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Executive Summary
What a difference a month makes!!!
The Coronavirus Pandemic has forced the world economies in more than 150 countries into a total lockdown situation. Construction, airlines, restaurants, hotels, international tourism & the cruise industry have just about ceased activities or are operating on a restricted basis. Thousands of people have been laid off or are about to join the ranks of the unemployed. According the John Hopkins University Coronavirus world tracker as of the end of March, there are 800,000 confirmed cases worldwide of (COVID-19), with 40,000 reported deaths & 170,000 recovered cases.
The US Government announced an extension of federal advice on continuing social distancing through the end of April, in a continual attempt to slow the increase of the Coronavirus.
The rate of layoffs is sure to gather momentum as the US economy drops into a possible recession. Business related cash flow has just about dried up in a lot of business sectors. The US unemployment rate could be between 10% & 15% by the end of May.
Various US states & cities have ordered companies to close their facilities, companies have instructed their employees to work from home. Schools & universities are closed for a least a month or two.
Stock markets are down one day, up the next; it’s hard to see when this will come to a conclusion. There are a few signs that the current situation will improve in the next couple of weeks.
- China’s factories are for the most part back in business.
- There are a couple of drugs that seem promising in mitigating the symptoms of the virus.
- The US Government has come up with a relief, bailout / stimulus package costing a massive $2.2 Trillion that is aimed at putting a damper on the impacts of the Coronavirus Pandemic. This relief package is aimed at assisting US industry & US citizens.
The fact is the Coronavirus Pandemic will seriously impact on the Global Construction Market: The vast majority of Global Capital Construction projects will experience material & major equipment cost increases, delayed completions & potential claims from Engineering firms & contractors due to work stoppages / suspensions, unavailable long lead materials & equipment items, low productivity & other difficulties related to the Coronavirus (COVID-19) pandemic. The full extent of the impact to the global economy due to this pandemic is still to be determined, it appear that this pandemic could take months until the global economy returns to normal.
The main takeaways for the Global Construction market from the Coronavirus Pandemic are:
- The developing unparalleled events of the global Coronavirus Pandemic & the oil price collapse is guiding Oil / Gas operating companies, Energy & EPC organizations to reevaluate their current business models.
- The wide-ranging consequences of this two pronged onslaught on the Global Economy continues to be uncertain. Engineering & Construction Productivity has decreased significantly over the last month or two as Owners / Operating Companies, Engineering & Construction organizations have hastily implemented policies such as working remotely from home, limiting staff meetings of no more than 10, imposing travel restraints, and other practices to minimize the spread of the Coronavirus.
- We read each day that various Owners / Operating Companies are reducing 2020 CAPEX budgets anywhere from 10% to as much 50%. The impact of this unfortunately will translate into reductions in staffing levels across the Global CAPEX / EPC community.
- The Coronavirus pandemic has significantly impacted the Global Construction Supply Chains. The vast majority of Chinese construction suppliers have not been producing products & components, these production factories have been closed for the most part of January & February. Chinese construction material supplies have for the most part been depleted, China supplies the US & Europe with more than 30% of construction materials / components, and they produce a whole host of products that includes rebar, cable, electrical / lighting, plumbing fixtures & much more.
- Look for increased costs & escalation of materials, construction in-directs & major equipment in the remainder 2020.
- A large number of Oil & Gas / Energy CAPEX projects will be cancelled or delayed due to both the Coronavirus pandemic & really low oil prices that have fallen by as much as 30% in the last month or two, due to the ongoing battle for market share between Russia and Saudi Arabia.
- Look for Contractors to issue claims for extended general conditions / preliminaries, loss of productivity & delay costs.
- Owners, banks, lending institutions appear to be uneasy on future construction related investments & borrowings.
- Infrastructure, Residential & Commercial Construction are set to see a significant slowdown if this pandemic continues past May or June.
- Unfortunately travel constraints / restrictions & quarantines will impact many Global construction projects.
- Going forward there are concerns that the GDP’s of USA, China, Japan & Europe will take a major hit that could be the harbinger of a Global Recession.
Nobody knows what the next 4 to 12 weeks will bring, we must be realistic & keep our fingers crossed for a good outcome.
Global construction was forecast to exceed $8.25 Trillion by the end of 2020. This take into account both government / public works and private construction expenditures, however this could trend significantly down as global economic activity stalls due to the Coronavirus Pandemic. We are forecasting a value of $7.25 Trillion as can be seen in the table below, a decline of 14%.
The USA, China and India will be the leaders and most active countries completing more than 50% of all global construction work in the next five years, this of course is assuming that the Coronavirus Pandemic can be significantly reduced & for the most part eradicated.
