Chemicals and construction: Building a future together 

The global construction industry makes up about 9 percent of the world's GDP,5 and construction is one of the main drivers of growth in almost every economy.

The worldwide construction market is dominated by ten major countries, which account for about 65 percent of construction spending. The top twenty countries account for about 82 percent.

US construction spending

Sources: Annual Value of Construction Put in Place 2002-2010, Census, April 1, 2011; Construction spending plummets 1.4% in February, Market Watch, April 1, 2011

The United States (US) is the world's largest construction market, with a value in 2009 of approximately US$900 billion. US construction spending accounted for nearly 88 percent of the North American market, with Canada contributing 10 percent and Mexico 2 percent. From 2000 to 2006, US construction spending grew steadily on a year-by-year basis, before falling sharply in 2007 with the country's real estate crisis and the ensuing global recession.

The European construction market can be divided into Western Europe and selected Central and Eastern European states (CEE). Construction activity is influenced primarily by general economic development, as represented by GDP, and also by incentives offered by the government for financing private housing or industrial development.

The Western European countries represent a mature construction market with a value of US$1,460 billion in 2009. CEE states (including all CIS countries) have a much smaller construction market value of around US$225 billion due to a lower GDP per capita.

Over most of the past decade, Japan has been second only to the US in construction spending. At the same time, investment for Japanese construction saw a steady decline beginning in the early 1990s. Between 2003 and 2009, construction buying fell at an average annual rate of 3.7 percent. Decreasing investment by the government largely accounted for this decline – from 44 percent of total construction spending in 2003 to 40 percent in 2009.

With the Democratic Party taking control of the Japanese government in 2009, it was expected that national construction budgets would not increase for at least several years. However, the massive earthquake and tsunami that struck in March 2011 has changed the direction of government policy and indeed the course of Japan's construction industry as a whole.

Chinese construction spending

Sources: China Infrastructure Report, BMI, October 2010

Construction in other Southeast Asian countries, especially China, has grown much faster than in Japan. In 2009, the value of construction in Japan accounted for nearly 38 percent of total Asian construction – but that figure represents a 70 percent drop from 2002. During the same period, however, China's share increased from 10 percent to 31 percent.

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Construction projects are relatively large, complex and capital-intensive. The business model of a builder assumes a project backlog of at least half a year if not several years. Between 2005 and 2008, soaring construction demand combined with limited resources for project management helped create extensive project backlogs that enabled construction companies to avoid the worst effects of the global downturn. Government stimulus programs in 2009 also helped support the global industry.

By 2010, government funding for most projects was coming to an end, and the construction industry began to look for new opportunities for growth. That same year, KPMG interviewed executives from 140 engineering and construction companies around the world, as part of our annual Global Construction Survey. The respondents represented a range of industries including chemicals, energy, power, industrial, healthcare, pharmaceutical, manufacturing, mining, education, and government.

Asked whether they expected backlogs to increase in 2011, 43 percent of the respondents said that they did. In fact, almost 40 percent reported a growing order book in 2010. However, even for these respondents, margins were very tight, with a large majority of contractors continuing to cut prices or hold them at current levels.

Six months after this survey, many construction companies, especially in developed countries, are still waiting for a significant uptick in project volume. However, the global construction industry continues to see significant growth in several geographic regions and industry subsectors.

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China remains at the forefront of world construction. General economic growth and sponsorship for worldwide events such as the 2008 Olympic Games in Beijing have prompted investments in basic infrastructure, road systems, port facilities, housing and city planning. To give just one example, China surpassed Japan in 2010 as the country with the largest high-speed train network, and Beijing has announced plans for the continued expansion of the network throughout eastern China.

In addition, China's property and housing business is also recognized as an increasingly important market for construction. In 2Q 2011, the International Monetary Fund and a number of economists began to raise concerns about inflation and the possibility of a real estate bubble in high-growth urban markets. Real estate prices have in fact increased 140 percent in China since 2007 and by as much as 800 percent in Beijing. Nevertheless, construction for real estate as well as other industry sectors in China is expected to show strong growth in 2011, although perhaps not at 2010 levels if China's economy cools somewhat during the year.

