insight · 2017-01-24 · airport (dxb) up 7.2 per cent from the same time in 2014 and hotel room...

Insight #6

INDUSTRY FOCUSA look to the future: how the construction industry is evolving

/ Global economy insight/ Middle East markets update/ Commodities price analysis

Welcome

Welcome to Insight #6. In our sixth edition of Insight we once again analyse the global economy and Middle East markets. Our focus this quarter is on how the construction industry is evolving. We also include our commodities price analysis to keep you up to date with the latest prices.

Page one / Global

Page four / Regional

Page six / Commodities price analysis

Page eight / Focus: A look to the future

Page thirteen / Currie & Brown offices

Currie & [email protected]

Insight #6

Insight / Page one

Global

Certain themes continue to dominate the global economic, social and political outlook. Market and central government forecasts remain linked to insecurity and instability in the MENA region, crude oil supply and pricing, elections and fiscal instruments.

As we have previously highlighted, the global economy has progressed at two speeds. Advanced economies are growing at 2-4 per cent per annum on average while emerging markets and developing economies are enjoying average growth of 6-8 per cent. These combine to give a projected global economic (GDP) growth of 3.7 per cent in 2016 according to the International Monetary Fund (IMF). Overall, potential output growth has fallen as the advanced economies were already in decline prior to the financial crisis, reducing demand on imports from developing economies. The combination of these long-term forces with the sharp decline in oil price and large exchange rate movements results in the rate of growth continuing to be compressed.

The decision by the Organisation of the Petroleum Exporting Countries (OPEC) to maintain oil production at an average of 30.84 million barrels/day has courted much speculation. At the most recent OPEC meeting this month in Vienna, Saudi Arabia’s oil minister Ali Al-Naimi reaffirmed the policy of unrestrained oil output contributing to a demand boost, curbed production from high-cost

3.7%GDP2016Projected growth. Source: IMF

operations such as US shale and deterred investment in major oil projects. The apparent strategy is to maintain and grow market share, despite a lower price and the potential for increased supplies from Iraq and Iran’s oil production entering the market following the lifting of sanctions at the end of this month. With OPEC supplying approximately a third of global demand, the US is the biggest consumer of oil globally at 42.3 per cent. Demand for OPEC crude sits at 29.3 million barrels/day while supply is at 30.84 million barrels/day (May 2015). Year-on-year growth is currently predicted at 1.06 per cent by OPEC, with no reduction in production planned. With Brent crude currently trading (14 June) at US$63.87/barrel and West Texas at US$59.96/barrel, the next six months before OPEC’s next meeting on 4 December will prove fascinating. Will the collective view of Iraq, Venezuela and Angola, who deem US$75-80/barrel a fair price, be realised, or will increased supply see a further reduction in price over the coming months?

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EUROPE BRENT SPOT PRICE FOB (US$/BARREL)

GLOBAL OIL CONSUMPTION 2014

PETROLEUM PRODUCTION 2014

0

20

40

60

80

100

120

140

usa europe japan Canada other other non-oecd other asia China Eurasia Europe

48.8%NON-OECDCOUNTRIES

49.2%OECD

COUNTRIES



usa europe japan Canada other other non-oecd other asia China Eurasia Europeusa europe japan Canada other other non-oecd other asia China Eurasia Europe







USA

EUROPE

JAPAN

CANADA

OTHER OECD

OTHER NON-OECD

OTHER ASIA

CHINA

EURASIA

EUROPE

OECD Organization for Economic

Cooperation and Development

OPEC

USA

RUSSIA

CHINA

CANADA

BRAZIL

MEXICO

OTHERS

Source: U.S. Energy Information Administration

Source: U.S. Energy Information Administration

Over the last period, exchange rate movements have been significant. Amongst the major currencies, the US dollar has seen major appreciation while the euro and Japanese yen have seen major depreciation. Tied to the monetary policies and economic rates of growth, the United States is seeing positive levels of growth along with the United Kingdom, but with projections of a slight reduction in growth in 2017. Janet Yellen, chair of the US Federal Reserve, will be updating its three-year forecast this week, with a view that any increase in interest rates will be delayed while growth remains below 3 per cent and inflation around 2 per cent. With the eurozone facing uncertainty from the current debt crisis in Greece, the UK European referendum (set for 2017 at the latest) and an ongoing political drive for nationalism, the euro continues to depreciate. However, with the resulting impact on balance of trade, the global economy may actually benefit from the exchange rate movements where exports from non-US dollar-based economies are more competitive compared to US dollar-based exports.