How rapidly the Coronavirus can be controlled will impact future construction growth prospects. The latest somewhat good news to report is that the majority of factories in China are back in production is promising. The unbelievable high death rate that Italy has experienced appears to be declining, again this indicated that social distancing is starting to work.
Construction is a huge industry that is a major component of many country’s GDP and employing millions of construction professionals, skilled and unskilled construction workers. The industry is forecast to account for more than 13% of the world’s economic output by 2025, this is predicated that “things” get back to normal in the next 3 to 6 months.
The global construction market is expected to grow and experts believe this growth will continue well into the next five years, based of course on eliminating the current Coronavirus Pandemic.
Five years from now in 2025 the top five construction markets will be.- USA
- China
- India
- Germany
- Japan
Right now, a lot of construction investment is on hold. Going forward, Vietnam, Thailand & Indonesian construction sectors should benefit from US and European major companies building facilities in these countries. Many of these companies are moving away from China to take advantage of lower production costs & wage rates in these countries.
Italy, UK, Spain, Germany & France will experience a daunting year economically as they all struggle to get past the Coronavirus.
The oil price war between Russia & Saudi Arabia over market share has driven oil prices down by 30% in the last 2 months, this is a serious problem which could lead to many future & ongoing Oil & Energy CAPEX projects to canceled or delayed.
Assuming we can get past the current difficulties, the international construction market is forecast grow to $12 trillion market by 2024, a 45% increase from 2019 levels. Lets revisit this in more detail in our next newsletter.
The chart below indicated the regional market share for the year 2020, these values unfortunately are anticipated to contract by as much as 10% to 20% due to the Coronavirus pandemic. We have indicated projected pre- Pandemic & post-Pandemic values.
| # | Region | 2020 Value in Trillions $’s (Pre- Pandemic) | 2020 Value in Trillions $’s (Post Pandemic Forecast) |
|---|---|---|---|
| 1 | North America (USA / Canada / Mexico) | 2.17 | 1.95 |
| 2 | South America | 0.66 | 0.56 |
| 3 | Western Europe | 1.73 | 1.51 |
| 4 | Eastern Europe | 0.56 | 0.48 |
| 5 | Middle East | 0.67 | 0.57 |
| 6 | Africa | 0.28 | 0.24 |
| 7 | Asia / Australia (China / India / Japan / Australia / New Zeal& / Other S.E. Countries) | 2.18 | 1.94 |
| Total | 8.25 | 7.25 |
The new US-Mexico-Canada Agreement (USMCA) trade agreement that replaced NAFTA has been agreed by the three countries, this agreement has been ratified by all three countries. By the year 2030, assuming we can mitigate the current major business disruption, (just ten years from now) it is estimated that the world will need 25% – 35% more energy, potable water & food. Therefore, there will be a big push to engineer & construct these related facilities.
Current world political & economic risks & issues include:
- The worldwide economic impact of the Coronavirus still needs to fully play out before realistic projections can be made.
- The race is on to develop a vaccine to protect against the Coronavirus, this unfortunately could take up to 12 months, there is talk of two or more approved drugs that have shown some positive results in small trials.
- The possibility of an all-out trade war between China and the USA seems to have diminished considerably with the agreement of Phase 1 arrangement.
- The European Union & the US are still in a stalemate regarding tariffs as we move into 2snd Q 2020, this issue for the most part has been relegated to the backburner because of the current pandemic.
- North Korea continues with test-firing short range missiles and testing rocket systems, this could be a major problem going into 2nd Q 2020.
If some of these issues can be resolved or put to rest, then the international construction market has an excellent chance to grow & prosper in the next 2 to 5 years – particularly in some of the 2nd & 3rd world developing economies of South East Asia, East Africa & South America. However, the current global war on the Coronavirus Pandemic needs to be won before this can be realized.
The Coronus Pandemic is the latest challenge the construction industry is faced with, hopefully this serious problem will be resolved in the next 2 to 4 months.
