Poor Demand In Construction Sector Threatens Chemical Manufacturers

photo : diamond.ac.uk

Whilst all chemical manufactuers are hoping for a better year in 2010, recent figures from the US indicate that demand remains very slack in the non-domestic construction sector, a major market for polymer and chemical manufacturers.

According to the American Chemistry Council (ACC), some 20% of spending in construction projects goes on chemicals and plastics and the figure is set to increase as buildings 'go green' with improved insulation, solar power etc.

The Associated General Contractors of America (AGC) has painted a negative picture in a number of recent press releases. In particular, the AGC recently released a construction industry outlook in which nine out of ten contractors stated that they believe that there will be no construction recovery in 2010.

This a big concern. Demand for chemical products relies on consumer demand, with construction and automotive being particularly important sectors. This downbeat assessment does not make happy reading for the chemical industry.

Is Now the Time to Start Planning New Investments?

photo : Germanhistorydocs

Although contractors are seeing an increase in the number of requests for proposals, the scale of projects is nothing like those seen just a few years ago. Large scale projects are just not being initiated just now, but arguably this may be a very good time to start to invest wisely.

Engineering contractors are seeing changes in demand patterns, as we move into the “new normal”. The scale of projects is nothing like those seen just a few years ago. But arguably next year may be a very good time to invest wisely, now that costs have come down to more sensible levels.

• Current demand for chemicals has been buoyed by the stimulus packages in place around the world.
• As these packages end (e.g. in autos), uncompetitive manufacturing assets will again come under increased pressure
• Cost pressures coming from climate change related legislation will also make things tougher for older and less efficient plants

Supply and demand will start to rebalance to some extent and although this will be offset by the wave of new capacity coming on stream in the Middle East and Asia, some opportunities will be created.

Although there are differing views on the speed and shape of the recovery, we remain in a cycle and the upcycle will come in the next few years. Many analysts are predicting a next peak somewhere around 2013-2014.

The combination of these factors means that any new investment has to be made judiciously and in the right market sectors. Given that new plant takes typically 3-4 years to complete, now is probably the smart time to start selectively investing in new, efficient and 'green' assets.

Dow and Saudi Aramco Achieve Savings on Ras Tanura?

I was very interested to read a report this week in Reuters claiming that Dow and Saudi Aramco had achieved savings of $4BN on an estimated total investment of $20BN in the Ras Tanura petrochemical complex.

As reported previously in this blog, construction costs are down, with the CERA downstream index showing that on average, the cost of building new refineries and petrochemical plants fell 9 percent between the third quarter of 2008 and the second quarter of 2009, after several years of steady and significant increases.

If the reported savings at Ras Tanura are correct, then Dow and Saudi Aramco have been highly successful in demanding cost reductions from managing contractors. Clearly, the managing contractors will be looking to their sub-contractors and equipment suppliers to achieve substantial savings. In some cases, where order books are weaker, this will create major problems and some may not survive.

After years of very high inflation in new plant construction, it is now necessary for all parties to work smartly to achieve economies and satisfy the end clients. The days of 'just get it built' are clearly over.