Furthermore, with significant political instability in the MENA region, continuing trade sanctions placed on Russia and weakness in Brazil, economic forecasting is proving to be more complex,

requiring specific analysis of countries rather than relying on simple generalisations of leading, emerging and developing economies.

As we move into the second half of 2015, the outlook for the trading environment and confidence supporting investment remains founded on a long-term outlook and strategy. With analysts predicting the requirement for infrastructure spend over the next 10-15 years at US$57-67 trillion or an annual expenditure

rising to US$9 trillion per annum from US$4 trillion in 2012, the continued growth of emerging and developing economies will drive opportunity. Continued investment in research and development, innovation and product service development will be required to provide efficient and increased productivity to satisfy this demand. With leading economies already experiencing productivity challenges, now is the time to invest and develop these products, processes and service delivery models.

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USD % DEPRECIATIONBETWEEN JUNE 2014 AND APRIL 2015

Regional

This time last year, the focus of the world’s recreational attention was on the FIFA World Cup 2014 hosted by Brazil; now all eyes are on the significant and continuing fall-out from the US and Swiss authorities’ investigations into both FIFA and specific individuals. On 2 June 2015, Joseph Sepp Blatter (having secured his fifth tenure as FIFA President four days earlier) presented his resignation following indictments issued by the US authorities. At the time of publication, speculation continues to surround FIFA with the potential for Blatter to rescind his resignation following support from both Asian and African federations. The consequences for the Middle East region, are still being felt, particularly in Qatar.

With the region continuing to be challenged by security issues and political instability, the majority of oil-producing states continue to balance their domestic budgets with increased oil production but lower sales prices. Significantly, Saudi Arabia has for the first time indicated the future potential for renewable energy sources to outweigh fossil fuel-derived energy. Speaking at a conference in Paris on business and climate change, the Saudi Arabian oil minister, Mr Ali Al-Naimi said: ‘In Saudi Arabia, we recognise that eventually, one of these days, we are not going to need fossil fuels.

I don’t know when, in 2040, 2050 or thereafter.’ With the Kingdom currently consuming 10 million barrels a day, the reduced oil price is placing major alternative power production programmes on hold. These include significant solar and nuclear power projects. However, in fossil fuel-poor Dubai, the state utility company DEWA has awarded ACWA (from KSA) a solar power plant that will sell electricity for less than six US cents per kilowatt hour. That is two to three US cents cheaper than generation from gas in Dubai. With solar panel prices reducing dramatically (up to 75 per cent) over the last five to eight years, renewable energy forming a significant part of the energy mix in the region may not be too far away.

As a consequence of falling revenues from lower oil prices, more than a third of Middle Eastern sovereign wealth funds expect new funding to decrease. Invesco’s 2015 global sovereign asset management survey reveals that 38 per cent of these funds are of this mindset, with 31 per cent expecting funding to remain the same. Should such a position remain, governments will increasingly need to access these fund assets to finance the sizeable spending programmes required to deliver their envisaged economic growth.

Recognised as the safe haven within the MENA region, Dubai’s economic development appears to be more sustainable than its previous boom. With passenger traffic at Dubai International

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'In Saudi Arabia, we

recognise that eventually...

we are not going to need

fossil fuels. Ali Al-Naimi

Saudi Arabian Oil Minister

Source: "Min-oil-Naimi-05" by Paradoxicalengineer (talk) - self-made. Licensed under CC BY-SA 3.0 via Wikipedia - https://en.wikipedia.org/wiki/File:Min-oil-Naimi-05.jpg#/media/File:Min-oil-Naimi-05.jpg

Airport (DXB) up 7.2 per cent from the same time in 2014 and hotel room occupancy being maintained with reduced room rates, on average, the sustainable diversification of Dubai’s economy seems to be succeeding.

