Urbanization trend boosts construction chemicals market

09 July 2010 00:00  [Source: ICB]

The global construction market is being impacted by populationmovements, as well as economic expansions and slowdowns

Rex Features

While building and construction has taken a hit from the recession, the urbanization megatrend in the developing world - combined with infrastructure projects in the developed nations - will mean steady demand for construction chemicals and materials.

As the rate of global urbanization continues to grow, it drives three key construction segments: residential, commercial and infrastructure, notes Andrew Bonham, president of US-based specialty construction chemical supplier Grace Construction Products, a unit of W.R. Grace. "This leads to demand increases for both building materials and construction chemicals," he says. "The challenges also encourage product innovation due to the unique environment in urban areas."

German chemical major BASF expects the use of construction chemicals to increase most strongly in the emerging markets of Asia, the Middle East (outside of the United Arab Emirates and its ongoing monetary crisis), and Latin America.

URBANIZATION A KEY DRIVER
"New construction is mainly driven by infrastructure and housing needs of countries with strong migration movements of young populations into urban economic centers," says Tilman Krauch, head of BASF's construction chemicals division. "This can be observed especially in China where urbanization has quickly reached a level of 40% and will further grow to 60% as in other mature societies."

"New construction is mainly driven by infrastructure and housing needs of countries with strong migration movements" Tilman Krauch, head of BASF's Construction Chemicals division

Infrastructure development is a driver in China and many emerging markets, points out the American Chemistry Council (ACC) trade group. This movement of rural populations to urban settings is driving the need for infrastructure improvements, creating the need for adequate housing, highways and streets, water and sewage, and other enhancements, as well as retail and commercial development.

According to the ACC, the rise of manufacturing in these emerging markets is leading to increased investment for factories and industrial structures, and the growth of service industries is leading to increased office construction.

Rising incomes, meanwhile, also encourage construction related to leisure activities and personal services. "Worldwide, the construction industry is one of the most important - and cyclical - elements of every economy," says ACC chief economist Kevin Swift.

HARD AS A ROCK
The use of some of the most common construction materials, such as masonry and concrete, has increased, not only for housing but also for infrastructure.

"As the emphasis on sustainability increases and more pressure is applied on governments, we'll see a shift towards the reduction in use of some raw materials common in construction chemicals," says Colin Gouveia, commercial director, Dow Construction Chemicals, North America. These include formaldehyde, phthalates, volatile organic compound (VOC) contributors, hydrochlorofluorocarbons (HCFCs), and others,

Sustainability concerns have increased building practices and products that improve energy efficiency, as well as increased efforts to reduce the carbon footprint of materials such as cement, Gouveia notes.

"The environment is certainly changing, and companies with an emphasis on innovation will be in the best position to support these trends going forward," says Gouveia.

"We believe that meeting these needs in a sustainable manner will require innovation in the construction industry [which] in turn can only be achieved with a broader use of construction chemical solutions," says Krauch.

Solutions improving the energy efficiency of traditional construction materials and reducing their carbon footprint are also growing, notes Krauch, especially concrete admixtures. "Advanced concrete admixtures not only improve the performance of concrete but also its workability, thus reducing the amount of energy used in its application," he says. "Most of all, concrete admixtures help to considerably reduce carbon dioxide emissions related to concrete production."

According to the American Concrete Institute's International Conference on Advancements in Concrete Technology and Sustainable Development, cement consumption globally is expected to more than double by 2020 to 4bn tonnes, from 2003 levels of 1.6bn tonnes, with most of that growth coming from developing countries. By then, China is projected to be producing 60% of the cement used worldwide.

However, China's growth rate for polyvinyl chloride (PVC) demand is expected to slow down to 8% in 2010 versus double-digit growth seen in 2009, according to an industry source at the 14th Asian Chlor-alkai Conference in Shanghai, China, in June. Construction in China is projected to slow, said industry sources at the conference. Observers expected PVC demand growth to slow further in 2011, to 7.5%.

China is expected to bring on stream nearly 5m tonnes/year of PVC this year, taking its total nameplate capacity to around 23m tonnes/year. But actual production will only be around 12m tonnes/year if the operating rate remains at last year's 50% because of high production costs, an industry source said.

China's consumption of PVC is expected to hit 10.6m tonnes in 2010, which would leave the nation with a surplus of 1.4m tonnes.

PVC consumption in India this year is expected to grow by double digits to 1.9m tonnes/year, overtaking the 8-9% GDP growth estimated for fiscal 2010. Demand growth for 2009 was about 30%, but will slow down because of fallout from the global financial crisis impacting the Indian construction market.

Be that as it may, demand will still require 700,000 tonnes of PVC to be imported to India, to supplement local production, estimated at roughly 1.2m tonnes in 2010.

