Infrastructure and Themes to watch
The moderation of global construction industry real growth and escalating construction input costs both feature prominently in our Key Themes, along with thematic developments across green infrastructure, the Belt and Road Initiative, non-residential building and hydrogen infrastructure.
In our 2022 Key Themes for Infrastructure, we expect that global construction industry growth will slow down in 2022, as base effects that pushed up construction industry growth following the adverse impact of the Covid-19 pandemic fade. We further anticipated that, despite its slowdown, global construction industry growth will remain above its pre-pandemic average. Lastly, we expected that the gap between public infrastructure investment in emerging and developed markets would widen on the back of public infrastructure development programmes in developed economies and reduced access to financing in emerging markets. Although we maintain our forecast that global construction growth will indeed slow down in 2022 due to fading base effects, we see this first component of our global infrastructure growth Key Theme playing out only partially, as this development is driven by a minority of large construction markets and is not reflected in the varied growth performances across the majority of construction industries globally. We expect that the value of the global construction industry will expand by 3.8% y-o-y in 2022, down from 5.5% estimated y-o-y growth in 2021. This slowdown due to fading base effects is driven by developments in the construction industries of Mainland China, and key markets in North and Latin America, as well as Western Europe, including the UK, France and Italy. We expect that China’s construction industry will expand by 5.2% y-o-y in 2022, following 6.8% y-o-y estimated growth in 2021. China’s construction industry accounts for almost a quarter of the global construction industry value, amplifying the impact of the slowdown in Chinese construction growth on the global construction sector. The construction industries of Italy, France, and the UK experienced two-digit growth in 2021, due to strong base effects following significant contractions in all markets. As these base effects fade, we expect growth in these markets, as well as in the North American construction sectors of the US and Canada, to slow down and follow the pattern we’ve highlighted as a 2022 Key Theme. Together, these markets account for almost 30% of the global construction industry, and the strong variations in the Western European construction markets, in particular, considerably shapes global construction industry growth. Unlike other regions where we see significant variations between markets’ performance throughout the pandemic, the large majority of Latin American construction markets are forecast to experience strong growth slowdowns in 2022 on the back of fading base effects.
Key Major Markets Drive Global Construction Growth Slowdown
Global - Construction Industry Value, Real Growth, % y-o-y
Source: Fitch Solutions
While our global construction industry growth forecast aligns with our 2022 Key Theme that the industry will expand at a slower pace than in 2021 due to fading base effects, we note that this global construction industry growth trajectory is supported by developments in most of the world’s largest construction markets, including those highlighted above. At the same, however, we expect that the overall majority of construction markets across the globe will in fact not experience a growth slowdown due to fading base effects after strong 2021 growth, as they follow a range of different growth trajectories, meaning that this part of our global construction growth key theme also plays out only partially. For instance, 2020 construction industry growth in Germany, Europe’s largest construction market, considerably outperformed its pre-Covid-19 growth rates and only contracted in 2021, delaying the impact of base effects on industry growth into 2022, when we expect 1.6% y-o-y growth. Many Asian markets suffered a strong negative impact on growth from the spread of the delta variant of Covid-19 in the first half of 2021, limiting the extent to which they could benefit from base effects following weak 2020 growth and causing growth to pick up in 2022.
Moderating But Stable Growth For Global Construction
Global - Construction Industry Value Real Growth, % y-o-y (2015-2026)
e/f = Fitch Solutions estimate/forecast. Source: Local sources, Fitch Solutions
We further maintain our forecast that global construction industry growth will remain above its pre-Covid-19 average in the medium term, supported by economic stimuli that bolster public infrastructure investment. We expect the global construction industry to grow at an average annual rate of 3.3%, compared with a 3% average annual growth between 2015 and 2019. This more robust growth will be supported, in particular, by Western European construction markets which will benefit from the public infrastructure spending programmes, including funding from the EU’s Recovery and Resilience Facility. We expect that average medium-term growth in the majority of Western European construction industries will outperform their respective average 2015-2020 growth rates, including the region’s largest markets Germany, UK, France and Italy. Together, they account for over 10% of the global construction industry value. Medium-term growth rates in most markets in the Middle East and North Africa, as well as in most Latin American construction industries, are also forecast to outperform the respective market’s pre-Covid-19 construction growth. The growth outlooks for the regions’ largest markets, such as Iran, Saudi Arabia, UAE, Mexico, Brazil and Argentina, lend particular support to our positive medium-term global construction industry growth outlook. In contrast, we expect that a series of key Asian markets will drag on medium-term growth, as compared with their respective pre-Covid-19 performances. We expect China’s construction industry to expand at an average rate of 4.4% per year in the medium term, down from 5.8% average annual real growth between 2015 and 2019. Persistent uncertainties in the real estate sector weigh on our medium-term growth outlook for China’s building industry, although the government’s push for an infrastructure-focused stimulus programme poses upside risks for our outlook. While construction growth in the majority of Asian markets will underperform their pre-Covid-19 averages, India, Indonesia and Australia will provide some upward pressure on the region’s medium-term construction growth as some of the region’s largest construction markets.
