown in the Euro regions and emerging economies, an increase in oil supply, and a weaker Dollar have contributed to the recent fluctuations in markets.

Ongoing tensions have led to one of the largest recent declines in crude oil prices. Markets may stabilize as a result of economies reacting to supply and demand but accurate forecasting remains difficult. Although there was no actual interruption in oil flow following Middle Eastern unrest a significant share of OPEC’s capacity growth for the next few years is expected to come from Iraq. Natural gas prices remain high due to robust demand from energy intensive industries.

Metal prices are expected to decline at a similar rate as to that of the previous year, largely based on reduced demand from China and its weakening economy who accounts for 47 percent of global metal consumption. Any future growth prospects will depend on new supplies entering the market.

Energy – our future

The World Bank’s energy price index plunged by 6 percent in the 3rd quarter 2014 due to an across the board decrease in energy prices, crude oil, coal and natural gas prices all fell.

Investment in unconventional oil production (shale and tar sands) in North America have offset supply disruptions in the Middle East almost barrel for barrel. This has kept the global oil market in balance and held prices within the $100-110/bbl range throughout the majority of the year, however recent movement has seen the price fall to its lowest level in five years at around $70/bbl. The latest falls in the oil price follows OPEC's decision not to cut output and leave its production target at 30 million barrels a day.

Non OPEC oil output growth remains strong with 0.7 mb/d being added by producers to global supplies in 2012, a further 1.3 mb/d during 2013 and production up in 3rd quarter 2014 by 0.8 mb/d from the same quarter in 2013. World oil demand increased by 0.5 mb/d in the last quarter with all growth coming from non OECD countries.

In the short term, world demand for oil is expected to grow at less than 1.5 percent annually, whilst pressure to reduce emissions due to environmental concerns is expected to dampen demand growth at a global level. Prices of natural gas and coal are expected to remain low when compared with crude oil, with prices in the US well below that of European and Japanese natural gas.

It is hoped that new innovative exploration techniques and extraction methods will increase the output of existing and newly discovered wells.

Changing metal markets

In the last three years metal prices have seen a slow decline from the highs of February 2011, however in recent months the World Bank base metal prices have shown a slight increase, reflecting varying supply conditions.

Iron ore prices have recently experienced a sharp fall largely due to an expansion in low cost producers, particularly Australia and the weakening growth in demand from China.

A strengthening aluminium price is the result of production cuts and has moved the market into deficit, with the exception of the Chinese markets which remain in surplus and capacity still rising. An export ban on unprocessed ore has affected the nickel price the most, but surging exports from the Philippines has offset this. Zinc prices continue to increase with fears that mine closures in the future will leave the market in deficit.

Despite the recent slight upwards movement in metal prices it is expected that there will be an overall decline of 5 percent during 2014, this comes on top of last year’s 5.5 percent drop. At the top of the drop list comes iron ore, followed by copper, with lead and tin not expected to change much, whilst nickel and zinc prices will rise.

Construction Industry

As we approach the end of 2014, looking back at the performance of the global construction industry, it is difficult to recognize that 2014 has seen any real sustained growth. A marked slowdown in the Chinese economy could see a serious impact on global economic growth in the remainder of 2014 and beyond. Improving prospects within the Eurozone has seen minimal growth but with sanctions being imposed on Russia future growth is less certain.

The UK construction industry is seeing a recovery from the 2008 downturn and is expected to see continued, albeit, slow growth in 2015, with eastern European countries such as Poland expecting to experience higher growth rates. Despite Germany having the largest economy in the Eurozone, recent years have seen little construction growth.

The construction market in the US has seen slow but continued growth in 2014, with construction unemployment falling and low material price increases, future predictions for this market appear to be moving in the right direction and have a positive outlook. Construction activity continues to increase but with varying degrees across differing sectors and geographical location. Process and pipeline investment continues to be rewarded with sustained growth, together with transport infrastructure.

An overvalued Chinese housing market has seen a fall in sales and consumer spending which is having a knock-on effect on the Chinese construction sector. However, China is still considered to be the number one growth market followed by India. With the award of the 2020 Olympic Games, the Japanese construction sector is expected to significantly improve, however there are fears that a labor shortage will lead to spiralling costs.

In the Middle East, Saudi Arabia is expected to be the front runner in construction activity, with its rapidly growing population, housing and associated infrastructure being a major growth opportunity. The potential for growth in the UAE is encouraging seeing that a number of construction projects are getting underway which had previously been put on hold, including transportation, roads and power facilities.

The Russian construction industry continues to grow due to its booming energy and infrastructure markets, and with the 2018 FIFA World Cup being held within the foreseeable future, this will only add to future growth prospects with the construction of new stadia and hotel facilities. Russia continues to be a major player in the production and exporter of oil and gas to Western Europe and China.

Global construction prices are on the increase following signs of a slow recovery, construction will still provide good value for those companies who have the financial capacity to invest in their futures, provided they take professional advice on the appropriate procurement strategy to suit this market.

