The costs for designing and constructing downstream refining and petrochemical projects was essentially unchanged from Q1 2012 to Q3 2012, according to the latest edition of the IHS Downstream Capital Costs Index (DCCI). The DCCI is holding steady at 198, approximately the same level dating back to Q3 2011.
The index is a proprietary measure of project cost inflation similar in concept to the consumer price index (CPI). It provides a benchmark for comparing costs around the world and draws upon proprietary IHS insight and analysis to provide a benchmark for comparing costs around the world. The DCCI has been at approximately 198 since Q3 2011. The values are indexed to the year 2000, meaning that a project that cost $100 million in 2000 would cost $198 million today.
A sharp decline in steel costs (9 percent decrease), and to a lesser extent, engineering costs (2.5 percent), offset small increases in two of the other four markets (process and electrical equipment), while the balance of markets (construction labor and civil) were flat.
Steel prices were down sharply for the second straight half, as the world continues to deal with an oversupply situation, mostly from China. Steel prices declined throughout the supply chain—from iron ore, which has been on a steady decline since Q3 2011, through finished products—in all regions of the world.
Process equipment continued to post modest gains, from heavy machinery and other large items through electrical and instrumentation equipment, despite the drop in steel. Both markets are up between 3.5 percent and 5 percent since the beginning of the year, (2.9 percent and 1.8 percent for the half) respectively. Costs are up due to a tight manufacturing supply chain, despite the drop in steel and other raw material costs. Lead times for most types of equipment have increased as a result of continued strong orders, allowing equipment manufacturers to raise prices while raw materials fall. This situation is anticipated to weaken in the coming six to 12 months as the impact of the weak steel market is felt.
Construction labor costs were essentially flat this half (0.3 percent decline), mostly an impact of a weaker U.S. dollar. When measured in local currencies, labor charge out rates experienced moderate to strong gains, particularly in Asia and South America. But, for the purpose of the DCCI, labor rates are corrected to the U.S. dollar, which gained ground against all currencies tracked by the forum, especially in South America and Eastern Europe. In North America and Western Europe labor rates were up about 0.5 percent, but down in U.S. dollar terms as a result of a weaker euro.
Civil and construction costs (a combination of heavy construction equipment, scaffolding, concrete and rebar, asphalt, and paint) were down 0.4 percent from Q1 to Q3 2012. The ready-mix concrete market, which peaked in 2008 and has been on a long slide ever since, was down 1 percent over the six month period. The consensus is that the industry is near the bottom and likely in a holding pattern until mid – to late 2013. Construction equipment rates around the globe, which vary from weak in the developed world to stronger in the developing world, were up 2 percent overall this period. Asphalt and paint, both commodities which closely track oil prices, were down 0.8 percent.
“The refining situation in the Atlantic basin—from the Northeast United States through Western Europe—continues to struggle with low demand for transportation fuels (gasoline, jet fuel and diesel fuel) and lower overall refinery conversion capabilities,” said Glenn Giacobbe, director, IHS Downstream Capital Costs Forum. “While high conversion refineries in the U.S. Gulf Coast are struggling with lower margins as a result of narrowing light/heavy spreads.” A different picture emerges in Asia and the Middle East, where refining activity for grass roots plants and especially cracking/conversion capacity, is robust.
Overall, the IHS Capital Costs Forum concludes that the DCCI is in a holding pattern while the global economy continues to emerge from the recession. Costs are expected to begin a gradual rise mid to late 2013 driven by a dwindling resource pool of skilled labor and the gradual tightening of the global steel markets.