Global Construction Input Prices To Remain High
While in our 2022 Key Themes for Infrastructure we had anticipated that elevated construction input prices would remain a challenge for the industry through much of the year, more elevated inflation than expected has transformed this into a greater obstacle to investment than our outlook had accounted for. The Russia-Ukraine conflict in particular, under way since February 2022, has increased supply chain challenges which had been in part causing high construction input prices, while also driving up energy costs, directly raising the energy costs related to running construction equipment, while also indirectly increasing the costs of construction inputs by rising production and transportation costs. Amid these impacts, construction input costs have continued to rise higher so far in 2022 across key markets. In the UK, the latest data available at the time of writing from the Department for Business, Energy and Industrial Strategy show that, rebased to 100 in 2015, the cost of construction material and components had risen to 158.8 as of May 2022 - having been at just 115.1 in December 2020. Equivalent rebased data from the US Bureau of Labor Statistics showed that US construction costs had similarly escalated in recent months; with a reading of 153.8 in June 2022, up from 115.0 in December 2020.
Construction Materials Costs Already At Record Highs
US, UK - Producer Price Indices For Construction Materials & Components, 2015 = 100 (2015-2022)
Note: UK data unavailable for June 2022. Source: US Bureau of Labor Statistics, ONS, Department for Business, Energy and Industrial Strategy, Fitch Solutions
We anticipate that the prices of key construction inputs will remain at high levels through 2022, putting strain on project financials and likely weighing on the willingness of firms to launch new projects, particularly amid tightening monetary policy in numerous markets as central banks look to reign in elevated inflation. Regarding our global commodity price forecasts at Fitch Solutions, we expect the global steel price to average USD980/tonne in 2022, up from our previous forecast made in December 2021 for the global steel price to average USD750/tonne in 2022. Our Oil & Gas team, meanwhile, expects Brent crude to average USD105/bbl and USD100/bbl in 2022 and 2023, up from USD71/bbl in 2021.
Ukraine Conflict, High Energy Costs Among Factors Keeping Steel Prices Elevated
Global - Steel Price Averages & Forecasts, USD/tonne (2014-2026)
Note: Prices are an average of Longs and Flats. Source: Bloomberg, Fitch Solutions
Public Investment Efforts Across North America and Europe to Catalyse Private Investment
Public infrastructure investment across North America and Europe has gathered pace over H1 2022, with the disbursement of the European Union's (EU) ‘NextGenerationEU’ funding continuing alongside developments in the US regarding the Infrastructure Investment and Jobs Act (IIJA). Initially, we noted that 2022 will see the efforts of authorities in developed markets to increase green infrastructure investment begin to come to fruition, with decarbonisation increasingly forming a key part of economic stimulus plans in recent months. This would see a substantial injection of public investment which in turn will drive considerable construction activity on green infrastructure projects in 2022 and subsequent years.
In the EU, over EUR228bn has been allocated for investment in renewable energy, low-emission transport and the energy efficiency of buildings, with disbursement to member markets ongoing since H2 2021. In absolute terms, Italy has been allocated the largest figure of any member state; EUR88bn, given the fact that it received the largest overall Recovery and Resilience Facility allocation of any member state. Spain, Poland and France have also allocated substantive funding for green infrastructure; EUR29bn, EUR21bn and EUR20bn respectively. In relative terms, authorities in Denmark have opted to allocate the largest portion of their funding allocation to green infrastructure of any member state; 92%.
Regarding the ongoing disbursement of the EU's overall Recovery & Resilience Facility, data from the European Commission (EC) show that over EUR100bn of Recovery & Resilience Facility grants and loans were disbursed between August 2021 and June 2022. While the EC expects to make the Recovery & Resilience Facility's funding fully available by the end of 2023, it expects to commit 70% of grants before the end of 2022.