In the US, the story is decidedly different. The construction industry in general and homebuilding in particular has yet to recover from the worst downturn in memory. Las Vegas, Nevada is typical of many regions, where 2011 property prices are around 60 percent what they were in 2006, leaving 70 percent of homeowners with mortgages that are "underwater" – meaning that they owe more on their mortgage than their property is worth.

McGraw-Hill has estimated that after a 2 percent decline in 2010, the US construction industry will increase by 8 percent in 2011, although the full effects of recovery will not be felt until 2012. Some bright spots in an otherwise cloudy outlook have been detected. A 2011 survey of building contractors released by the Associated General Contractors of America reported that about a third of respondents expected more construction starts in the healthcare, education and power sectors. With the impact of shale gas on the US chemical industry, the coming years are also likely to see the construction of world-scale chemical plants in the US for the first time in a generation.

Construction forecasts in Europe remain mixed, with continued economic uncertainty and reduced government spending on public buildings and infrastructure holding back recovery. In Poland, however, construction actually kept the country from sliding into recession. New football stadiums, airport expansions, roads, high-speed railway routes and other projects are under way in preparation for the Euro 2012 football tournament. The industry supplies 7 percent of Poland's GNP and provides employment for 30,000 workers.

In Japan, massive construction efforts are being planned in the aftermath of the devastating earthquake and tsunami that struck the Fukushima area north of Tokyo. Roads, ports, homes, public buildings and facilities such as the quake area's nuclear power plants will have to be repaired or completely rebuilt.

In April 2011, the Japanese government proposed a US$50 billion fund to help finance reconstruction efforts, including the construction of 100,000 temporary homes for survivors of the country's earthquake and tsunami in March 2011. The fund is expected to be only the first installment of several in the months ahead. About US$15 billion will go to fixing roads and ports and more than US$8.5 billion will go to build temporary homes and clearing debris.

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The global construction chemicals industry produces a wide range of concrete admixtures, asphalt additives, protective coatings, adhesives and sealants. Non-residential construction constitutes the largest end-use segment, and protective coatings and sealers represent the largest product segment. Worldwide, the fastestgrowing product segment is cement and asphalt additives. In Asia-Pacific, the sales of these additives are expected to reach US$ 1.2 billion by 2013.

World market for construction chemicals (US$ millions)

a Data are estimates based on percentage of GDP by construction industry, extent of informal sector, and technological standards available.
Source: SRI Consulting 2010

Chinese consumption of commercial concrete

Source: SRI Consulting 2010

China has now overtaken the US as the world's leading market for construction chemicals, the result of its booming economy as well as the continued slump in US construction. As of 2009, China accounted for about 27 percent of the world market, followed by Western Europe with 22 percent. China is expected to remain the single-largest market for construction chemicals until at least 2014, fuelled by a market growth rate of 11 to 13 percent.

High growth rates are also expected in countries that profit from the high prices of their natural resources – the OPEC countries, Russia, Brazil and Australia. Overall, the importance of markets in the developed regions of North America, Western Europe and Japan will continue to shrink.

After years of consolidation, the global construction chemicals industry is now dominated by a relatively small group of companies. Major players include:

BASF, the leading producer of construction chemicals worldwide, providing concrete admixtures and additives as well construction systems for tasks such as tiling, waterproofing and dry wall.

W.R. Grace, a manufacturer of specialty construction chemicals such as performance-enhancing concrete admixtures, cement additives, masonry products, fireproofing and waterproofing materials and systems.

MAPEI, providing installation product solutions for flooring, tile and concrete restoration.

Sika, a global leader in roofing, waterproofing and flooring, and the second-largest provider of concrete admixtures.

RPM, a holding company that includes Euclid Chemical (concrete admixtures) and DAP (adhesives and sealants).

