International Construction Intelligence

Richard Anderson
This United Kingdom iteration of International Construction Intelligence presents data and intelligence about international costs and related trends for the construction industry. Our construction industry experts examine trends in carbon cap and trade, the performance of construction markets worldwide, and the impact of exchange rates on construction.

Global Outlook

In 2011 commodity prices peaked following two years of strong growth, however in 2012 prices are generally declining due to a slowdown in demand in emerging markets, improved supply prospects and concern over the global economic and financial outlook. Compared to their early 2011 highs most indices ended the year much lower, with energy down 10 percent, and metals down 25 percent.

If political unrest continues in the Middle East and North Africa this could lead to further disruption of supplies and higher oil prices in the short term, but with markets absorbing these disruptions and supply conditions improving, prices would come under increasing downward pressure from slowing demand.

Metal prices are expected to decline in 2012 by 6 percent due to new supply projects being commissioned and a moderation in demand. With both the metals and energy markets being particularly sensitive to changes in industrial production, future uncertainty still remains, partially due to the world debt crisis.

Oil still flowing

Crude oil prices (World Bank average) peaked at nearly $120/bbl in 2011 following a loss of 1.4 mb/d of Libyan oil exports, resulting in a significant tightening of the market, particularly in Europe where much of Libya’s oil is sold. High oil prices and weakening economic growth impacted on oil demand in 2011, with world consumption growth of just 0.7 mb/d or 0.8 percent. OECD oil demand declined for the fifth time in the past six years, and indications show that it is on track to fall again in 2012.

Rising geopolitical tensions in a number of the oil producing countries (Iran, Iraq, Nigeria, South Sudan and Yemen) has seen a recent price rise. Likewise in January, on extremely cold weather in Europe, prices rose due to an increase in demand for heating oil. Prices have also been supported by unexpected production outages in the North Sea and elsewhere, and by European refiners arranging to replace Iranian crude ahead of the EU embargo and US sanctions that come into full force in July.

Despite this, oil prices are expected to decline due to a slowing global demand, growing supply, efficiency improvements and substitution away from oil. However, it is likely that OPEC will endeavour to limit production to keep prices relatively high, given the large expenditure needs in most countries.

Changing metal markets

Metal prices have fallen from their highs in early 2011 due to concerns about global growth emanating from debt crises and changing policy in China. World metals consumption, which grew at 11 percent in 2010, slowed to 4 percent in the first 10 months of 2011, with growth slowing sharply in all main regions. Prices are projected to decline in the medium term for all metals with the exception of aluminium, which is expected to rise, supported by higher production costs for power, carbon and alumina.

India, with its large population, is often cited as the “next China” in terms of consumption of commodities. China’s refined metal consumption (aluminium, copper, lead, nickel, tin and zinc) has expanded 17 fold since 1990, with its world share jumping from 5 percent to 41 percent. In stark contrast, India’s share of world metals consumption has risen from 2 percent to a mere 3 percent in the same period. Clearly, its very different structure of the economy, levels and direction of investment, and sector growth trends has a part to play in this.

Copper prices are expected to rebound from the recent drop as economic growth recovers and China re-stocks. Medium term, prices are expected to decline as demand moderates and new capacity pushes the market into modest surplus. The massive Oyu Tolgoi copper mining project in Mongolia is likely to add significant growth in 2013-14. Robust aluminium demand is expected to continue, with new state of the art plants in China replacing outdated technology; large plants are also planned in India and Russia. Nickel prices are volatile at present due to large stainless steel production cycles and are expected to decline due to substantial supply additions in the coming years.

Construction Industry

2011 was another difficult year for the global construction industry, with a shift in future demand from developed to developing countries. However, despite their good fortunes, even the BRIC countries, which together provide a striking contrast to the current gloom prevailing over some of the more established Western powers, have not entirely escaped the impact of the financial crisis.

Typically, the Brazilian economy only grew by 2.7 percent in 2011, a big drop from the 7.5 percent growth seen the previous year. If this continues, it could have an effect on the construction programme planned for the forthcoming 2014 World Cup and 2016 Olympics which are both being hosted by Brazil.

The troubled and indebted economies of Portugal, Ireland, Greece and Spain show little sign of a quick turnaround and, with the possibility of Italy joining them the Eurozone construction market will remain depressed until a robust plan to deal with the euro crisis in put in place. The next 12 months is likely to see the Eurozone crisis come to a head which, whilst this will initially erode further confidence it is hoped that this will become the catalyst to a foundation for recovery.

