International Construction Intelligence

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

Construction Industry Overview

Despite sharp declines in commodity prices during 2012, the year ended with most of the indices at a level close to where they began. However, metal prices fell by more than 15 percent, ending the year at levels close to the mid 2010 lows, whilst raw materials fell by almost 20 percent. These declines reflect the intensification of the European debt crisis along with slower growth prospects in emerging economies, especially China.

With the EU’s embargos on Iranian oil and continued violence in the Middle East, oil prices have responded to geopolitical concerns. However, in this volatile market, the key element for price stability will rest on how well the Organization of the Petroleum Exporting Countries (OPEC) (and more importantly Saudi Arabia) can address changing demand conditions.

Metal prices are expected to gain slightly in 2013 but the main price risk on metals depends on the prospects of the Chinese economy as China accounts for almost half of the global metal consumption. It is also forecast that there will be a marginal rise in the cost of global construction bulk materials which include cement, concrete, rebar and timber. Along with energy markets, the future still remains uncertain due to current global financial market conditions.

Oil – is it still Black Gold?

Despite large fluctuations, crude oil prices (World Bank average) ended 2012 at US$101/bbl (barrel), close to where it began. The decline in the early part of 2012 reflected weak demand due to slower growth outlook and heightened concerns about the European debt crisis.

World oil demand increased only modestly at less than 0.8 percent or 0.67 mb/d (thousand barrels per day) in 2012, whilst Organisation for Economic Co-operation and Development (OECD) consumption is down almost 5 mb/d, or 10 percent from its 2005 peak, confirming indications in 2011 for yet another fall in 2012. Japan is the only OECD country to increase crude oil demand, the increase being destined for power generation, following the loss of nuclear capacity after the Tohoku earthquake.

In the short term oil prices are likely to be capped because of price induced demand constraints and geopolitical problems in countries struggling with conflict and security, which include Libya and Iraq. Whilst oil production is expected to increase in a number of regions, including Brazil, Canada, the Caspian, West Africa and the United States, the increases will be offset by declines in such areas as the North Sea.

It is expected that OPEC will continue to limit production to ensure that prices are kept relatively high. However, OPEC may be sensitive to letting prices rise too high, for fear of inducing technological changes that alter the long term price of oil.

Changing metal markets

The majority of metal prices declined steadily during the first 8 months of 2012, down 15 percent due to weakening demand, in particular by China, high stocks of most metals and concern over global growth. China’s import demand growth slowed in 2012, owing to destocking, reflected in the fact that China consumes almost 45 percent of the world’s metal’s output. Following an extended period of high prices that has generated large investment in new capacity, and supply rising quicker than demand for some metals, in late 2012, most metal prices reversed their downwards trend. Overall metal prices are expected to increase marginally in 2013.

Global production capacity of aluminium continues to outstrip consumption, the bulk of which comes from China with the majority of the rest coming from the Middle East, Europe and North America. Prices are likely to respond to higher production costs, of which energy accounts for 40 percent.

Copper prices fell sharply in 2012 due to weakening import demand from China, this fall is expected to continue in 2013 and 2014. Copper mine production, which was flat in 2011, has not kept pace with consumption due to delays in start-up projects, labour disputes, declining grades and shortages of skilled labour. Production at the world’s two largest mines, Escondida in Chile and Grasberg in Indonesia has seen a pronounced fall. Despite this, copper prices remain sufficiently high enough to induce a wave of new mines that are expected to come on-stream.

Nickel prices have seen a modest rise in 2012, with 2013 prices expected to follow a slightly upward trend. Stainless steel (the end use of nickel production) is seeing robust growth, mainly driven by high grade consumer applications in high income countries and increasingly so by emerging economies. New projects in Australia, Brazil, Madagascar, New Caledonia and Papua New Guinea will soon ramp up production keeping nickel prices close to marginal production costs.

Construction Industry

2012 was yet another difficult and challenging year for the global construction industry, despite some recent indications of an improvement it is still too early to assess whether a sustained recovery will follow in 2013. The US “fiscal cliff” presented a major risk at the beginning of 2013 to the US construction industry, whilst this was averted, significant financial challenges still remain for the US economy and continuing problems with the Euro will potentially dampen European construction activity.

The Sovereign debt crisis is likely to continue in Europe, with Italy now joining the troubled and indebted economies of Portugal, Greece and Spain. The recent strengthening of the UK economy has not yet fed through to the UK construction industry which is expected to see flat or minimal growth in 2013, whereas the Eastern European countries are more likely to experience better growth rates due to their low cost construction labour rates.

India continues to see significant growth, but future growth plans could be affected if the chronic shortage of engineers is not resolved in the next few years. Despite China still experiencing sustained growth, it potentially faces a problem with a vast stock of houses and commercial office space being left empty, which could have a serious impact on future global construction growth.

The Russian construction industry continues to grow due to its booming energy and infrastructure markets, and with the World Cup and Winter Olympics being held within the foreseeable future, this will only add to future growth prospects.