EUR100bn Of EU Recovery Funding Disbursed As Of June 2022
EU - Recovery & Resilience Facility Grants & Loans Disbursed, EURbn (August 2021-June 2022)
Source: European Commission, Fitch Solutions
In the case of the US, our view has played out, though to a lesser degree as a lack of congressional support has limited the ability of the Biden administration to implement its plans for robust investment in decarbonisation. The IIJA, an infrastructure spending law passed in November 2021 and involving some USD1.2bn in spending over five years, does include substantial investment in lower carbon emissions technologies. This includes robust new funding for urban transit (USD39bn) and intercity rail (USD66bn), support for electric vehicle (EV) charging infrastructure, as well as investment in expanding and modernising transmission infrastructure in the country. Plans for additional subsidies for electric vehicle purchases have failed to materialise as a lack of sufficient support in the US Senate has prevented the bill from advancing there, following passage by the House of Representatives in December 2021. While negotiations had continued through 2022 around the potential passage of a smaller version of the bill, it now appears that such an outcome is unlikely.
Almost 7,000 EV Charging Stations Opened In North America During H1 2022
US, Canada - Cumulative No. of EV Charging Stationed Opened By Access (2015-2022)
Source: US Department Of Energy, Fitch Solutions
US-China Tensions To Shape Global Infrastructure Development And Financing Landscape
In our Infrastructure Key Themes for 2022, we highlighted our expectation that intensifying tensions between China and the West will shape infrastructure investment in emerging markets in particular, as they will determine EM's access to foreign infrastructure funding and the scope for cooperation between Western and Chinese companies in construction markets globally. We see this theme playing out partially: while a recalibration of the West's diplomatic focus in light of the Ukraine war will likely prevent a near-term deterioration of China-West tensions, Western governments have nonetheless reiterated their aim to provide alternative sources of infrastructure funding to China's Belt and Road Initiative. As Russia’s invasion of Ukraine has prompted the US and its allies to refocus their diplomatic attention toward Russia, we expect that their somewhat reduced focus on the Indo-Pacific region will prevent China-West relations from deteriorating in 2022, limiting the likelihood that Western governments will increase their scrutiny of Chinese contractors and Chinese involvement in infrastructure development across the globe. While we expect that Western governments will continue to pressure other governments to limit Chinese participation in their infrastructure sectors, the re-prioritisation of the West’s foreign policy will keep these pressures from intensifying throughout 2022. Similarly, existing Western alternatives to China's BRI, including Build Back Better World (B3W) and Global Gateway Plan, will continue to have a limited impact on the global infrastructure industry and financing landscape in 2022, but their advance is unlikely to accelerate significantly. We thus do not expect a significant reduction in the number of BRI-designated projects in our KPD, which currently stands at 1,765, across 131 markets. Within this, 861 are currently under construction and 60 are suspended. Nonetheless, we note that China-West relations would deteriorate should the latter accuse China of providing material assistance to Russia or take advantage of the West's distraction. This would prompt our current view on China-West relations to realign more closely with our pre-Ukraine war view that a deterioration of China-West relations in 2022 would impact the global infrastructure project pipeline and financing landscape.
Significant Challenge For US To Compete With BRI-Designated Project Financing
Global - No. Of Belt & Road Initiative-Designated Projects
Note: Map excludes cancelled and completed Projects. Source: Fitch Solutions Infrastructure Key Projects Data
We doubt that the newly launched Partnership for Global Infrastructure (PGII) will have a significant effect. The initiative, which was announced by US President Joe Biden and his G7 peers in Germany, aims to 'mobilise' USD600bn by 2027 to fund clean energy, communications, health and other investments in emerging markets. The actual source of the money and the mechanism by which it will be raised and targeted has been left very unclear. The official announcement did not provide much evidence of big spending announcements. It only highlighted 10 projects, totalling just USD6.7bn. Even this figure may overstate the impact of the programme; only 25% of the funding is actually being provided by G7 governments (see chart below). In other cases, schemes are included because governments will help to mobilise or support private actors. Almost a third of the already-announced total seems to be made up of a USD2.0bn solar energy project in Angola, which is being funded by the Angolan government but built by an American company that received an undescribed 'collaboration' from the US Department of Commerce. At least at this stage, the PGII seems to be an effort in rebranding existing commitments. The projects shown above were, after all, agreed before the initiative was even announced (the Angolan solar plan was signed off in October 2021). The entire scheme seems to be an effort to rebrand President Biden’s stalled Build Back Better World (B3W) project, which he launched at the 2021 G7 summit in Cornwall. The president’s domestic opponents opposed the B3W project, which was the international arm of a domestic programme that was rejected by the US Senate. Other attempts to launch infrastructure initiatives, such as the EU Global Gateway Initiative, that would counter Chinese influence in emerging construction markets have involved similar efforts to rebrand existing financing commitments and bolster financial volumes by including not-yet-mobilised private sector funding, undermining their potential effectiveness.
