Is There Another Side to the Sourcing Cost Mountain? Gerry Yurkevicz Managing Director, Energy Services Global Insight

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1 Is There Another Side to the Sourcing Cost Mountain? Gerry Yurkevicz Managing Director, Energy Services Global Insight

2 Managing the Sourcing Mountain: Summary Materials, equipment, and labor sourcing issues represent critical management challenges for energy companies No near-term price relief is in sight Actions to consider: Building intelligence capabilities Improving the project cost estimating process Elevating sourcing discussion Copyright 2008 Global Insight, Inc. 2

3 Three Key Drivers of Sourcing Issues Enormous increases in commodity and material prices Accelerated spending plans by energy companies, including utilities and pipelines Increased performance pressure on sourcing organizations Copyright 2008 Global Insight, Inc. 3

4 Global Insight Industrial Materials Price Index Commodity Prices Continue to Show Pressure (2002:1=1.000) Global Insight Industrial Materials Price Index CRB Raw Industrials Price Index Copyright 2008 Global Insight, Inc. 4

5 Global Insight Energy Spending Index (50 Utilities) Utilities and pipelines expect capital spending of US$250 billion from , 35% more than Index Q Q Q Q2 An index value of greater than 50 suggests strong spending momentum Copyright 2008 Global Insight, Inc. 5

6 Internal Sourcing Execution Challenges Capital spending, and related rate base growth, represents the key growth and earnings driver for regulated companies Cost estimating and sourcing effectiveness supports approval of spending by management and regulators Investment cost effectiveness drives profitability with non-regulated/market opportunities Management expects significant savings from sourcing activities Copyright 2008 Global Insight, Inc. 6

7 Steel Pipe Prices Pipe prices remain at high levels; very strong demand; follow plate and bar prices Pipe Index $1,200 $1,000 $800 $600 $400 $200 Spot Price, $/ton $0 Pipe Index Spot Plate Copyright 2008 Global Insight, Inc. 7

8 Heavy Industry Construction Contractor Prices U.S. Contractors Price Index (Percent change) Continued near-term pressure through 2010 more pressure in specialized segments; labor market forces should provide some longer-term escalation relief Copyright 2008 Global Insight, Inc. 8

9 Key Equipment Categories: Mixed Bag Category Meters Transformers/ Breakers Wood Poles Turbines Power Plant Equipment Prices/ Escalation Moderate Significant Moderate Significant Significant Availability Adequate Tightness Adequate Tightness Tightness Copyright 2008 Global Insight, Inc. 9

10 Key Materials and Fuels Categories: Expensive Category Construction Steels Wire & Cable Plastic Pipe Cement & Concrete Diesel & Gasoline Prices/ Escalation High Level Relief/Risk High Level Moderate High Level Availability Tightness Adequate Adequate Adequate Adequate Copyright 2008 Global Insight, Inc. 10

Action 1: Build Sourcing Intelligence Capabilities Responds to market, management, board and regulator needs Provides input to negotiations and decision making: helps make

12 Action 1: Build Sourcing Intelligence Capabilities Responds to market, management, board and regulator needs Provides input to negotiations and decision making: helps make better sourcing decisions Supports evolving market analysis/category management functions in sourcing Evolves away from just suppliers Copyright 2008 Global Insight, Inc. 12

13 Action 2: Rethink Project Cost Estimating Process $120 $100 Even today, with all the price increases, many companies still apply a single escalation rate (e.g., 3%, 4%, 5%) for cost estimating purposes. Escalation Spend $80 $MM $60 $40 $20 $ Total Copyright 2008 Global Insight, Inc. 13

14 Improve Project Cost Estimating Process $MM $140 $120 $100 $80 $60 $40 $20 $0 No one has it figured out completely but companies are finding that project management, sourcing decision making, and cost estimates are improved by applying category-specific escalation rates Esc Steel Esc Equip Esc Labor Steel Equip Labor Total Copyright 2008 Global Insight, Inc. 14

15 Action 3: Elevate Communications & Analysis Efforts Elevate sourcing-related info and issues to the level of power/fuels discussion Educate management and regulators on sourcing issues (e.g., the role of China) Do better risk analysis (e.g., cases, statistical) $/ton $1,000 $900 $800 $700 $600 $500 $400 Structural Steel Prices: China Scenarios Baseline Optimistic Hard Landing Copyright 2008 Global Insight, Inc. 15

16 Thank you! Gerry Yurkevicz Managing Director, Energy Services, Global Insight

cost trends insights on construction costs

cost trends insights on construction costs In This Issue: The following cost trends are included in this issue. U.S. Construction Costs Leading Indicators of Construction Industry Spending Backlog Indicator