Middle East countries will see a significant level of construction activity in 2013, particularly Saudi Arabia, with Qatar and the UAE also seeing measureable growth. A number of construction projects will get underway which had previously been put on hold, including transportation, roads and power facilities. 

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 futures, provided they take professional advice on the appropriate procurement strategy to suit this market.

Parity Index Q2 2013

Using the Parity/Index

(UK base)

Country City Parity Range Exchange Rate
Index Range Average Index
EUROPE
Austria Vienna 0.96 - 1.29 1.1802 EUR 81.3 - 109.3 95.3
Belgium Brussels 0.92 - 1.25 1.1802 EUR 78 - 105.9 92.0
Czech Republic Prague 16.15 - 21.85 30.2873 CZK 53.3 - 72.1 62.7
Denmark Copenhagen 8.76 - 11.86 8.7985 DKK 99.6 - 134.8 117.2
Finland Helsinki 1.14 - 1.54 1.1802 EUR 96.6 - 130.5 113.6
France Paris 1.11 - 1.5 1.1802 EUR 94.1 - 127.1 110.6
Germany Frankfurt 1.05 - 1.42 1.1802 EUR 89 - 120.3 104.7
Greece Athens 0.8 - 1.08 1.1802 EUR 67.8 - 91.5 79.7
Ireland Dublin 0.89 - 1.09 1.1802 EUR 75.4 - 92.4 83.9
Italy Milan 0.93 - 1.26 1.1802 EUR 78.8 - 106.8 92.8
Netherlands Amsterdam 0.89 - 1.2 1.1802 EUR 75.4 - 101.7 88.6
Norway Oslo 10.09 - 13.65 8.9560 NOK 112.7 - 152.4 132.6
Poland Warsaw 2.63 - 3.74 4.9003 PLN 53.7 - 76.3 65.0
Portugal Lisbon 0.57 - 0.81 1.1802 EUR 48.3 - 68.6 58.5
Russia Moscow 38.56 - 54.91 48.5000 RUB 79.5 - 113.2 96.4
Spain Madrid 0.7 - 0.94 1.1802 EUR 59.3 - 79.6 69.5
Sweden Stockholm 11.58 - 15.67 10.0623 SEK 115.1 - 155.7 135.4
Switzerland Zurich 1.73 - 2.34 1.4453 CHF 119.7 - 161.9 140.8
UK London 0.9 - 1.1 1.0000 GBP 90 - 110 100.0
AMERICAS
Brazil Sao Paulo 1.88 - 2.68 3.1175 BRL 60.3 - 86 73.2
Canada Toronto 1.32 - 1.62 1.5656 CAD 84.3 - 103.5 93.9
Mexico Mexico City 12.52 - 16.95 18.8997 MXN 66.2 - 89.7 78.0
USA Chicago 1.3 - 1.59 1.5570 USD 83.5 - 102.1 92.8
PACIFIC
Australia Melbourne 1.31 - 1.78 1.5032 AUD 87.1 - 118.4 102.8
China Shanghai 5.04 - 6.47 9.6059 CNY 52.5 - 67.4 60.0
India Bangalore 28.29 - 38.28 83.5760 INR 33.8 - 45.8 39.8
Japan Tokyo 131.27 - 177.61 151.8900 JPY 86.4 - 116.9 101.7
Malaysia Kuala Lumpur 1.72 - 2.45 4.7378 MYR 36.3 - 51.7 44.0
New Zealand Auckland 1.68 - 2.39 1.8150 NZD 92.6 - 131.7 112.2
Singapore Singapore 1.56 - 1.9 1.9175 SGD 81.4 - 99.1 90.3
Thailand Bangkok 25.68 - 36.58 45.5525 THB 56.4 - 80.3 68.4
UAE Dubai 4.29 - 5.81 5.7184 AED 75 - 101.6 88.3

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.

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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 United Kingdom, which cost GBP 700/m2. Use the parity values from the Parity/Index table to calculate likely costs in Yuan (CNY).

Low

GBP 700/m2

X

5.04

=

CNY 3,528/m2

High

GBP 700/m2

X

6.47

=

CNY 4,529/m2

Average

GBP 700/m2

X

(5.04+6.47)/2

=

CNY 4,028/m2

Using the average parity value provides a most likely cost of CNY 4,028/m2.

This equates to GBP 420/m2 (CNY 4,028 / 9.60; cost / exchange rate), meaning to build in China is approximately 40 percent less expensive than in the UK. 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 GBP 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

GBP 700/m2

X

52.5%

=

GBP 368/m2

High

GBP 700/m2

X

67.4%

=

GBP 472/m2

Average

GBP 700/m2

X

60.0%

=

GBP 420/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 10.00 CNY / GBP, not the current rate of 9.60 used for the published index value.

Average of parity range

 

New exchange rate

 

Revised index

5.755

/

10.00

=

57.6%

If the costs are to be presented in the two currencies, the CNY cost would remain constant at CNY 4,028/m2 whilst the GBP cost to build this project would be GBP 403/m2 (GBP 700/m2 x 57.6%).

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.