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

Since the start of the financial crisis in 2008, commodity prices have surged, with energy prices more than doubling and metal prices up nearly 170 per cent. Recent political unrest in the Middle East and North Africa has resulted in a loss of oil supply, pushing prices even higher, partially due to the fear of further disruptions.

Steel, tin and copper have been close to their all time highs in the last 12 months, largely due to renewed strong growth in China and supply constraints. Other metals markets, particularly aluminium, have seen fewer supply constraints. Prices for most metals and minerals are expected to strengthen further as demand recovers towards the end of 2011, again notably from China.

Spotlight on energy

In Q1 2011, global oil demand was 2.3 per cent higher than a year ago, but, with future growth rates expected to ease, this would follow the long term trend of the past decade. The increase in oil demand was largely satisfied by  increased production in non-OPEC countries, including the US, Russia, China, Brazil, Colombia, Kazakhstan, Azerbaijan, Canada and Oman. Oil prices are expected to remain high with political turmoil adding to price volatility.

Whilst oil prices have increased nearly fourfold since 2000, natural gas prices linked to oil (in Europe and Japan) have only increased by 160 per cent. With growing supplies of unconventional gas, natural gas prices are expected to stay well below oil prices. Contract prices in Europe and Japan, which are tied to oil prices, are expected to come under downwards pressure as end users push to tie these prices more closely to spot prices for natural gas. Over time, these large gaps between oil and natural gas prices can be expected to induce shifts in consumption from oil to natural gas, reducing demand for oil, and as a result reducing price pressures.

There is always an inherent risk on oil pricing levels. Large supply shocks can have a significant impact on prices and economic activity, with OPEC production policies also affecting price levels. The long term impact of the Fukushima nuclear accident is an additional risk to energy prices. A combination of a reduction in the share of nuclear and the likely environmental pressures in crude oil may exert additional pressure in energy prices over the longer term.

Metal markets

Thanks to robust demand, metals and minerals prices have recovered strongly in the last three years since the recession-induced lows of 2008. Most metals that experienced supply constraints have seen strong price increases, with the majority at least doubling in price. However price increases have been more moderate where there has been an ample supply, as in the case of aluminium.

Global metal markets, especially copper and nickel, have struggled over the past decade to meet the strong demand in China. As a result prices have increased to ration the demand and balance the market. Large restocking in China, the world’s largest metal consumer, led the recovery in 2009. Demand in China slowed in 2010 but this was offset by strong demand elsewhere, particularly in developed countries.

The increase in cost of raw materials such as iron ore, together with rising energy costs, has resulted in a number of recent price increases to steel. Copper in 2011 reached an all time high. Where supply has been very tight, it has seen a 220 per cent increase since its 2008/2009 low. High metal prices have led to an increase in recycling and substitution of other cheaper alternatives such as aluminium and plastics.

Overall, metal prices are expected to rise in 2011 compared with 2010, owing to increasing demand, but are expected to ease thereafter, as new capacity comes on line and keeps the markets in surplus.

Construction Industry

Higher commodity prices ultimately bring higher construction material prices but not necessarily higher construction project costs. With the price of oil affecting transport costs and oil based products, plus steady rises in most metals used in the construction industry, the supply chain has had to absorb many of the resultant price increases in order to keep trading.

Contractors are working with tighter margins to win work and maintain order books, whilst the construction labour force, probably one of the hardest hit in a global recession, continues to wait for any sign of wage awards.

Variances in global exchange rates have recently caused construction prices to soar in certain countries, especially Switzerland which has seen a 17 per cent rise in the value of the Swiss franc.

The slump in the global economy has hit the construction industry in the western economies particularly hard. Recovery is expected to be slow as concerns over sovereign debt levels are stifling governments’ attempts to stimulate home economies. Future growth will continue to be driven by emerging markets such as China, India, Russia and Brazil, although their rates of growth may not be maintained as increased home demand is unlikely to fully replace the drop in exports caused by the global recession.

Until the global financial markets are confident that the US, UK and the eurozone have a coherent sustainable policy for dealing with their levels of indebtedness, the depressed construction market in the western nations will continue. The slowing growth rates likely in the BRIC economies can only provide a modest counterbalance.

Global construction prices will therefore continue to 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 - Q3 2011 (United Kingdom Base)