| Countries | 2nd Q 2020 % GDP Growth | 2nd Q 2020 Inflation % | 2nd Q 2020 Unemployment % | Comments on Construction 2020 Future Spending Activity |
|---|---|---|---|---|
| USA | 0.5 | 2.5 – 4.5 | 10 - 15 | The 2nd Q of 2020 will be very challenging as the US construction sector tries to catch its breath. The full scale of the economic impact to the US of the Coronavirus Pandemic is still to become known. The Coronavirus Pandemic has the potential for all US future or current construction projects to be delayed or the worst case cancelled. Look for construction unemployment to skyrocket in the next month or two. |
| CANADA | 0.3 – 0.5 | 2.5 – 4.5 | 10 - 15 | The economic impact of the deadly Coronavirus is still to emerge. Unfortunately the Coronavirus Pandemic has the potential for all Canadian future or ongoing construction projects to be delayed or the worst case called off. Look for construction unemployment to rise steeply in the next month or two. |
| BRAZIL | 0.3 – 0.5 | 3.5 – 5.5 | 15 - 20 | The full scale of the economic impact of the deadly Coronavirus on Brazil is still TBD. Regrettably, the Coronavirus Pandemic has the potential for all Brazilian future or ongoing construction projects to be delayed, deferred or the worst case situation axed. Look for construction unemployment to increase rapidly in the next month or two. |
| UNITED KINGDOM | 0.3 – 0.4 | 2.5 – 4.5 | 10 - 15 | The UK has a high likelihood of falling into a recession later in 2020, this & the Brexit issue will take some skilled navigation to come to a good outcome. The economic impact of the Coronavirus Pandemic on the UK construction sector is still to come into focus. This Coronavirus Pandemic has the potential for all UK future or ongoing construction projects to be delayed or the worst case situation cancelled. Look for construction unemployment to skyrocket in the next month or two. The UK pound is showing signs of weakness going into the 2nd Q of 2020. |
| GERMANY | 0.2 – 0.4 | 2,5 – 4.5 | 10 - 15 | Germany (the engine of Europe) has a high probability of falling into a recession later in 2020. The Coronavirus Pandemic has the potential for the majority of German future or ongoing construction projects to be delayed or the worst case stopped. Look for construction unemployment to increase rather rapidly in the next month or two. |
| FRANCE | 0.2 – 0.4 | 2.5 – 4.5 | 12 - 17 | The full scale of the economic impact of the deadly Coronavirus Pandemic on France is still TBD. This virus couldn’t have come at a worse time as France has struggled economically for the last 4 years. The Coronavirus Pandemic has the potential for all French future or ongoing construction projects to be delayed or the worst case shelved. Look for construction unemployment to increase rather rapidly in the next month or two. |
| RUSSIA | 0.2 – 0.4 | 3.5 – 5.5 | 10- 20 | A severe fall in the Russian Ruble after the dramatic oil price drop is still TBD. The ramifications of the global economic impact of the deadly Coronavirus Pandemic is still to emerge in Russia. The Coronavirus Pandemic has the potential for all Russian future or ongoing construction projects to be delayed or the worst case postponed. Look for construction unemployment to increase rather rapidly in the next month or two. |
| JAPAN | 0.2 – 0.4 | 2.5 – 3.5 | 5 - 10 | The 2020 Olympic games have been cancelled until 2021 The full scale of the global economic impact of the deadly Coronavirus Pandemic on Japanese construction is still to emerge. Unfortunately, the Coronavirus Pandemic has the potential for all Japanese future or ongoing construction projects to be delayed or the worst case cancelled. Look for construction unemployment to increase rather briskly in the next month or two. |
| CHINA | 2.5 – 4.5 | 2.5 – 4.5 | 5 - 10 | The Chinese economy & construction sector will experience an unprecedented slowdown in 2nd & 3rd Q of 2020. The ramifications of the global economic impact of the deadly Coronavirus Pandemic is still TBD. The Coronavirus Pandemic has the potential for all Chinese future or ongoing construction projects to be delayed or the worst case suspended. Look for construction unemployment to increase rather rapidly in the next month or two. |
| INDIA | 2.5 – 3.5 | 5 – 7.5 | 10 - 20 | Many Indian planned or ongoing construction projects need to be reevaluated, delayed or in the most unpleasant case rescinded. Look for construction unemployment to increase rather rapidly in the next month or two. Prime Minister Narendra Modi has earmarked a $2 billion fund to mitigate the effects of the Coronavirus Pandemic on the Indian population & industry. |
2nd Q 2020 Prices at a Glance:
- Forecast Cost of a barrel of Crude Oil $23 – $29
- Forecast of Euro / US $ Exchange Rate 1.05 – 1.10
- Forecast of UK Pound / US $ Exchange Rate $1.10 – 1.20
- Forecast of Copper per pound $2.10 – $2.30
- Forecast of Aluminum per pound $0.80 – $0.95
- Forecast of Gold per Ounce $1,450 – $1,600
- US Construction Material Inflation (Basket of 10 construction materials) 2.5% – 4.5%
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To contact the Author of this newsletter or to enquire about our Cost Saving services, contact John G. McConville CCP – in USA call (609) 577 4505 or contact me at sales@compassinternational.net
