Contractors Face Challenges in International Market
The market for international contractors has been undergoing stresses over the past four years, starting with a drop in commodity metals prices, which curbed the mining sector, closely followed by the collapse in oil prices. International contractors also have had to contend with national political and financial upheavals.
The uncertainties in the international construction market can be seen in the results of the ENR Top 250 International Contractors survey. This list ranks firms based on contracting revenue from projects outside of their home countries, measuring their presence in international commerce. ENR’s Top 250 Global Contractors list also ranks contractors based on total worldwide contracting revenue, regardless of project locations.
The Top 250 International Contractors reported $468.12 billion in contracting revenue in 2016 from projects outside their home countries, down 6.4%, from $501.14 billion, in 2015. This is the third straight year showing a drop in Top 250 revenue. As a group, firms also reported $927.94 billion in revenue from domestic projects in 2016, up 3.4%, from $897.33 billion, in 2015.
On a regional basis, the Middle East was the biggest gainer, up 9.8%, to $84.02 billion, in 2016. This increase still is well below the $91.32 billion earned by the Top 250 in 2012. Europe also saw a modest gain in 2016, rising 2.7%, to $95.99 billion.
The international contracting market in Canada continued its free fall, down 18.4%, to $18.72 billion, in 2016 after falling 22.4% last year. The Canadian market is off 45.3% since 2013, reflecting the downturn in its oil-sands market. The biggest loser was the Latin American market, which declined 42.9% on weakening economies and political turmoil.
Among market sectors, the petroleum market is the most prominent one under siege. Revenue from petroleum-related projects among the Top 250 fell 8.6%, to $104.51 billion, in 2016 and is down 16.3% from 2015. The buildings market fell in 2016, down 5.1%, to $101.43 billion, while the power market also sagged, dropping 15.8%, to $45.55 billion.
In contrast, the transportation market, the largest international market for the Top 250, has continued to grow through global tumult, rising 3.4%, to $144.38 billion.
Low oil prices are putting a severe damper on petroleum projects throughout much of the world. Oil prices per barrel remain in the low $40 range, and many firms believe this price trend will continue for the foreseeable future.
An example of the impact of low oil prices was the July 26 announcement by Malaysia’s national oil company, Petronas, that it had cancelled the Pacific NorthWest LNG project at Port Edward, British Columbia. The decision was a result of “the prolonged depressed prices and shifts in the energy industry,” it noted.
Firms in the petroleum market expect more of the same. “Unless oil stabilizes at $50/bbl or above, we should expect the negative trends to continue,” says Samer Khoury, president of engineering and construction at Greece-based Consolidated Contractors Group.
But the news is not all bad in the petrochemical arena. Many oil producers are focusing their capital spending on projects to optimize processes and reduce maintenance costs, says Pierroberto Folgiero, CEO of Italy’s Maire Tecnimont Group. “This means pipelines and lots of infrastructure,” he observes.
Further, cheap gas is a strong driver in many regions. “The gas-rich USA is kind of the place to be for a downstream contractor,” Folgiero says. Downstream gas is strong in many regions, whether for export purposes or as feedstock for fertilizer and polyolefins plants, he notes.
On the other hand, the trend toward urbanization has forced nations to invest in infrastructure. “Every nation has drawn the blueprint for the economy [revitalization] and given priority for some large and important projects,” says Li Runyao, commercial manager of China Energy Engineering Corp. Ltd.
Urbanization and the subsequent need for supporting infrastructure is a global phenomenon. “Egypt, Algeria, Saudi Arabia and Iraq are classified as young, populous, emerging countries with increased demand for infrastructure. These fundamentals should provide continued opportunities for years to come,” says Osama Bishai, CEO of Egypt’s Orascom Construction.
This development has led to a surge in work to support urbanization efforts. The growth of mega-cities and the quest for sustainability are boosting transportation and renewable-energy orders to a degree “that had not been the case for decades,” thinks Pietro Salini, CEO of Italy’s Salini Impregilo SpA.
These trends have caused some large contractors to reassess their portfolios. Many international contractors report having some success in shifting gears. For example, after a period of falling sales, “we are growing again,” says Jérôme Stubler, chairman of Paris-based VINCI Construction.