Post-Covid-19 Pandemic Trends In Non-Residential Building To Crystallise
Our expectations of post-Covid-19 pandemic industry trends regarding the use of office space, e-commerce, and the onshoring of supply chains are beginning to be seen to directly impact industry activity in non-residential building, particularly across industry output data, company announcements, and survey data.
The Covid-19 pandemic's acceleration of greater hybrid working adoption in developed markets, whereby workers split their time between their usual place of work and home, is seeing major employers across developed markets materially reduce their office space needs. This overall reduction in the time spent by workers in a centralised workplace will continue to cap demand for fresh office space and dampen the non-residential building project pipeline. Companies including HSBC and Lloyds Banking Group have moved to begin reducing their office space, with the former stating in February 2022 that it had reduced its global office space by 18%; while Lloyds stated that it had achieved a 9% reduction in its UK office space as of February 2022. In the US, JP Morgan reportedly reduced its New York office space by 400,000 sq ft during 2021, following a 300,000 sq ft reduction in 2020. Given companies' willingness to permit hybrid working absent Covid-19-related restrictions through H1 2022, we expect companies to continue to accordingly reduce their office space needs to more efficiently serve a dispersed workforce. Underscoring the persistence of this industry trend, we note the Partnership for New York City's survey results for April 2022 regarding the proportion of Manhattan office workers currently at the workplace on an average weekday, along with employers' intended post-Covid-19 pandemic working model. 38% of Manhattan office workers were at their workplace on an average weekday, with employers only expecting this to rise to 49% by September 2022. Crucially, 78% of employers surveyed stated that they intend to utilise a hybrid working model on a permanent basis, while 22% expect to reduce their office footprint over the next 5 years. Similarly, the UK's Office for National Statistics conducted a Great Britain-wide survey in February 2022, which found that 84% of surveyed workers intended to split their time between their usual place of work and home on a permanent basis. Of this figure, 42% of surveyed workers stated that they would mostly work from home and sometimes their usual place of work, up from 30% seen in the previous survey's results in April 2022.
The proliferation of e-commerce will see commercial building activity begin to pivot in 2022; away from the construction of large-scale, urban retail premises towards smaller, localised buildings to facilitate the delivery of online orders. As a result, demand for e-commerce will remain structurally higher and begin to materially shift commercial and industrial building activity. As highlighted by our Consumer team, consumer-facing businesses have expanded their e-commerce offerings throughout the Covid-19 pandemic, driving mass adoption of e-commerce services by both retailers and consumers. This has seen internet sales as a percentage of total retail sales rise substantially across DMs and EMs alike, while retail footfall has remained structurally below pre-Covid-19 pandemic levels despite the gradual removal of social distancing measures. As a result, industrial output will remain elevated due to greater warehouse-related activity, while activity related to traditional multi-retail outlets will be subdued.
Continued disruption to global trade beyond the Covid-19 pandemic is providing upside for industrial building activity via the onshoring of manufacturing in the long term, though we note that acute pressures on supply chains in the short term have inhibited investment decisions to this end during H1 2022. As the viability of large-scale investment improves, companies will act to enhance the resiliency of their respective supply chains against future external shocks. For industrial building activity, markets in Central and Eastern Europe (CEE) are particularly well placed to accommodate the onshoring of autos manufacturers’ supply chains, particularly the burgeoning electric vehicle (EV) battery manufacturing industry. Asian markets, such as Vietnam, Malaysia and Taiwan, China, will also exhibit elevated industrial building activity.
Construction output data for the UK aptly demonstrate the diverging outlooks for industrial output; covering factories and warehouses, and commercial output; covering offices, shops and other social infrastructure, as a result of these post-Covid-19 pandemic industry trends. Rebased to 2019, data from the ONS show private industrial output was at 122.0 in May 2022, while private commercial output stood at just 77.7. After both construction segments suffered similarly substantial falls in output during H1 2020, industrial output has continued to recover to above its pre-Covid-19 pandemic level, while commercial output has continued to languish. While we continue to monitor the industry for signals of a potential recovery in private commercial output, along with the implications for investment from a slowing in near-term real GDP growth, it remains highly likely that commercial construction output will remain structurally lower as the aforementioned industry trends surrounding e-commerce and the use of office space persist.