Growth in Dubai is projected to be around 5 per cent in 2015, mirroring 2014. Dubai has taken the global lead on air passenger numbers and Jebel Ali Port's cargo handling has seen growth of 12 per cent compared to last year, which supports current projections that it will be the world’s biggest container port by 2030. With government-run entities having repaid or restructured their debts, investor confidence is returning. The emirate’s population is forecast to double by 2020, just in

time for Dubai Expo, so significant investment in commercial, residential, social and civil infrastructure will be required. Furthermore, with the Asian market deploying representatives to Dubai as their business hubs for Africa, Dubai also stands to gain significantly if sanctions are lifted on Iran at the end of this month.

Dubai, therefore, provides a clear opportunity in the real estate and infrastructure sectors. With access to capital finance required, significant interest is being placed in Dubai through export credit finance and foreign direct investment (FDI) initiatives. With this funding model, these state-financed programmes provide opportunities for their

domestic market to engage in the emirate, deploying leading products, processes and thinking. Following the lead of Dubai Municipality, Meraas Holdings has now identified a number of capital projects where building information modelling (BIM) and a collaborative team culture will be implemented with learning captured through the project stages. Contracting organisations are continuing to develop their supply chain and, subject to payment terms, are significantly improving (less of a challenge when export credit finance or FDI is provided). All told, the construction market has significant opportunities to look forward to.

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Artist’s impression of the Bluewaters development by Meraas Holdings(Image credit: www.meeras.com)

Commodities price analysis

■ Non-ferrous metal prices derived from London Metal Exhange, whereas steel prices derived from Middle East steel price indications; all based on average prices for the month.

■ The price of rubber derived from International Rubber Board, based on average prices for the month.■ All prices for commodities are based on bulk quantities, cash trade and US dollar. An average price has been assumed.■ The rate for beams - channels has been derived from Far East/Europe/India market.■ Cement prices derived from UAE local supplier.■ Crude oil derived from light crude Brent, US market.■ Diesel rates are from EPPCO.■ Concrete rates AED/m3 based on the average price of concrete 45/27 from four UAE suppliers.■ Reinforcement bars are taken from four UAE suppliers.

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2014 2015Commodities Unit Q3 Q4 Q1 Q2Non-ferrous metals Aluminium alloy US$/tonne 2,051.67 2,036.67 1,876.67 1,796.67 Aluminium US$/tonne 1,967.33 2,043.67 1,890.08 1,772.33 Copper US$/tonne 6,854.17 6,662.33 6,006.17 6,056.17 Lead US$/tonne 2,103.00 2,021.33 1,869.17 1,910.67 Nickel US$/tonne 17,375.00 16,095.00 15,088.33 13,053.33 Tin US$/tonne 20,986.67 20,193.33 19,017.50 15,825.00 Zinc US$/tonne 2,281.17 2,278.17 2,125.00 2,176.67Steel Reinforcing bars US$/tonne 578.33 578.75 511.17 445.00 Steel beams - channel US$/tonne 678.33 654.23 633.38 570.00 Hot rolled plates US$/tonne 561.67 522.50 478.50 410.00 Cold rolled coils US$/tonne 650.00 611.00 572.33 478.33 Prepainted galvanised steel, 0.35 US$/tonne 825.00 800.00 773.33 735.00 Stainless steel HR coils 304 base US$/tonne 2,775.00 2,791.18 2,612.55 2293.33Energy Crude oil US$/barrel 97.45 74.17 58.01 58.44 Diesel (Dubai only) AED/gallon 14.01 13.25 11.99 10.98Cement Cement US$/bag 3.50 3.59 3.41 3.38 Concrete (Dubai suppliers) AED/bag 258.00 257.67 255.33 255.00Rubber Rubber US$/100kg 220.50 196.45 203.37 209.59AggregateAggregate (Dubai suppliers) AED/tonne - - 35.00 35.00Gabro aggregate (Dubai suppliers) AED/tonne - - 275.00 270.00Bitumen 60/70Bitumen US$/tonne - - 531.69 516.26

Commodities price analysis

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Steel beams - channel

Hot Rolled Plates

Cold Rolled Coils

Reinforcing bars

Prepainted Galvanised Steel, 0.35

Stainless Steel HR Coils 304 Base

Steel (2006 - 2015)

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FOCUS: A look to the future

Introduction

Any construction project envisaged by a client is expected to be delivered against an aggressive schedule, at the most economical price while still delivering great quality. Disappointment is common, with delays, contractual claims and poor quality being delivered. Furthermore, this is only in relation to capital spend with little or no regard for any operational implications.