Supply and demand swings in commodities have seen price fluctuations over the last six months directly affecting profit margins within the supply chain, with many contractors still deciding to swallow any increases in an attempt to fill order books and maintain job security. The construction industry still faces an uphill battle to achieve sustained growth, particularly in the light of the continuing high rate of construction insolvencies, with little sign of this trend halting.

As previously reported, with global construction prices at their current level, construction will still provide good value for those companies who have the financial capacity to invest in their future, provided they take professional advice on the appropriate procurement strategy to suit this market.

Parity / Index - Q1 2012 (United Kingdom Base)

Using the Parity / Index

Country City Parity Range Exchange Rate Index Range Average Index  
EUROPE
Austria Vienna 0.96 - 1.30 1.1994 EUR 80.00 - 108.40 94.20
Belgium Brussels 0.93 - 1.25 1.1994 EUR 77.50 - 104.20 90.90
Czech Republic Prague 16.19 - 21.90 29.8296 CZK 54.30 - 73.40 63.90
Denmark Copenhagen 8.79 - 11.89 8.9165 DKK 98.60 - 133.30 116.00
Finland Helsinki 1.14 - 1.54 1.1994 EUR 95.00 - 128.40 111.70
France Paris 1.11 - 1.51 1.1994 EUR 92.50 - 125.90 109.20
Germany Frankfurt 1.05 - 1.42 1.1994 EUR 87.50 - 118.40 103.00
Greece Athens 0.80 - 1.08 1.1994 EUR 66.70 - 90.00 78.40
Ireland Dublin 0.90 - 1.10 1.1994 EUR 75.00 - 91.70 83.40
Italy Milan 0.93 - 1.26 1.1994 EUR 77.50 - 105.10 91.30
Netherlands Amsterdam 0.89 - 1.20 1.1994 EUR 74.20 - 100.10 87.20
Norway Oslo 10.11 - 13.67 8.8913 NOK 113.70 - 153.70 133.70
Poland Warsaw 2.63 - 3.74 4.9571 PLN 53.10 - 75.40 64.30
Portugal Lisbon 0.57 - 0.82 1.1994 EUR 47.50 - 68.40 58.00
Russia Moscow 38.46 - 54.78 46.5314 RUB 82.70 - 117.70 100.20
Spain Madrid 0.70 - 0.95 1.1994 EUR 58.40 - 79.20 68.80
Sweden Stockholm 11.60 - 15.69 10.6126 SEK 109.30 - 147.80 128.60
Switzerland Zurich 1.74 - 2.35 1.4465 CHF 120.30 - 162.50 141.40
UK London 0.90 - 1.10 1.0000 GBP 90.00 - 110.00 100.00
AMERICAS
Brazil Sao Paulo 1.88 - 2.68 2.7475 BRL 68.40 - 97.50 83.00
Canada Toronto 1.32 - 1.62 1.5762 CAD 83.70 - 102.80 93.30
Mexico Mexico City 12.54 - 16.97 20.3381 MXN 61.70 - 83.40 72.60
USA Chicago 1.30 - 1.59 1.5854 USD 82.00 - 100.30 91.20
PACIFIC
Australia Melbourne 1.32 - 1.78 1.4846 AUD 88.90 - 119.90 104.40
China Shanghai 5.06 - 6.50 10.0015 CNY 50.60 - 65.00 57.80
India Bangalore 28.32 - 38.32 79.0514 INR 35.80 - 48.50 42.20
Japan Tokyo 132.01 - 178.60 129.1440 JPY 102.20 - 138.30 120.30
Malaysia Kuala Lumpur 1.72 - 2.45 4.7902 MYR 35.90 - 51.10 43.50
New Zealand Auckland 1.68 - 2.39 1.9272 NZD 87.20 - 124.00 105.60
Singapore Singapore 1.56 - 1.91 1.9932 SGD 78.30 - 95.80 87.10
Thailand Bangkok 25.66 - 36.55 48.6007 THB 52.80 - 75.20 64.00
UAE Dubai 4.29 - 5.81 5.8312 AED 73.60 - 99.60 86.60

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

United Kingdom

Contributing to the latest GDP growth figures, the Office of National Statistics (ONS) has reported construction output falling 0.5 percent in Q4 2011 compared to an increase of 0.3 percent in the previous quarter leading the Construction Products Association (CPA) to predict further falls of over 5 percent during 2012. Forecasts from the Construction Industry Training Board (CITB) predict a fall of 3 percent in construction output in 2012, stoking concerns that up to 45,000 jobs could be lost in the construction industry. Their Construction Skills Network (CSN) survey suggests that overall construction employment will rise by 76,000 by 2016 though this is well short of 2008 levels.

