Costs for designing and building refining and petrochemical plants were essentially unchanged from this year's first quarter to its third quarter, according to the latest edition of the IHS Downstream Capital Costs Index.
At 198, the index has not changed since third-quarter 2011, based on 100 in year 2000. IHS's index measures project cost inflation similar in concept to the broader Consumer Price Index.
A sharp decline in steel costs (-9%) and, to a lesser extent, engineering costs (-2.5%) offset small increases in process and electrical equipment, two of the other four markets, while the remaining markets (construction labor and civil) were flat, IHS reported earlier this month.
Steel prices dropped sharply for the second straight half-year, as the world continues to deal with oversupply, mostly from China. Steel prices declined throughout the supply chain—from iron ore, which has been declining steadily since third-quarter 2011, through finished products in all global regions.
Process equipment continued modest gains, from heavy machinery and other large items through electrical and instrumentation equipment, despite the drop in steel. Both markets have increased by 3.5-5% since the start of the year, 2.9% and 1.8%, respectively, for this year's second half.
Despite the drop in steel and other raw material costs, overall costs have risen due to tight manufacturing supply, said the company's published synopsis of its longer, proprietary study. Lead times for most types of equipment have increased because of continued strong orders, allowing equipment manufacturers to raise prices while raw materials fall. This situation will likely weaken in the next 6-12 months, under the impact of the weak steel market.
Construction labor costs were essentially flat during the second half (-0.3%), mostly an effect of a weaker US dollar. When measured in local currencies, labor rates grew moderately to strong, particularly in Asia and South America. For the purposes of IHS's index, however, calculations correct labor rates to the US dollar, which gained against all tracked currencies, especially in South America and Eastern Europe. In North America and Western Europe, labor moved up about 0.5% but were down in US 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% from this year's first to third quarters. The ready-mix concrete market, which peaked in 2008 and has been on a long slide since, was down 1% over the 6-month period.
Consensus is that the industry is near the bottom and likely will hold until mid- to late-2013. Global construction equipment rates, which vary from weak in the developed world to stronger in the developing world, were up 2% overall this period. Asphalt and paint, both commodities that closely track oil prices, were down 0.8%.
"The refining situation in the Atlantic Basin—from the US Northeast 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 of IHS's Downstream Capital Costs Forum, "while high-conversion refineries on the US 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, said IHS, where refining activity for grassroots plants and especially cracking and conversion capacity, is robust.
Overall, IHS's Capital Costs Forum said the index is holding while the global economy continues to emerge from the recession. Costs will begin a gradual rise mid- to late-2013 driven by a dwindling pool of skilled labor and the gradual tightening of the global steel markets.