MEED reported in June 2015 that US$3.4 trillion of projects are either planned or under way within the MENA region, hitting an all-time high. The majority of these projects are either in KSA or the UAE. However, the rate of regional growth is actually slowing, driven primarily by the lower oil price. With significant investment in infrastructure projects – transport, power and energy – in KSA and a broader range of asset class development in the UAE (specifically Dubai) accounting for 72.4 per cent of projects planned or under construction, does this value of spend represent an opportunity to change the approach and methodology of construction?

Let’s explore the division of sectors. Across the UAE, two

thirds of current capital project spend relates to real estate construction (US$544.92 billion) and an overwhelming 88.47 per cent in the residential/mixed-use sectors (typically a combination of office, retail, residential and hospitality).

Applying Pareto’s 80:20 principle (80 per cent of effects come from 20 per cent of causes) suggests that a significant impact can be made on the UAE market with a focus on these specific sectors. Likewise, these sectors are driven by financial return on investment, expedient delivery, yield and quality of finish in construction.

Other markets, particularly in the UK, have developed an approach to design and construction where the learning and philosophy can

be translated into the regional market. This approach is known as off-site manufacture (OSM) or design for manufacture and assembly (DfMA).

Gone are the days of latent defect-ridden assets born from 1960s pre-fabrication techniques and approaches. Now even institutional standard high-rise commercial office towers in the centre of London can be designed and constructed, in the majority, off site prior to erection and assembly on site.

British Land and Oxford Properties, acting as a joint venture, appointed Roger Stirk Harbour + Partners to design a commercial office tower in the City of London. The design of 122 Leadenhall Street was

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Healthcare

Cultural, Education, Public andTransportRetail

Commercial

Earthwork (Dredging)

Hospitality and leisure

Residential

Mixed-use

CAPITAL PROJECT SPEND IN THE UAE

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Healthcare


Commercial



Residential

Mixed-use

Mixed-use

Residential

Hospitality and leisureEarthwork (dredging)

Commercial

Retail

Healthcare

Cultural, education, public and transport

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derived from compliance with the sightlines in London relating to St Paul’s Cathedral. Consequently, the iconic 10-degree tapering façade provides an uninhibited view towards the dome of St Paul’s with the building given the moniker of the ‘Cheesegrater’.

The Leadenhall Building brief required 610,000ft2 of lettable space provided over 46 floors with an overall building height of 224m and gross internal area of 908,730ft2. Located opposite Lloyd’s of London, construction commenced in the autumn of 2011 led by Laing O’Rourke. Shell and core construction was completed in June 2013 and the building opened in July 2014. The design and construction set a new benchmark for the mature commercial office market in London. Over 80 per cent of the construction had been designed specifically for off-site manufacture and assembly, delivering significant gains to the developer and tenants (as well as the neighbouring users and tenants).

So what is this new approach?

Pre-fabrication or off-site manufacture has established efficient, cost-effective solutions that have been translated into other end-markets. These include mechanical and electrical engineering components, structural components, cladding

and curtain walling panels, pods and complete accommodation units through off-site manufacture.The key benefits of off-site manufacture have been well documented across mature construction geographies with a wealth of case studies of projects already built and operational. The key benefits are:

■ Performance - components that are performance-specified for simplicity and speed of installation

■ Programme - simplification of the critical path and increased levels of productivity on site

■ OSM can reduce on-site programme durations by an average of 50 per cent

■ Quality - factory-based manufacturing accuracy; learning, development and product/process innovation. (Some off-site building systems will exceed Building Code Regulations requirements for air leakage by up to 70 per cent.)

■ Whole-life cost - improved and rationalised design and manufacturing process can reduce the operational consumption of the unit/component, defects and repair process

■ Sustainability - gains from enhanced performance and efficiency of the components/unit; waste reduction both in the static element and dynamically across the full asset; reduced site traffic; operative travel; reduced site waste. (Research has shown that off-site construction can reduce on-site waste by up to 90 per cent.)