VINCI took this road because of changes in many of its base markets. Cuts in local French government spending hurt VINCI at home in the past few years, says Stubler. At the same time, low oil prices reduced demand for its specialty division in that sector and hit infrastructure spending in its African markets, he adds. VINCI retains a network in France’s former African colonies, some of which rely on oil exports. “We see lots of projects, but [they are] lacking financing,” says Stubler.
For Sweden’s Skanska AB, the market is “strong in all our geographies,” says Johan Karlström, president and CEO. Compared to last year, orders are up in Nordic and European markets but down in the U.S., where the firm faces “fierce” competition, he adds.
Many contractors complain that clients are becoming more demanding and, in some cases, less reliable because of economic upheavals. Lebanon’s Contracting and Trading Co., aka C.A.T. Group, has had some problems pursuing projects “caused by tight cash flows, stricter and riskier contractual terms and conditions, and many cancelled prospects to which we have bid with unclear communication from some clients,” says Georges Hage, group CEO.
Many contractors also are concerned about national economic conditions and exchange rates. “The main negative issue we see in the future is the cost of money and the fluctuations in financial markets,” says Cenk Düzyol, a board member of Turkey’s Renaissance Construction. “It has been an uphill battle to sustain cash flow due to hectic international markets and U.S. dollar and euro value fluctuations.”
Inflation has hit hard many formerly prosperous markets in Latin America. But other major markets also are experiencing the problem. High inflation in Egypt has increased the cost of investment, says Bishai. “While our contracts have the right provisions and terms that protect us from this, new investors are less likely to develop greenfield projects if the cost of borrowing and investment is elevated,” he adds.
Many firms are taking steps to mitigate their risks. On July 14, Skanska said it was booking nearly $100 million of write-downs on troubled U.K. and U.S. projects where unexpected project delays caused costs to rise, it claimed. This state of affairs has caused Skanska to become more risk-averse. “We will be very selective in new bids,” says Karlström.
Salini Impregilo, too, is reducing its risk profile by diversifying from megaprojects to “more regular work,” notes Salini. Its top-10 projects now account for half of total sales, down from two-thirds in 2014. Further, it is cutting in half its 2014 African exposure, aiming to generate 30% of sales in the U.S. this year. Having acquired Connecticut-based Lane Construction Corp. in 2015, Salini now ranks the U.S. as its biggest market.
Competition also is ramping up risks in the international market. Some firms are being assisted in the global market by their government’s policies. “The Chinese government has made related beneficial policies for us, such as advocating Chinese enterprises to go globally,” says Li of China Energy Engineering Corp. He notes that China’s Belt and Road Initiative has helped “deepen the cooperation between different nations or regions.”
But many old-line contractors are uncomfortable with the level of government assistance given to new competitors. “The contracting industry is being affected by the aggressive stand by some government-backed companies from China and Korea with financing offices. This is something that we are facing more and more,” says Khoury.
The European market has been sluggish for several years, and Britain’s vote last year to exit the European Union caused many contractors to pause. However, the continental market has shown some resilience.
In Western Europe, VINCI has been “very successful in Paris,” picking up major infrastructure work, says Stubler. And the firm won large contracts this year on the U.K.’s high-speed railroad and the long, Denmark-Germany immersed tube tunnel. Local French government spending “has been recovering slowly,” he says.
Skanska’s Nordic markets are strong, “especially in Sweden,” says Karlström. The U.K.’s planned departure from the EU creates “uncertainties,” he admits. But after a period of weakness, the recovery of Skanska’s business in Poland is growing.
Stubler also sees recovery in central and Eastern Europe, supported by EU funding. However, he says Greek construction remains slow. He notes that this year’s completion of vast motorway projects marks the end of an era for Greece (see related story, p. 26).
Turkey’s Renaissance Construction is betting big on Europe. In 2013, it acquired Swiss-based Alpine Bau GmbH, Hergiswil, and recently completed the final acquisition of 100% of Ballast Nedam, the Netherlands. “With these acquisitions, not only are we entering the European market but adding on to what we have on the infrastructure side, as well,” says Cenk Düzyol, a Renaissance board member.
The Middle East market has been a mixed bag in the past two years. The continuing weak oil prices and strained fiscal balances of Gulf Cooperation Council (GCC) countries have led to deferment or cancellation of not just oil-and-gas work but also many regional public infrastructure projects.