Divergent Fortunes For Industrial And Commercial Construction Output
UK - Construction Output, 2019 = 100 (2019-2022)
Source: ONS, Fitch Solutions
In the US, data from the US Census Bureau show construction spending on offices remaining below its pre-Covid-19 pandemic level, while spending across commercial and manufacturing construction remains strong. Rebased to December 2019, office construction spending was at 92.6 in May 2022, while commercial and manufacturing were at 116.2 and 117.1 respectively. The US Census Bureau defines commercial construction spending as including multi-retail construction alongside warehouses, therefore we note uncertainty when determining the contribution of each to the total commercial construction spending figure.
US Office Construction To Remain Low
US - Total Construction Spending By Classification, December 2019 = 100 (2019-2022)
Source: US Census Bureau, Fitch Solutions
Hydrogen Infrastructure Development To Accelerate
Activity surrounding the early development of a hydrogen industry across markets globally continues to grow, with feasibility studies, project proposals and final investment decisions seen across the bulk of regions globally during 2022. While Russia's invasion of Ukraine has created near-term upheaval for oil and gas output, prompting some European markets to enact fresh liquefied natural gas (LNG) investment for non-Russian imports, the long-term investment thesis remains in favour of hydrogen infrastructure. Across Asia, project activity has continued to focus on the establishing of logistical supply infrastructure to enable hydrogen exports, while Western Europe continues to see the focus placed on hydrogen hubs and co-located facilities.
At the time of writing, our Infrastructure Key Projects Data (KPD) show 83% of the global hydrogen project pipeline currently at planning stage, followed by 8% being under construction. Australia, Germany and Spain lead among individual markets, with 47, 25, and 22 individual hydrogen projects currently in development.
Significant Hydrogen Project Volumes At Planning
Global - Share Of Hydrogen Project Pipeline By Status, %
Source: Fitch Solutions Infrastructure Key Projects Data
Among notable hydrogen-related developments during H1 2022, we highlight:
June 2022 saw HH2E and MET Group form a joint venture (JV), H2 Lubmin, to develop, build and operate a power-to-X plant in the German state of Mecklenburg-Vorpommern. The JV intends to invest more than EUR1bn (USD1.05bn) in the proposed 1GW facility, including more than EUR200mn (USD208.7mn) in the 100MW first phase. Initially, the facility will produce around 6,000 tonnes of green hydrogen per annum, and upon full completion, output is expected to reach more than 60,000 tonnes. Construction on the first phase is expected to start in 2023 and commissioning is scheduled for 2025. The second phase is due to complete in 2030.
January 2022 saw Essar Oil UK and Progressive Energy form a joint venture, Vertex Hydrogen, for the construction of a GBP1.0bn (USD1.3bn) hydrogen production facility at the Stanlow hydrogen production complex in the UK. The proposed facility would produce a total of 1GW of hydrogen per annum, across two units. Essar will own 90% majority stake in the JV, while Progressive Energy will own the remaining share. The overall facility is due to be operational from 2026.
June 2022 saw Woodside Energy and Fortescue Future Industries (FFI) enter the final negotiation phase in a competitive process to select the lead developer for the NZD5bn (USD3.1bn) Southern Green Hydrogen project in New Zealand. The project is a joint venture between Meridian Energy and Contact Energy, and it includes the construction of a 600MW hydrogen production facility.
May 2022 saw APA Group and Wesfarmers Chemicals, Energy and Fertilisers, a unit of Wesfarmers, sign a memorandum of understanding to conduct a pre-feasibility study for production and transportation of green hydrogen to WesCEF's production facilities in Kwinana in Western Australia. Nearly 100% of green hydrogen is expected to be transported through APA's 43km Parmelia gas pipeline.
Middle East & North Africa
April 2022 saw Masdar and Hassan Allam Utilities sign two MoU with local organisations to develop around 4GW green hydrogen production facilities in Egypt by 2030. The local organisations include the New and Renewable Energy Authority, the Egyptian Electricity Transmission, the Sovereign Fund of Egypt and the General Authority for Suez Canal Economic Zone. The power plants would come up in the Suez Canal Economic Zone and on the Mediterranean coast. The first phase of the project would feature a green hydrogen production facility, which would be operational by 2026.
January 2022 saw Copenhagen Infrastructure Partners (CIP) partner with AustriaEnergy Group and Oekowind to develop a 1.7GW onshore wind, green hydrogen and ammonia project in Chile. Called the HNH Project, the proposed facility will require an investment of more than USD3.0bn and it will also feature a wind farm, electrolysers, ammonia plant and a port facility, in Chile's Magallanes region. The facility is expected to provide around 1mn tonnes of green ammonia per annum.