■ Safety, working conditions and recruitment - fewer trades on site, full year operational facilities in controlled environments.

■ Maximised return on investment.

Laing O’Rourke is recognised as

LEADENHALL BUILDINGLONDON, UK

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one of the leaders in OSM through its investment in its Explore Industrial Park in the UK, which provides one of Europe’s most advanced facilities producing pre-cast and pre-assembled products. OSM provides a key advantage in a major contractor’s portfolio, delivering value and innovation into the market.

In 1994, the Latham Report Constructing the Team along with the subsequent Egan Reports Rethinking Construction (1998) and Accelerating Change (2002), suggested that waste in the industry accounted for 25-30 per cent of project costs and encouraged the industry to view construction as a manufacturing process. With the introduction and expansion of CAD/CAM, the potential of BIM is only now starting to be realised, with a direct impact on OSM within the construction market. A number of designers, manufacturers, suppliers and contractors are already exploiting the gains

of OSM in their production processes, providing clients and project teams with additional benefits related to visualisation, quality control, work scheduling and exchange of information and attributes.

It is clear that OSM could be seen as one of the early adopters of integrated project delivery and indeed BIM. Viewed as still being in its infancy, the leveraging of information modelling in this context has resulted in gains across design optimisation (options and parametric modelling), providing additional attribute data into the model from the manufacturer and integrating smart technology for operational and FM functions, virtual assembly and construction modelling and automatic call-off/just-in-time delivery.

With major contractors developing consultant-like service offerings and approaches in the pre-contract period, the early

appointment of suppliers and manufacturers using pre-contract services agreements is an appropriate method to engage these at an early stage. So what does a common or preferred approach look like?

Critical to the successful implementation of OSM is creating a culture of design for manufacture among the project team, including input from manufacturers and suppliers within the design and tender process. Let’s return to Laing O’Rourke and explore their strategic approach.

Philosophy - an enduring engineering enterprise

The essence of Laing O’Rourke’s philosophy centres on it becoming an engineering enterprise, driven by innovation with technical excellence in design, manufacturing and construction at its core. Engineering excellence, coupled with proactive adoption

Category DescriptionComplete buildings Units that enclose usable space and actually form part of the completed

building or structure; typically fully factory-finished internally (and possibly externally)

Volumetric pre-assembly Units that enclose usable space that are then installed within or onto a building or structure; typically fully finished internally

Non-volumetric pre-assembly Large category of items that the designer/supplier has chosen to assemble in a factory before installation; units do not enclose usable space; applica-tions may be skeletal, planar or complex

Component sub-assemblies Relatively small-scale items that are invariably assembled off site, such as light fittings, doors, windows, door furniture, etc.

Table 1. Four main categories of off-site manufacture (Vokes and Brennan, 2013)

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of beneficial new technologies in the form of digital engineering (BIM) and an active human capital agenda are at the heart of this trajectory.

The company is above all a ‘projects’ business and nothing animates the business quite like involvement in major projects and their successful delivery. A central pillar of project-driven activity is self-reliance and the nurturing of independent strength, finding expression in the ‘one-team’ approach and an emphasis on self-delivery in all geographic hubs.

Smarter construction: harnessing technology for design for manufacture and assembly (DfMA)

Laing O’Rourke Middle East is leading the way in the integration of lean manufacturing processes and techniques in the delivery of projects. DfMA is a collaborative team approach that involves engineering, manufacturing and

suppliers early in the design cycle. In this approach, components are manufactured and pre-assembled in a controlled environment prior to delivery to a construction site for installation.

By designing buildings in a common component set and then manufacturing the components off site, Laing O’Rourke can provide greater certainty of construction times and costs. Modularisation techniques divide complex elements into manageable modules, leading to a dependable financial control, as well as ensuring a safer, more productive site with less congestion between trades.

Components are built and then transported, manoeuvred and secured into position on site. By maintaining a close working relationship with the client throughout the build programme, the modular impact is improved and there is a reduced installation period.

The best results are achieved when DfMA is used at the conceptual stage with the cross-functional teams working together to optimise the design for reducing waste and achieving efficiencies ie reduction in labour, programme, carbon footprint and AFR.

