BMI Singapore Infrastructure Report Q4 2011.pdf

Q4 2011 www.businessmonitor.com infrastructure report issn 1750-5461 published by Business Monitor international Ltd. sinGapore INCLUDES BMI'S FORECASTS Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subsbusinessmonitor.com Web: http:/www.businessmonitor.com © 2011 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. SINGAPORE INFRASTRUCTURE REPORT Q4 2011 INCLUDING 5-YEAR INDUSTRY FORECASTS BY BMI Part of BMI's Industry Report the public-led US$44bn investment plan into Singapores suburban metro system over the next 10 years is a case in point. ? Year-on-year growth continues to outperform global indicators. ? Business environment is highly regulated and rated, giving investors confidence. ? Highly developed transport and energy sectors provide strong base for construction projects. ? A relatively skilled workforce. Weaknesses ? Singapore has a mature infrastructure market that contributes a smaller percentage to construction industry value than other Tier I countries. ? Singapores export and retail-lead economy is still highly sensitive to external factors such as global consumer confidence. Reliance on power imports and rises in fuel prices create uncertainty in determining cost of construction inputs. Opportunities ? Overseas markets, notably developing Asian countries, will provide local firms with opportunities to avoid drastic downturns in revenues. ? The governments work to improve the country, as a services and transport hub, will help support future infrastructure projects. ? The governments clear intention to turn Singapore into a regional green energy hub will provide many job opportunities. Threats ? Low-cost competitors, particularly in China, threaten Singapores export-oriented manufacturing industry. This could adversely impact infrastructural investments around new manufacturing units. ? Recent events, such as the surge in property values show the underlying volatility still present in the market. ? The regulatory environment in the Asia-Pacific region as a whole remains far below developed standards and as a result this may impact Singapores rating. ? Relatively saturated and mature market may make nearby under-developed neighbours a more attractive investment prospect. Singapore Infrastructure Report Q4 2011 © Business Monitor International Ltd Page 8 Market Overview Singapore One of the markets most severely hit by the global recession, Singapore has seen excellent results due to government stimulus efforts that were implemented in the first half of 2010. Despite the official statistics agency revising down its estimates from 2006 onwards the prospects for the industry remain extremely strong. This momentum is evident throughout the countrys construction sector, where investments are channelled into port infrastructure to bolster Singapores maritime primacy, and also into transport, tourism and residential construction. Singapore re-affirmed its status as one of Asias most attractive infrastructure markets following the successful completion of the second of Temaseks power divestments. A clear commitment to government investment saw the market bounce back after a sharp fall, and a rise in manufacturing helped to buoy the export sector. The government has also taken steps to ensure that it is in a position to take advantage when markets recover through investment in centres of excellence. As a result it is expected that the government will be examining ways to allow a new wave of immigrants to enter the country to meet demand in the infrastructure market. It is estimated that as many as 100,000 foreign workers will be needed to cope with the surge in construction, according to Le Monde. After strong growth of 18% in the first half of 2010, Singapore is now aiming to achieve the worlds highest growth rate at 13-15% of GDP. Singapore is one of the smallest markets in the Asia-Pacific region in terms of population, and demographics are an issue for the economy. Although the government hopes the population will reach 6.5mn in the coming decades (mainly due to an influx of foreign expats and highly skilled labour) the populations average age is forecast to increase as birth rates decline. The issue of immigration remains a sensitive topic in the country with Singaporean Prime Minister Lee Hsien Loong quoted during an official visit to the US as stating: If we don't allow the foreign workers in, you are going to have overheating. We have to accept that. Arguably, the mass investment witnessed primarily, although not exclusively, in transport infrastructure, linking the financial districts with resorts and residential developments can be seen as an incentive to attract larger numbers of foreigners into the economy. Its economic foundations lie in an advanced electronics sector and a strong export-oriented manufacturing sector. This is a double-edged sword, as exemplified by the economys exposure to drops in global demand. However, Singapore remains a hub for the international maritime industry, and has the second busiest port after Shanghai. The rise of China and India has produced fierce competition in the region, challenging the traditional competitive advantages that many of the original Asian Tigers enjoyed. However, Singapores strong business environment looks set to weather this challenge. Singapore Infrastructure Report Q4 2011 © Business Monitor International Ltd Page 9 Despite the small size of its infrastructure market, Singapore has achieved the top spot in the Asia-Pacific region, as the government has shown keen interest in spending on infrastructure to improve productivity growth. Local expertise is also among the highest in the world (especially in the water utilities sector) a characteristic that is lacking in the majority of the other emerging markets in the region. The city state ranks second among 167 countries ranked in BMIs Global Business Environment ratings. The country has a highly developed transport system that it is expanding further. In terms of utilities, the market is quite small although it ensures adequate supply from oil and gas to meet domestic demand and it does not produce any natural resources. The construction sector has produced some of the most elaborate structures in the Asia-Pacific region, and it is now further boosted by the tourism infrastructure. On the downside, the small size of the population has also given rise to concerns that demand will not be strong enough to yield the anticipated benefits from the investments in infrastructure, especially as rising costs reduce the margins and lead to demand deficits. The Singaporean construction sector is characterised by a large number of small- and medium-sized contractors in fierce competition for a dwindling pool of contracts. A recent survey commissioned by the Building and Construction Authority (BCA) revealed that there were 117 small- to medium-sized contractors (with more than 50 employees) per US$1bn of construction output. This is extremely high compared with other countries, such as Canada with 39 contractors per US$1bn output and Japan with just 14. Singapore Infrastructure Report Q4 2011 © Business Monitor International Ltd Page 10 Building Materials Global Materials Building Materials: Consumption Hitting New Highs in 2011 And 2012 Surging demand in Asia and particularly China saw global cement and steel consumption increase by 8% and 13% respectively in 2010, offsetting an uncertain and broadly muted recovery in Europe and North America. We expect this trend to continue over the next two years as Asia's booming economies drive global demand; meanwhile, gradually improving economic conditions in key developed markets should further bolster this growth outlook. However, the ongoing political crisis in the Middle East and North Africa (MENA) and China's slew of monetary tightening measures both present downside risks to our outlook. High input costs will also continue to weigh on producer margins and exert upward price pressure. Key views for 2011: ? Asia and Latin America to outperform globally: Emerging Markets (EM) demand for building materials to hit new highs in 2011, driven by robust economic growth. ? Europe/North America: cement production to remain depressed but stable; still below pre-crisis levels exports remain significant drivers of sales growth. ? MENA crisis will see consumption growth muted in 2011; rebounding in 2012. ? Steel prices to trend steadily higher through 2011 and 2012; but Chinese overcapacity to alleviate some upside pressure. Risks: ? Higher cost of energy (oil, coal) and raw materials (iron ore) represents a continued threat to producer margins and consumers. ? China to remain key growth driver of cement and steel demand; though monetary tightening measures present downside risk to the demand outlook. ? Inflationary pressures a key concern for the sector across much of Asia. Singapore Infrastructure Report Q4 2011 © Business Monitor International Ltd Page 11 Asia Pulling Away Rising per capita income, demographic growth, urbanisation and industrialisation are the key growth drivers behind Asia's building materials consumption story. Indeed, while base effects, China's cooling measures and continued weakness in developed markets will likely see a moderation in cement and steel consumption in 2011, demand growth will remain robust. Across much of Asia and other key emerging markets, notably Brazil, the rate of cement and steel consumption will accelerate. Asian Encroach(ce)ment Global Cement Production (mn tonnes) Source: US Geological Survey Having accounted for the lion's share of growth in global cement sales, and two thirds of global steel production in 2010, we expect key Asian markets such as China, India, Indonesia and the Philippines to further increase the region's share of the total in 2011. Moreover, Asia will be the key driver behind a steady shift in global steel consumption over the coming years, away from developed economies and towards emerging/developing economies. This will see emerging markets account for 72% of global steel consumption in 2012 (from 61% in 2007); while steel use in the developed world will still be 14% below the 2007 level, according to WSA forecasts. Of these markets, Indonesia, Asia's third most populous country, the Philippines, Thailand and Vietnam continue to be key growth drivers behind the rampant consumption of building materials in the region, with residential construction in particular continuing to exert strong upward pressure on cement prices. Indonesia's cement consumption is expected to grow by between 6% and 8% in 2011, according to Reuters, while Vietnam is expected to see a 9% to 10% rise (according to the Ministry of Industry and Trade). Singapore Infrastructure Report Q4 2011 © Business Monitor International Ltd Page 12 A Mixed Bag In 2010 Holcim Cement Price/Volume Variance By Region (1) Weighted average like-for-like. Source: Holcim India To Outperform China Although demand is forecast to remain robust in China, monetary tightening could lead to slower than anticipated demand from the world's largest consumer of cement and steel. However, risks to the upside come in the form of China's plans to build 36mn affordable homes over the next four years, creating significant demand for domestic cement companies and steel producers. While China's consumption growth is expected to moderate over the next couple of years, India, Asia's other giant, will see the demand for building materials accelerate in 2011. Indeed, according to the World Steel Association, demand for steel in the country is expected to grow by 13.6% y-o-y in 2011 and 14.3% in 2012, as the country's insatiable demand for housing and infrastructure projects drives consumption of the metal. Demand for cement will also rise, although whether this will exert any upward pressure on prices is uncertain, as capacity is high and India's cement producers are able to absorb rising costs. However, there are significant risks to this outlook, notably those arising from the well publicised shortcomings within India's business environment. Singapore Infrastructure Report Q4 2011 © Business Monitor International Ltd Page 13 Higher Costs Brent Crude, Newcastle Coal And Chinese Iron Import Price Index (rebased 12/07/2010) Source: Bloomberg Rising Input Costs And Inflation To Squeeze Margins Over the last 12 months inflationary pressures and the high cost of key raw materials (notably fuel and iron ore) have been, and remain, a key concern for the construction industry. Driven by strong demand in Asia and perpetuated by the ongoing unrest in the Middle East rising input costs have put pressure on companies' operating margins and in many cases served to offset improving sales growth. These effects have weighed particularly heavily on the building materials industry given its energy and resource- intensive nature. The costs of key inputs such as iron ore, coking coal and scrap steel have all surged over the last year, placing strong pressure on firms' margins. Moreover, with input costs likely to remain high over the coming months, margins will be squeezed further, as well as the increased likelihood that these costs will be passed on to the consumer. In South East Asia in particular, such issues are accentuated by the constant threat of inflation, which will be a key concern for a number of countries in the region in 2011, particularly Indonesia and Vietnam. Although local supply-demand dynamics can drive up prices in a particular market on a short-term basis, factors such as transport and distribution costs, as well as uncertain electricity supply, also remain notable constraints for the building materials sector in many emer