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The chemical industry has a unique relationship with the construction industry in that it can be both a supplier and a customer. Spurred by a recovering economy, new market opportunities and access to cheap feedstocks, chemical companies are funding a number of new construction projects for chemical production and distribution facilities worldwide.

BASF is building a new chemical plant in Tianjin, China. The project will include a centre for sales and technology services in addition to a space for manufacturing an organic compound used in the production of polyurethane foams. BASF has also started construction for a chemical plant in Southwest China's Chongqing municipality. Both projects are expected to be completed by 2012. Saudi Kayan Petrochemical Company is continuing work on a multi-billion dollar complex at Jubail, Saudi Arabia. Trial runs have already started at the core facility, a 1.48 million m.t./year ethylene and 630,000 m.t./year propylene plant.

Egypt Japan Petrochemical Corp., a company established by Mitsubishi Corp. and Chiyoda, has announced the development of what it says will be the world's largest methanol manufacturing complex. Built at Ain Sohkna, Egypt, the two-line facility will have total capacity for 6,000 m.t./day of methanol.

Dow Chemical plans to build worldscale, ethylene and propylene plants on the US Gulf Coast as part of plans to take advantage of cheaper US feedstocks. By 2018, propylene capacity would be raised by 900,000 m.t./year and ethylene capacity by 2.3 million m.t./year. The plants are scheduled to start up in 2015 and 2017.

With order books still not recovered to pre-recession levels and contractors continuing to hold prices low, there exists a window of opportunity for chemical companies to lock in construction contracts at favourable rates. However, in an attempt to eradicate pricing mistakes of the past, construction contractors are applying far more rigorous analysis at the bidding and planning stage as part of a rapidly evolving risk culture.

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As with other areas of the specialty chemicals sector, the construction chemicals industry is directly affected by increased globalization, consolidation and significant consumption growth in rapidly developing markets such as Brazil, China, India, Russia, the Middle East and Southeast Asia.

Globalization will continue to support competition from low-priced imports of raw materials. This will possibly be less of a problem for most formulated products because of high transportation costs but more of a threat to a few high-value categories, such as adhesives and sealants.

Sourcing will also be a key driver for competitive advantage. Compounders and formulators have a growing number of choices for raw material sourcing, leading to make-or-buy decisions and backward integration economics. However, these initiatives are not always simple and can be subject to rapid change. As a result, tactical sourcing decisions may be more appropriate than longer-term strategies, particularly with rising or uncertain energy prices and volatile pricing for petroleum-based raw materials.

The construction chemicals industry will see continued opportunities to address energy conservation and sustainability. Suppliers can benefit from government policies that require the use of specialty construction chemical products to aid in energy conservation. A growing awareness of climate change will drive the demand for energy-saving materials and technologies, chemicals that increase performance, and environmentally friendly products like waterborne coatings and formaldehydefree adhesives.

In addition, certain construction chemicals companies will be considering more expensive packaging improvements that can reduce labor and injury costs. These savings are recognized more in the US, Canada, Western Europe and Japan where labor and injury costs can be very high compared to much of the developing world.

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Global economic megatrends suggest that the construction industry will continue to grow in size and diversity as a market for construction chemicals. Increased urbanization, especially in emerging countries, will drive public infrastructure and housing projects. Growing economies, again in emerging markets, will require more plants for manufacturing and more shops and office buildings for retailers, service providers and businesses in general.

However, the construction industry is cyclical by nature, and even in a strong economy, construction chemicals companies need to adopt flexible strategies designed to accommodate unforeseen fluctuations in construction activity. These include efforts to keep costs at a minimum, an unwavering focus on market opportunities, new joint ventures and M&A transactions to gain access to new markets or technology, and the introduction of innovative products that can extend the realm of possibilities for architects, designers and builders, particularly in the provision of sustainable solutions for energy efficient buildings that can help to combat climate change.

Working together, the construction chemicals and construction industries can continue to build a better, safer and more sustainable world.

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