Using DfMA, Laing O’Rourke is able to construct better quality buildings quicker, more safely and more sustainably. Through a commitment to continuous improvement, Laing O’Rourke is seeking to eliminate waste, improve quality and maximise value to clients through their buildings' portfolios. This lean approach also extends into logistics management, operating to a principle of ‘just in time’ delivery, optimising resources by delivering just what is needed, where it is needed, exactly when it is needed.

Modulor Factory: Laing O’Rourke’s Dubai-based manufacturing division – designing, manufacturing, delivering, installing and commissioning fully completed building components sets and bathroom ‘pods’.

Hilton Garden Inn, Al Barsha, Dubai An internal view of a pre-finished bathroom

pod by Modulor which was signed off by the client while the project was

coming out of the ground.

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An investment in modular technology

Laing O’Rourke’s approach has led to significant investment in cutting-edge innovation contributing to the creation of a large-scale, self-delivery business.

Digital engineering (BIM) enables Laing O’Rourke to integrate data related to a building’s design, construction and future function to develop the most efficient methods of delivery and operation. In simple terms, if it can be built in the ‘virtual’ world of BIM, then it can be built in the real world, supporting greater collaboration and more informed decision-making by providing a central data source.

Manufacturing capabilityLaing O’Rourke Middle East owns and operates a number of engineering, construction, manufacturing and specialist services companies, which combine to provide clients with a comprehensive investment, development and management capability, transforming traditional construction methodologies into a modern process of component-based assembly:

■ Emirates Precast Construction (EPC) – design, manufacture and erection of architectural and precast concrete products

■ Modulor – design, manufacture, delivery, installation and commissioning of factory produced modularised rooms and building components (bathrooms, kitchens, accommodation, etc)

■ Joinery – specialising in interior contracting and the design, manufacture and installation of high quality joinery

■ Crown House Technologies – mechanical, electrical and plumbing services in prefabricated modularised systems and component sets (plantrooms, risers, horizontal services distribution units, etc)

■ Select Plant – one of the largest construction plant and equipment operators specialising in tower cranes, transport, tools and site facilities

The company’s combined capability provides product sets including precast concrete building components, modular mechanical and electrical plant installations, smart wall flat-pack building components, completed internal rooms and services ‘pods’.

Working collaboratively with its public and private sector clients and the design and delivery supply chain, the Middle East business is driving for this value-based agenda to be more widely understood and applied in the region.

Hilton Garden Inn, Al Barsha, DubaiCurrently under construction.

Deploying LOR’s DfMA approach in the form of bathroom pods, PCC composite façade units and floor slabs,

MEP modular components (6m) and plantroom/riser modules

AMERICAS

Arizona T +1 602 748 1470

CaliforniaT +1 415 518 7511

MexicoT +52 55 52 81 11 74

New JerseyT +1 609 759 7000

New MexicoT +1 505 798 7161

Oregon T +1 503 547 0316

CHANNEL ISLANDS

JerseyT +44 (0)1534 720 326

EUROPE

FranceT +33 (1)55 04 74 10

FAR EAST

JapanT +81 3 3442 6642

TaiwanT +886 (0)2 2555 5886

INDIA

BangaloreT +91 80 4116 2435

ChennaiT +91 44 4353 1614

MumbaiT +91 22 6574 9550

New DelhiT +91 11 2612 4372

MIDDLE EAST

Abu Dhabi, UAET +971 2 671 6265

Dubai, UAET +971 4 295 5198

QatarT +974 4434 0048

Sultanate of OmanT +968 244 83417

UNITED KINGDOM

AberdeenT +44 (0)845 287 8500

CumbriaT +44 (0)845 287 8620

EdinburghT +44 (0)845 287 8500

GlasgowT +44 (0)845 287 8500

Haywards HeathT +44 (0)845 287 8764

LondonT +44 (0)845 287 8800

ManchesterT +44 (0)845 287 8626

Milton KeynesT +44 (0)845 287 8700

PlymouthT +44 (0)845 287 8475

PortsmouthT +44 (0)845 287 8400

[email protected]

Currie & Brown offices

Insight / Page thirteen

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