The Dynamics of Global Plant Construction Location Factors Ed Glatzer Managing Director, Technology and Analytics Group, OMDC, IHS Markit +1 203 644 1809 ed.glatzer@ihsmarkit.com Building a Foundation for Profitable Growth in Uncertain Markets
Why the need for a new look at Location Factors? This was the No. 1 technical question from our clients This is of great importance for the understanding of global competitiveness We wanted to establish a sound analytical basis for worldwide comparisons of the cost of chemical plants Source: Hyundai 2017 IHS Markit
Why does Location Factor change? 1 Changes in 2 3 4 5 6 country labor costs and wage inflation/deflation exchange rates labor productivity domestic material costs (steel and other bulk items) equipment sourcing country support infrastructure
What is a Location Factor? the ratio of the cost of construction in two locations at the same point in time The cost in each location is normalized to a reference currency by means of currency exchange rate The location factor is expressed in similar currency Location factor is inclusive of taxes Source: Great Western Painting
IHS developed a methodology based on specific researched inputs IHS queried industry experts for equipment prices and installation costs, construction labor costs and percent of internationally sourced off-shore equipment The inquiries went to suppliers, EPCs and operating companies in Brazil, China, Europe, India, Japan, Russia, Saudi Arabia and US
IHS asked for labor and productivity as well as costs Pressure Vessels Instructions: Please enter cost and labor man-hours requirements into the colored cells to the right. It is not necessary to prepare a cost estimate from scratch. If you have an existing estimate for a vessel of similar size, please enter the costs and man-hours and overwrite our specifications with yours. Type Horizontal Shell material A 515 Liquid volume 9400 gal 35580 liters Vessel diameter 8 ft 2.44 meters Tangent-to-tangent length 25 ft 7.62 meters Design temperature 300 F 149 C Design pressure 165 psia 11.4 bars Estimated weight 20100 lbs 9117 kg Typical manholes and nozzles Purchased equipment cost, FOB Total Installed Cost Total Installation Labor Man-Hours What design code did you use? (in local currency) (in local currency)
IHS asked for labor and productivity as well as costs Compressors Instructions: Please enter cost and labor man-hours requirements into the colored cells to the right. It is not necessary to prepare a cost estimate from scratch. If you have an existing estimate for a compressor of similar size, please enter the costs and man-hours and overwrite our specifications with yours. Casing material Carbon Steel Actual inlet gas flow rate 5500 Cubic ft/min 156 cu meters/min Design inlet pressure 115 psia 7.9 bars Design outlet pressure 230 psia 15.8 bars Feed molecular weight 28.9 Specific heat ratio 1.4 Pressure ratio 2.0 Number of stages 1 Driver power 3000 HP 2237 kw Design inlet temperature 68 F 20 C Driver type Electric Lube oil system Included Purchased equipment cost, FOB Total Installed Cost Total Installation Labor Man-Hours What design code did you use? (in local currency) (in local currency)
IHS PEP developed Location Factors for ten countries/regions
Domestic and imported content must be included International Content Cost at Location Local Equipment Local Materials Local Labor Locally supplied equipment incorporates local labor and material costs and productivity Percentage of domestic equipment is also effected by the process technology and the licensor preferences
A Location Factor calculation includes several key elements Compares the local cost of construction labor, after adjusting for 1 relative productivity, and the relative cost of bulk materials The cost to fabricate local equipment compared to imported 2 equipment An estimate of local vs import equipment sourcing is necessary Imported equipment bears the costs of duties, taxes and freight Locally fabricated equipment cost is adjusted by the fabrication differences of steel prices and labor requirement
We examined over 100 PEP Program capital cost estimates (all on 2016 USGC basis) Costs divided into the six subcomponent capital cost fractions: EQ = equipment ST = steel material bulks CV = civil material bulks EL = electrical material bulks CL = construction labor bulks ENG = engineering and project mgmt C EQ + C ST + C CV + C EL + C CL + C ENG = 1.00
Each of the subcomponent weights is adjusted with location Equipment, steel, civils and E&I are costed at the specific location in local currency Component buildup percentage is kept constant for all locations, e.g. equipment = the same percentage of total for all locations before local adjustment
Labor includes wages and social benefits, but can also include site housing, clothing, transportation As an example, Saudi Arabia wage rate is largely set by subcontract construction labor sourced from abroad, principally India and the Philippines. This includes upcharges for local fringes and contractor fees and profit Though they have stated the goal of increasing the number Saudi nationals in the employment force, this is expected to be seen more on the management level
Labor all-in extras can be significant In Saudi Arabia, the skilled construction wage reflects ex-pat labor at about $6/manhour. This rate is then increased accordingly (all in US$): Labor fringes: $1.50 EPC markup: $1.50 Visa fee: $1.00 Housing fees: $2.00 Therefore, Total Saudi Skilled Labor = US$ 12.00