STRAW HOUSES
While developing regions have been doing well, the new and commercial construction in mature markets, particularly in Southern Europe and US, have been weak.

In the US and Europe, except for Spain, "the housing markets have bottomed out and are showing first signs of improvement," says Krauch. "We are expecting that the continuing uncertainty in the markets will cause the construction sector to act very carefully on the path ahead."

As for the European debt crisis, its influence on construction depends on how contained it remains. "If it stays within Europe, demand for construction materials, including coatings, will be hindered as new construction and infrastructure projects are put on hold," says Jon Hastings, strategy and new business development director, for Dow Coating Materials.

While it is perceived as relatively contained, Hastings notes: "If the crisis spreads outside of Europe due to trade imbalances, it would certainly have greater impact." The US, however, has still been dealing with the fallout from the financial crisis. US housing starts peaked at 2.07m in 2005 and fell to 558,000 in 2009.

The consensus is for housing starts to hit about 700,000 this year, says the ACC, and then to increase to about 1.05m in 2011, and 1.55m in 2012. In mid-June, the US Census Bureau reported that housing starts fell by 10% to 593,000 in May, following a downwardly revised 3.9% increase in April. "This is the lowest level since a year ago, and the worst drop in 19 years," says the ACC.

US HOUSING MARKET SHRUNK
According to a January study by US-based consultancy Deloitte, the recession shrank the US housing market by 47% from 2007 to 2009 to $178bn (€144.8bn).

While the US market is projected to grow to $254bn by 2014, that is still 24% smaller than the market's size in 2007. In 2007, there was more than $6.5 trillion of building and construction globally, according to US-based consultancy IHS Global Insight. The ACC estimates that this construction activity generated $227.4bn in direct and indirect sales of chemistry products throughout the world.

In the US, each housing start uses an average of roughly $16,000 worth of chemistry, and the ACC estimates that the building and construction sector was enabled by $44.7bn in direct and indirect chemistry, including $15.1bn in direct purchases of chemical products.

The remaining $29.6bn represents the value of chemistry contained in construction materials supplied by other industries, like plastic and rubber products, plywood, fixtures, textiles and so on. US-based SRI Consulting says the global market for construction chemicals was $24bn last year.

Consumers are only beginning to understand the importance of using construction chemicals, but the signs are positive, says international consultancy Frost & Sullivan.

The Latin American construction chemicals market is projected to reach $2.05bn in 2016, up from $1.46bn in 2009. And the rise in disposable income in India has been a boon for the construction chemicals market there, which earned revenues of Indian rupees (Rs) 12.7bn ($276m) in 2008, and Frost & Sullivan estimates this will reach Rs31.05bn by 2015.

The outlook for the overall Southeast Asian market for construction chemicals looks optimistic as well, buoyed by government focus on infrastructure development. Demand is likely to support a compound annual growth rate of 7.3% for construction chemicals in Southeast Asia from 2008 to 2015, driving revenues from $464.7m in 2008 to $767.4m in 2015.

Meanwhile, the construction market for sustainable buildings is estimated by US coatings and selants firm RPM International $600bn worldwide and $150bn in the US. US-based ABI Research forecasts the global market for green building materials, with a focus on cement, insulation and wood products, will reach $571bn by 2013 from $455bn in 2008.

COATINGS ON THE UPSWING
The development of the global middle class, in conjunction with increasing urbanization, has had a two-fold effect on the coatings market, says Hastings.

In addition to the naturally increased consumption of coatings in urban areas, he says: "There is also a direct correlation between increased discretionary spending and how much these new urban dwellers are willing to spend to beautify their personal space," says Hastings. "While a young, single professional in Shanghai may have different taste and cultural preferences than a family of four in Kuala Lumpur, paint is consistently a top choice when it comes to improving their indoor environment."

On the industrial coatings side, increased urbanization translates to more appliance and car purchases, home improvement upgrades, and so on - all of which drive coatings demand.

Prosperity and urbanization also influence spending on infrastructure. "We see a direct correlation between increasing GDP and increased coatings consumption," says Hastings.

The second major trend that Dow sees is what it calls "sustainability with a purpose." That is, in emerging markets, the growing middle class wants coatings to be sustainable and high performance. "This is driving technology innovation at a rapid pace within the coatings industry," says Hastings. He cites the company's new formaldehyde-absorbing technology, which has created a new category of sustainable and high performance coatings in the Asian market.

"The technology improves the indoor environment by not only absorbing formaldehyde that is emitted by carpeting and other products in the home, but continues to do so over time," says Hastings.

Additional reporting by Prema Viswanathan and Aaron Cheong in Singapore

For more on the macroeconomics of the industry, visit Paul Hodges' Chemicals and the Economy blog

By: Ivan Lerner
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