Data from the ONS shows construction output in January 2012 at 12.3 percent lower than the previous month of December 2011, and 2.3 percent lower than the same period in 2011.

In the 3 months from September – November 2011, total volume of construction output fell by 1.2 percent (-£338m) whilst new work fell by 1.3 percent (-£241m) compared to the previous quarter.

Increases were seen in new infrastructure work – increasing 14.7 percent (+£436m), private commercial new work – increasing 2.8 percent (+£178m) and non-housing repair and maintenance – up 4 percent (+189m), whilst decreases were seen in new public non-housing work, declining 14.9 percent (-£536m). Unfortunately the problems in the Eurozone are continuing to promote uncertainty and dampen confidence in the private sector making investors more risk averse.

Construction insolvencies reached 5,215 in the last two years alone with London, the West Midlands, Yorkshire and the North West being the worst affected regions according to PricewaterhouseCooper (PwC). Owing to the government’s capital spending programme and continued uncertainty surrounding the economy, PwC suggest there is little sign of this trend halting.

Given the importance of the public sector’s contribution to growth in the construction sector, further cuts in this area will only serve to harm growth prospects for the sector and continue to constrain UK GDP growth overall. Many within the industry are hoping the government recognises these difficulties by quickly and decisively implementing their heralded infrastructure programme responding before things potentially take a turn for the worse.

Building costs throughout 2011 rose steadily and although they’re expected to stabilise during 2012 inflationary pressures are nevertheless set to remain as labour wage strains and competitive labour forces continue to affect input costs.

Increased materials prices will persist as intensive demand in East Asian countries – particularly China – and 2011’s natural disasters continue to push commodity prices upwards. Metal and ores prices have all witnessed increases, with the price of copper rising by over 20 percent in 2011. Aggregates and steel prices also remain high, driven again by demand in developing economies, despite increases in global supplies.

Middle East

The construction market in the UAE contracted further in 2011.

Whilst the construction industry in Dubai and the Northern Emirates have witnessed green shoots of recovery, the largest and wealthiest of the emirates, Abu Dhabi, has continued to slowdown with a number of projects put on hold or cancelled. Overall the UAE saw a 52 percent fall in the number of contracts awarded in 2011 compared to 2010.

Due to this slowdown construction costs have fallen as the demand for materials and labour has decreased, bringing the cost of construction to levels last seen in 2006.

Indicators are that Construction costs are likely to reduce further during 2012 by approximately 1 percent. However we forecast this downward trend will be reversed by the end of 2012 as projects which had been put on hold during 2011 in Abu Dhabi are recommenced, stimulating the construction sector.

The UAE construction market has seen a shift in investment from the over supplied property sector of residential and commercial to infrastructure, industrial, education and health.

In addition the fit out sector continues to remain buoyant as UAE companies seek to take advantage of the oversupplied commercial sector and reduce their fixed overhead cost by relocating. The fit out sector has been further buoyed by international companies moving into the UAE as this is seen as a safe hub within the region.

Asia Pacific

Singapore

Singapore’s economy grew by 4.9 percent in 2011, following the expansion of 14.8 percent in 2010, whilst its real GDP grew by 3.6 percent on a year-on-year basis in 4Q 2011.  The construction sector grew by 2.9 percent on a year-on-year basis. On a sequential basis, the sector contracted by 2.2 percent (annualised) largely due to a decline in private residential and commercial building activities.

The Building Construction and Authority (BCA) of Singapore reported that the total construction demand in 2012 is forecast to reach between S$21 billion and S$27 billion, reflecting a continued and sustained level of workload.

The public sector is expected to be the key demand driver in the construction industry, contributing about 60% of the total construction demand of between S$13 billion and S$15 billion, this coming primarily from public housing developments, institutional buildings and infrastructure projects. 

It is also projected by BCA that the private sector construction demand will be between S$8 billion and S$12 billion, reflecting a more cautious stance in terms of new construction investments. This is heightened by uncertainties and problems resulting from the slowing global economy arena, the sluggish US economic condition, the severe Eurozone sovereign debt problems, as well as the implications of the Singapore government's property cooling measures. Despite the current sentiments, it has been observed that a number of sizeable residential developments have been launched in the last two months.