Adjusting for labor productivity Saudi productivity is nominally 2.0 relative to the US based on skill level, level and state of construction capability and local conditions IHS is using a 2.3 factor to account for construction managers tending to over staff because of the low wage rates China productivity is similar to Saudi Arabia, with higher head counts for the construction activity in order to employ more people
International content basis is an important factor IHS developed two location factors for each country Domestic: assumes all equipment and bulk materials are domestically sourced International: assumes a portion of the equipment is imported Percentage import equipment varies Type of equipment not fabricated in location Materials of construction Licensor dictates
Taxes and duties can be significant for countries that import more IHS developed two location factors for each country Import taxes and duties are, in several countries, a function of what agreements with trading partners they have and what they fabricate In many countries, import duties are much higher for items that can be produced in the country than for items that cannot. India s high import tax, which coupled with a high level of import content, makes the International Content LF much higher (0.97) than if 100% domestic (73%)
Adverse weather conditions can delay schedules and add cost Weather conditions include conditions that will, on average, impact construction costs by schedule delay, loss of productivity, or other reasons This may consist of countries with extreme and prolonged cold or hot climate conditions IHS assigned a 10% penalty to the extreme cold climates of Western Canada and Russia and 15% to the extreme hot conditions of Saudi Arabia
Infrastructure requirements also impact Infrastructure accounts for design requirements over and above the standard design, that limit the optimization of the plant design In Saudi Arabia: export oriented facilities Russia: regulations limiting the height of structures
Business environment may also be considered We do not take into consideration a relative Country Risk Factor IHS has a unique country risk-rating system to enable clients to compare and contrast the investment climate The system provides a comprehensive picture of the quality of conditions and level of stability encountered by investors in each country
As we ve discussed, Location Factor is a sum of many factors North America Labor Productivity Extreme Weather Increment Added Infrastructure Scope Factor Taxes, Tariffs, Freight % Int'l Content Location Factor Canada 1.05 10% 0% 1.08 80% 1.16 South America Western Europe Eastern Europe Asia Middle East United States 1.00 0% 0% 1.00 20% 1.00 Brazil 2.25 0% 5% 1.41 40% 0.91 Germany 1.00 0% 0% 1.31 40% 1.04 Poland 1.15 0% 0% 1.13 60% 0.82 Russia 1.43 15% 10% 1.31 30% 1.11 China 2.00 0% 7% 1.29 30% 0.68 India 2.50 5% 5% 1.21 80% 0.81 Japan 1.10 0% 5% 1.14 30% 0.91 Korea 1.20 0% 0% 1.15 30% 0.82 Singapore 1.30 0% 0% 1.11 70% 0.85 Saudi Arabia 2.30 10% 5% 1.15 80% 1.19
US Cents / Japanese Yen Location Factor The 2016 location factors are probably lower than might be expected Figure 5.22 Historical Location Factors, Japan 1.30 1.20 1.10 1.00 0.90 0.80 0.70 2011 2012 2013 2014 2015 2016 Figure 5.23 Exchange Rate, US Cents/Japanese Yen 130 120 110 100 90 80 70 2011 2012 2013 2014 2015 2016 This is mostly due to exchange rate changes that have led to the current strong dollar For Japan, Fig. 1 shows the historical trend in the Japanese location factor relative to the USGC and Fig. 2 how much the exchange rate has varied over this time The yen depreciated by over 30% at one point before recovering recently
Location Factor Many LFs remain high due to currencies tied to or not changed from the US dollar Figure 4 Location Factor Saudi Arabia 1.30 1.25 1.20 1.15 1.10 1.05 1.00 2011 2012 2013 2014 2015 2016 The Saudi Arabia LF has been nearly flat at approximately 1.19. We attribute this to the Saudi riyal being fixed to the dollar at 3.75 riyals per dollar. We see similar historical behavior in China, Korea, and Singapore. All of these countries have currencies that have not changed much against the dollar
IHS compared our calculated 2016 LFs to what we had in 2012 The change in relative wages has North America a large impact Brazil saw a real wage reduction in US dollars of more than 30% Russia wages were reduced by close to 50% Japan and Canada also shows large wage reduction in US dollars South America Western Europe Eastern Europe Asia Middle East Location Factors Relative to the US Gulf Coast 2012 2016 Canada 1.46 1.16 United States 1.00 1.00 Brazil 1.29 0.91 Germany 1.20 1.04 Poland 0.92 0.82 Russia 1.96 1.11 China 0.75 0.68 India 0.90 0.77 Japan 1.15 0.91 Korea 0.83 0.82 Singapore 0.91 0.85 Saudi Arabia 1.19 1.19
How important is the LF change? For VCM in Russia, LF from 1.96 in 2012 to 1.15 in 2016 At cash cost plus depreciation (10%) plus a nominal 15% ROI, the cost of production goes from $1094/MT to $844/MT In other words, the lower capex results in an increase in ROI from 15% to 37% at the same production cost World Cost Curve: Vinyl Chloride Monomer $/Metric Ton 2500 2000 1500 1000 Source: IHS 500 VCM, Russia, LF = 1.96 (2012) VCM, Russia, LF = 1.11 (2016) (Cost Basis = Plant Gate, Operating Rate Basis = IHS Baseline Integration Basis = On) 0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 Cumulative Production - Million Metric Tons Demand US Price W Europe Price China Price 2016