Parity Index – 4Q 2014

Using the Parity/Index

EUROPE

CountryCityParity RangeExchange RateIndex RangeAverage Index
Austria Vienna 0.66 - 0.89 0.8024 EUR 82.3 - 110.9 96.6
Belgium Brussels 0.63 - 0.86 0.8024 EUR 78.5 - 107.2 92.9
Czech Republic Prague 11.09 - 15.01 22.0958 CZK 50.2 - 67.9 59.1
Denmark Copenhagen 6.02 - 8.15 5.9690 DKK 100.9 - 136.5 118.7
Finland Helsinki 0.78 - 1.06 0.8024 EUR 97.2 - 132.1 114.7
France Paris 0.76 - 1.03 0.8024 EUR 94.7 - 128.4 111.6
Germany Frankfurt 0.72 - 0.98 0.8024 EUR 89.7 - 122.1 105.9
Greece Athens 0.54 - 0.73 0.8024 EUR 67.3 - 91 79.2
Ireland Dublin 0.61 - 0.75 0.8024 EUR 76 - 93.5 84.8
Italy Milan 0.64 - 0.86 0.8024 EUR 79.8 - 107.2 93.5
Netherlands Amsterdam 0.61 - 0.83 0.8024 EUR 76 - 103.4 89.7
Norway Oslo 7 - 9.47 6.8045 NOK 102.9 - 139.2 121.1
Poland Warsaw 1.8 - 2.56 3.3476 PLN 53.8 - 76.5 65.2
Portugal Lisbon 0.39 - 0.56 0.8024 EUR 48.6 - 69.8 59.2
Russia Moscow 27.39 - 39.01 45.7327 RUB 59.9 - 85.3 72.6
Spain Madrid 0.48 - 0.65 0.8024 EUR 59.8 - 81 70.4
Sweden Stockholm 7.92 - 10.71 7.4380 SEK 106.5 - 144 125.3
Switzerland Zurich 1.18 - 1.6 0.9648 CHF 122.3 - 165.8 144.1
UK London 0.62 - 0.76 0.6367 GBP 97.4 - 119.4 108.4

AMERICAS

CountryCityParity RangeExchange RateIndex RangeAverage Index
Brazil Sao Paulo 1.34 - 1.9 2.5216 BRL 53.1 - 75.3 64.2
Canada Toronto 0.91 - 1.12 1.1234 CAD 81 - 99.7 90.4
Mexico Mexico City 8.78 - 11.88 13.6319 MXN 64.4 - 87.1 75.8
USA Chicago 0.9 - 1.1 1.0000 USD 90 - 110 100.0

PACIFIC

CountryCityParity RangeExchange RateIndex RangeAverage Index
Australia Melbourne 1.15 - 1.56 1.1697 AUD 98.3 - 133.4 115.9
China Shanghai 3.49 - 4.49 6.1400 CNY 56.8 - 73.1 65.0
India Bangalore 20.45 - 27.66 61.8750 INR 33.1 - 44.7 38.9
Japan Tokyo 91.26 - 123.47 117.8830 JPY 77.4 - 104.7 91.1
Malaysia Kuala Lumpur 1.2 - 1.71 3.3535 MYR 35.8 - 51 43.4
New Zealand Auckland 1.16 - 1.65 1.2819 NZD 90.5 - 128.7 109.6
Singapore Singapore 1.08 - 1.32 1.3018 SGD 83 - 101.4 92.2
Thailand Bangkok 17.77 - 25.31 30.9070 THB 57.5 - 81.9 69.7
UAE Dubai 2.96 - 4.01 3.6732 AED 80.6 - 109.2 94.9

These indices should only be used as a guide. Factors such as the ratio of imported to local materials, the specific location within the comparative countries and the relative construction supply and demand for each project can have a substantial effect on project cost. We would recommend that specific advice is sought before irrevocable decisions are taken.

In addition to Faithful+Gould and Atkins employees worldwide, we gratefully acknowledge the data sources provided by Compass International.

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Using the Parity/Index

Essentially, there are two approaches to using the parity/index to compare costs at different locations when one location involves the base country. Use the parity value to calculate costs in the national currency of each country. Use the index value to calculate the cost in the currency of the index base country.

Illustration 1 – Costs in a local currency

Assume you need to compare the cost of a proposed manufacturing facility in China with a similar recently completed project in the US, which cost USD 1,000/m2. Use the parity values from the Parity/Index table to calculate likely costs in Yuan (CNY).

Low

USD 1,000/m2

X

3.49

=

CNY 3,490/m2

High

USD 1,000/m2

X

4.49

=

CNY 4,490/m2

Average

USD 1,000/m2

X

(3.49+4.49)/2

=

CNY 3,990/m2

Using the average parity value provides a most likely cost of CNY 3,990/m2.

This equates to USD 650/m2 (CNY 3,990 / 6.14; cost / exchange rate), meaning to build in China is approximately 35 percent less expensive than in the US. This example uses the exchange rate from the Parity/Index table. It is possible to use a different exchange rate.

Illustration 2 – Costs in index base currency

Introducing the exchange rate with the parity calculation illustration clearly shows the relationship between parity and index. The index is simply the parity value restated through currency exchange into a single currency. It allows comparison in the base location currency in one step.

To ascertain the USD rate per square meter for a project in China simply use the index value from the Parity/Index table as follows. Note that the index is expressed in a percent format.

Low

USD 1,000/m2

X

56.8%

=

USD 568/m2

High

USD 1,000/m2

X

73.1%

=

USD 731/m2

Average

USD 1,000/m2

X

65.0%

=

USD 650/m2

In the event a different exchange rate is required, say due to fluctuations in the currency markets or fixed internal company international exchange rates, the index can be adjusted. The example below assumes a revised exchange rate of 6.50 CNY / USD, not the current rate of 6.14 used for the published index value.

Average of parity range

 

New exchange rate

 

Revised index

3.990

/

6.50

=

61.4%

If the costs are to be presented in the two currencies, the CNY cost would remain constant at CNY 3,990/m2 whilst the USD cost to build this project would be USD 614 /m2 (US$1,000/m2 x 61.4%).

In summary, parity enables the identification of the cost for the same building in different locations in local currency whilst the index enables the direct comparison of costs for the same building in different locations in a single currency.

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