BCA is optimistic that the industry's outlook for Singapore will remain promising over the medium term bolstered by the continued robust public sector construction demand, which would be anticipated to soften the impact of the likely fall in the private sector construction demand.  Despite the subdued and challenging global economic uncertainties, the Singapore Ministry of Trade and Industry is maintaining its 2012 economic growth forecast at 1.0 to 3.0 percent.

The construction tender price index published by BCA has shown a 2 percent increase in 2011 year-on-year, but has remained flat from the last quarter. Prices of key construction materials except steel reinforcement bars were generally higher compared to a year ago due to some global inflationary cost pressures on raw materials. The Singapore construction industry is facing a labour crunch, with a stricter foreign manpower quota having a direct impact on the higher labour costs. Nonetheless, competitive tendering aided by the adequate contracting capacity built up from the previous peak may have helped to mitigate the upward pressure on overall construction tender prices.

We anticipate the tender price index over the next 6 months will remain level but a potential fall of up to 2 percent is still possible.

China

In China, economic growth has continued to decelerate in recent months.  Weaker external demand caused export growth to decline to 13 percent but domestic demand has remained largely resilient to external shocks.

The year-on-year growth in Gross Domestic Product in China was 8.9 percent in the 1Q 2012, slowing from the previous quarter’s increase of 9.1 percent and was the slowest growth rate in nearly two years.

The Consumer Price Index rose by 3.2 percent year-on-year in March 2012 – a 20 month low, although many believe the real rate is in double digits largely driven by food.  Since late 2010, the Central Government has imposed a series of monetary and administrative control measures to cool down the private sector housing market and to tame the runaway inflation.  Such measures appear to have succeeded to a certain extent and the government has recently started to introduce some easing measures. 

With the effects Europe’s contraction lessening all the time, and the US steadily recovering China’s commodity prices are predicted to grow provided going forward domestic demand does not weaken, and current stock piles fall.

The current issues of rising labour costs will not go away any time soon.  The Five Year Plan published by the People’s Republic of China Government last year is an explicit target to raise minimum salaries.  For 2012 whilst the provincial-level regions have again announced significant increases these have been less than last average of 21.7 percent and are 13 percent.  Most companies are also expecting to pay large salary increments to its professional staff of between 10 and 20 percent.

It is anticipated that there will only be a moderate to high rise in construction costs in major cities in the coming months of 10 to 15 percent.

North America

Current signs point to economic growth that is modest and people remain hopeful.  Uncertainty clouds most or any predictions due to continued elevated unemployment, a sluggish housing market, and the Eurozone debt crisis. The lack of real job growth remains a major concern. Unemployment, at a 3 year low, is still high at 8.3 percent, but is 17.1 percent for the construction industry.

An indication that the economy continues to stagger is the lowering of GDP forecast to 2.2 from 2.7 percent by the Federal Reserve. The government reported annual GDP growth for the fourth quarter of 2011 at 1.6 percent.

Construction demand may see some modest growth in 2012. Comparing 2011 to 2010, construction spending fell about 1.7 percent. The 2011 construction put-in-place was USD 789.8 billion according to the Census Bureau. Volume forecasted for 2012 is USD 827.0 billion.

The January AIA Architecture Billings Index, a leading indicator of construction industry health, rose to 50.9 (A value below 50 indicates billings declined during the month). The third consecutive month increase signals encouraging business conditions at architectural firms, but there are mixed economic signals for construction growth this year.  Other entities are projecting modest growth as well but worldwide uncertainties will affect the economy such as rising oil prices, the debt crisis, global political uncertainties, and the upcoming US election cycle.

Construction materials price changes were mixed in 2011 with some rising and some are falling. The continuing rising price of oil is one contributing factor as is the worldwide supply for commodities such as steel and copper. Producer prices for asphalt rose about 23 percent and steel rose by 8 percent overall in 2011. However copper fell about 9 percent and timber products were down 2.7 percent. As a whole, material cost increases are expected in 2012 as well as increased labour costs.

Construction prices are not increasing at the same pace. One inflation measure, the Turner Building Cost Index, has construction with an overall rise of 1.9 percent for 1Q 2012 over 1Q 2011. The Bureau of Labor Statistics PPI for buildings shows an increase of about 4 percent from January to December of 2011.