National budget shortfalls have led many Middle Eastern countries to take steps to fill in the funding gap. “The GCC has approved the introduction of a value-added tax in 2018 [and] is also contemplating the introduction of other taxes to counteract the fall in revenue due to low oil prices,” says S.N. Subrahmanyan, CEO of India’s Larsen & Toubro. For example, Saudi Arabia has introduced a 2.5% annual tax on “white lands”— that is, undeveloped land designated for residential or commercial use.
But many countries in the Middle East continue to press ambitious building plans. For example, Kuwait’s upcoming infrastructure projects for the next 10 years is estimated at $83 billion, says Jalal Chaarawi, business development manager of Kuwait’s Combined Group Contracting Co. He also notes that, with the upcoming 2022 World Cup, there will be increases in infrastructure projects in Qatar.
Many firms feel the continuing political and economic turmoil is harming Middle East work, which “remains one of the most interesting markets,” says Salini. Sanctions on Saudi Arabia and Qatar over claimed terrorist ties and political interference with GCC neighbors’ internal affairs resulted in “some force majeure impact on costs due to some restrictions on the sourcing of some goods,” he notes.
The sanctions on Qatar may have a big impact on contracting in the region. “The political unrest that has manifested in certain geographies—cutting off diplomatic ties with Qatar, along with the imposition of [the] air, land and sea embargo—are weighing on the economic outlook of the Middle East region,” says Subrahmanyan.
One surprising trend in the Middle East is the move toward renewable energy. “First we believed that this would be simply a trend that governments would subsidize just to use the green-energy label. However … we witnessed economies of scale that rendered power from renewable energies even more viable than from fossil-fuel sources,” says Hage.
In Asia, VINCI is developing a big presence in Australia through its current acquisition of Seymour Whyte Ltd., which has a focus on transportation work and posted half-year sales of $185 million. With competition for megaprojects already intense, VINCI is looking for more modest, regular business, says Stubler.
Among international players targeting Australian megaprojects is Bechtel Inc., which recently became the owner’s delivery management partner for the 15.5 km of twin tunnels and stations on phase two of Sydney’s metro. With a long track record in the country’s now-slowing oil, gas and minerals market, the firm is diversifying into civil infrastructure, says Ailie MacAdam, Bechtel’s global leader for rail.
Germany’s Hochtief AG, which controls Australia’s CPB Contractors (formerly Leighton Contractors/Thiess), won a slice of the $2.3-billion Sydney metro tunneling work. Last month, CPB became the civil partner in a joint venture delivering $800 million of rail systems on Melbourne’s new metro. Paris-based Bouygues SA is on that metro’s winning team for a privately financed contract to build the 9 km of twin tunnels and stations.
In Perth, Salini Impregilo is “about to start excavating an extension of a rail line,” notes Salini. Under a design-build-maintain contract secured last year, the firm leads a joint venture that is boring 8 km of twin tunnels on the Forrestfield-Airport Link.
In Latin America, the political environment and limited financial resources are dampening development, notes Salini. But opportunities exist. “We have just started excavating a hydraulic tunnel in Buenos Aires,” he says. And VINCI’s specialty unit Soletanche Freyssinet SA is spreading into new markets in Latin America with recent wins in Peru and Chile, according to Stubler.
Although many contractors continue to see opportunities in Latin America, they recognize the difficulties. “Our best opportunities have been in Latin America, though the region, almost as a whole, faces problems in the national economies,” says Flavio Faria, CEO of Odebrecht Engineering & Construction-Industrial Engineering.
Karlström also see “a strong pipeline of projects” in the U.S., although the “Trump effect” has yet to materialize. “We are focusing on core geographies, core competencies and selecting projects very carefully,” he adds. Since President Trump’s revival of U.S. oil pipeline projects, VINCI is “waiting for the bids,” adds Stubler.
Several major international contractors have made significant acquisitions to gain entry into the U.S. market. One major transaction was Orascom’s acquisition of Des Moines-based contractor The Weitz Co. “In the U.S., we are the EPC contractor on two large, complex industrial projects,” says Bishai of Orascom. He notes that Weitz is building the Iowa Fertilizer Co. plant, the first world-scale nitrogen fertilizer plant to be built in the U.S. in the past 25 years, and Beaumont, Texas-based Natgasoline LLC, the largest merchant methanol plant in the U.S.