Using the Parity Index

Country City Parity Range Exchange Rate Index Range Ave. Index  
EUROPE
Austria Vienna 0.95 - 1.28 1.1347 EUR 83.7 - 112.8 98.3
Belgium Brussels 0.92 - 1.24 1.1347 EUR 81.1 - 109.3 95.2
Czech Republic Prague 16.02 - 21.68 27.5620 CZK 58.1 - 78.7 68.4
Denmark Copenhagen 8.72 - 11.79 8.4549 DKK 103.1 - 139.4 121.3
Finland Helsinki 1.12 - 1.52 1.1347 EUR 98.7 - 134 116.4
France Paris 1.11 - 1.5 1.1347 EUR 97.8 - 132.2 115.0
Germany Frankfurt 1.05 - 1.41 1.1347 EUR 92.5 - 124.3 108.4
Greece Athens 0.8 - 1.08 1.1347 EUR 70.5 - 95.2 82.9
Ireland Dublin 0.9 - 1.1 1.1347 EUR 79.3 - 96.9 88.1
Italy Milan 0.92 - 1.25 1.1347 EUR 81.1 - 110.2 95.7
Netherlands Amsterdam 0.88 - 1.19 1.1347 EUR 77.6 - 104.9 91.3
Norway Oslo 10.01 - 13.54 8.8734 NOK 112.8 - 152.6 132.7
Poland Warsaw 2.59 - 3.69 4.7274 PLN 54.8 - 78.1 66.5
Portugal Lisbon 0.57 - 0.81 1.1347 EUR 50.2 - 71.4 60.8
Russia Moscow 35.6 - 50.7 47.3219 RUB 75.2 - 107.1 91.2
Spain Madrid 0.7 - 0.94 1.1347 EUR 61.7 - 82.8 72.3
Sweden Stockholm 11.51 - 15.57 10.3490 SEK 111.2 - 150.4 130.8
Switzerland Zurich 1.74 - 2.36 1.3000 CHF 133.8 - 181.5 157.7
UK London 0.9 - 1.1 1.0000 GBP 90 - 110 100.0
AMERICAS
Brazil Sao Paulo 1.81 - 2.58 2.6371 BRL 68.6 - 97.8 83.2
Canada Toronto 1.32 - 1.61 1.6133 CAD 81.8 - 99.8 90.8
Mexico Mexico City 12.27 - 16.61 20.3853 MXN 60.2 - 81.5 70.9
USA Chicago 1.29 - 1.58 1.6348 USD 78.9 - 96.6 87.8
PACIFIC
Australia Melbourne 1.29 - 1.75 1.5634 AUD 82.5 - 111.9 97.2
China Shanghai 4.76 - 6.12 10.4472 CNY 45.6 - 58.6 52.1
India Bangalore 26.66 - 36.06 46.2255 INR 57.7 - 78 67.9
Japan Tokyo 132.94 - 179.86 126.1530 JPY 105.4 - 142.6 124.0
Malaysia Kuala Lumpur 1.7 - 2.42 4.8820 MYR 34.8 - 49.6 42.2
New Zealand Auckland 1.64 - 2.34 1.9719 NZD 83.2 - 118.7 101.0
Singapore Singapore 1.53 - 1.87 1.9764 SGD 77.4 - 94.6 86.0
Thailand Bangkok 25.24 - 35.94 49.1136 THB 51.4 - 73.2 62.3
UAE Dubai 4.2 - 5.68 6.0052 AED 69.9 - 94.6 82.3

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

The UK economy remains weak and continues to be affected by the government’s decision to cut faster and further in order to tackle the budget deficit. Forecasts for UK economic growth in Q2 stood at around +0.3 per cent.

Construction output is forecast to fall over the next two years, though picking up in 2013 with the aid of the commercial, energy and housing sectors. The decline in construction activity is in the most part a direct consequence of cuts to public expenditure. Public sector construction activity alone is set to drop by 24 per cent by 2014, contributing to this drop in construction sector growth.

The effect of the weak economy and predicted reductions in construction volumes is providing a very competitive environment which is resulting in stagnant and limited Tender Price Index (TPI) increases. This is set against a period of significant deflation over the previous three years. Contractors’ margins are being further squeezed by the steady increase of the General Building Cost Index at approx 3 per cent increase year on year, a direct result of increases in factory gate prices.

  • Concerns remain over the UK’s economic outlook for 2011
  • Inflation falls to 4.2 per cent in June
  • Construction activity set to fall off until 2013 though some sectors perform well
  • Construction sector employment at its lowest since 2003
  • Materials prices set to rise, though oil prices have recently dropped off.

Middle East

The UAE market has felt the direct impact of global financial crisis during the past few years and the construction industry was one of the major affected industries. The UAE market sank rapidly in 2009 and was relatively stable in 2010 and 2011.

After the sudden drop in construction tender prices in 2009, we have experienced low end stable tender prices during the past two years and most of the construction tender prices were comparable to tender price levels experienced in 2004 and 2005.

We have noticed slight upward trends in materials prices during the past few months, due to higher oil prices and increased construction activities in the region, especially Saudi Arabia and Qatar. However we foresee a stable level of construction tender prices during 2011 and for most of 2012, due to greater competition between contractors as they try to secure the fewer projects coming to the UAE market.

During the next five years, we foresee approximately 1-2 per cent average annual construction tender price increment, due to the expected relatively higher level of construction activities in the UAE and in the region. Beyond five years, we expect this trend to continue with considerably higher rates (approximately 5-6 per cent annually) mainly due to the anticipated higher demand for construction related resources in Saudi Arabia and Qatar.

Singapore

Singapore’s economy in Q2-2011 grew by 0.9 per cent year on year but contracted 6.5 per cent on the seasonally adjusted quarter-on-quarter expansion. The Ministry of Trade and Industry (MTI) has recently announced that the Singapore GDP is expected to grow by 5 to 6 per cent in 2011. There was a modest growth in the construction industry by 1.5 per cent year on year basis. This was sustained primarily by the increase in construction activities from the public sector residential and civil engineering projects, as well as the private sector residential and commercial developments.

Over the medium term, the construction and infrastructure growth levels are likely to remain stable. The government is looking to invest in infrastructure to promote productivity growth over the longer term, with a slew of projects already in the pipeline.

The concrete supply prices have increased and the copper and iron prices have fallen in recent months. Inflationary pressure on construction materials appears to have eased and looks set to stabilise for the rest of 2011. However many regulatory changes for the industry, notably the increase of foreign worker levy, reduction of Main-Year Entitlement and specialist foundation trades, are expected to add to labour and preliminaries costs, resulting in a direct impact of approximately 1 per cent to 2 per cent increase in the Tender Price. Another factor contributing to a fall in Tender Price Index could be the lower construction demand/activities and this is evident from the competitive pricing obtained in recent contractors’ bids. The Tender Price Index published by the Building and Construction Authority in Singapore has shown a 0.1 per cent decrease year on year. A further slight fall of up to 1% in building tender prices is forecast over the next few months. Thereafter the market is more difficult to predict but our best estimate is that tender prices will  remain level to October 2012.

China

China has battled with inflation this year - the household staples of pork and rice surged 56 per cent and 70 per cent year on year respectively – together with drought and floods, corruption scandals, a tragic accident on its high speed rail system and, of course, a global economy that is now in the danger zone.

But China remains a beacon of hope for the global economy. China’s GDP is forecast to grow 8.9 per cent in 2011 and 7.8 per cent in 2012. This is a cooler rate of growth compared to recent years but is nonetheless upward. So what is driving it? Many of China’s commentators claim that China’s current economic success is nothing more than a puff created by government stimuli and exports. The more optimistic view is that the ever increasing domestic consumption, fuelled by the increasing wealth of the Chinese with an earn and spend mindset will replace the current dependence on exports.

Inflation-adjusted wages in urban areas rose 7.8 per cent in 2010 and have risen another 7.6 per cent during the first half of 2011. However the real driver continues to be fixed assets. Manufacturing activity has increased 32 per cent so far in 2011. Many of the west’s largest and oldest companies long ago recognized China’s transformation and shifted capital overseas to continue growing their revenues. Despite some cooling measures this activity still maintains the same 25 per cent year on year increase as China continues to gobble up commodities.

While China’s ’ghost cities’ have made the headlines, its real estate is much stronger than the pundits suggest. The government’s focus on keeping housing price growth under control and limiting the availability of mortgages has resulted in price increases of around 1 per cent month on month. This is in stark contrast to last year when prices jumped 17 per cent on a year on year basis.

The likely effect on construction prices of the continued but slightly more muted growth in the overall Chinese economy is difficult to predict but is likely to be in the range of 10-12% per annum over the next two years, on the assumption that China continues to peg it’s US dollar exchange rate at the current level.

North America

All signs indicate that economic growth has slowed. Consumer confidence remains low amid continued high unemployment, a lifeless housing market, inflation concerns, the US debt crisis and the EMU debt crisis. The sustained lack of job growth is a major impediment to economic improvement. Unemployment is down to 9.1 per cent, while the construction industry has fallen to 13.6 per cent.

Another sign that the economy continues to struggle is the recent GDP forecast reduction to a range of 2.7 to 2.9 per cent by the Federal Reserve. The government reported annual GDP growth of 1.3 per cent for the Q2 2011.

A falling GDP and other lacklustre economic news do not bode well for the construction industry. Demand continues in a downward trend, just less steep. Compared with the first six months of 2010, construction spending this year fell over 5 per cent. The Census Bureau estimate for construction put-in-place this year is USD 772.3 billion. Volume was USD 803.6 billion in 2010.

The July AIA Architecture Billings Index, a leading indicator of construction, dropped to 45.1. (A value below 50 indicates billings declined during the month). The four month decline signals that the construction activity will not rebound until sometime next year at the earliest.

Prices for many construction materials are rising. The higher price of oil is one contributing factor as is the worldwide demand for commodities such as steel and copper. Producer prices for asphalt rose about 6 per cent and steel about 10 per cent since the first of the year. As a whole, material cost increases this year are about 3 to 4 per cent. Labour costs are up about 2 per cent.

Construction prices are not increasing at the same pace. One inflation measure, the Turner Building Cost Index, has construction prices rising about 1.2 per cent the first half of 2011 after falling 4 per cent in 2010. The Bureau of Labor Statistics Producer Price Index  for buildings shows increases of about 2 per cent through July after an increase of about 0.5 per cent in 2010.