INSIGHT: European construction continues to build steady growth despite economic pessimism

Author: Morgan Condon

2019/09/11

LONDON (ICIS)--Traditionally, September marks a buoyant period for the European petrochemicals industry as buyers and sellers return in earnest from summer breaks, prompting a flurry of activity before Christmas shutdowns.

This year, however, the outlook for many is more pessimistic, with expectations that a prolonged slump in trading will stretch beyond the longer days and good weather.

The automotive industry continues to flounder in the wake of more stringent emissions regulations, while demand for consumer goods remains weak in response to the ongoing US-China trade war.

Bucking the downward trend, the construction industry has largely been performing well in Europe in spite of economic tedium, which has been echoed in feedback across a range of petrochemical markets.

“We are into construction and things there are not too bad, not as gloomy as some sectors,” a plasticizers buyer said.

One example of this is in the high density polyethylene (HDPE) pipe market – which is closely linked to the construction market – where demand has remained strong.

While prices for other HDPE grades in Europe have fallen prey to imports from the US and caused spot levels to decline, the stringent regulations surrounding the construction industry have helped sustain pipe-grade material by comparison.

The EU’s statistical agency Eurostat stated that seasonally adjusted total construction rose by 2.1% for the second quarter compared to the same period the previous year.

This was echoed by key European economies in the same timeframe, with Germany, France and Spain recording increases of 1.6%, 1.7% and 1.1% respectively.

“Construction is up and the main supporter of the market development. Other bigger consumer industries like automotive are substantially down, dragging down the overall economic development,” one polyvinyl chloride (PVC) producer said.

In turn, this has bolstered demand in other petrochemical industries used in construction, such as the plasticizers sector.

“You don't use plasticizers alone. You use it along with PVC as a compound. What is important to the plasticizers: construction has been going pretty well," said a plasticizers producer.

"But automotive has been the opposite. It is having a direct impact,” it added.

The positive growth was not uniform across Europe, with the UK noting the sharpest decrease in new works in August since March 2009, according to IHS Markit’s purchasing manager’s index (PMI).

The UK appears largely anomalous, suffering from the persistent uncertainty caused by ongoing Brexit discussions.

Much like the EU, the construction sector can be viewed as a monolithic entity in terms of the petrochemical industry's subsectors such as house building or civil engineering, drivers that are currently shaping the market.

In order to survey the structural integrity of the whole sector, assessing these in turn may provide clearer insight into why the industry is demonstrating strength at a time of relative economic trepidation.

“While we see some cracks appearing in the European economy, housing, particularly residential investment, is one of the few bright spots. The housing market continues to show strong divergence from other much weaker sectors,” said analysts at London-based consultancy Oxford Economics.

As Europe contends with an ageing population and slower population growth rates than the rest of the world, there is still a consistent demand for housing, and construction rates are not meeting the needs of the EU citizens.

Build Europe, the Europe-wide trade group for house builders, said that despite a growing demand for affordable housing, public funds allocated to its development are constantly decreasing by "significant" proportions.

“At the current rate of housing construction, which is too low, this polarisation of demand in cities may have the effect of boosting house prices, reducing the number of owner occupants and increasing the share of the rental sector, itself subject to increased rental prices,” said Build Europe.

While home ownership is not the norm throughout Europe, demand for the sector remains firm.

In an attempt to encourage more citizens to buy housing, mortgage rates in European countries remain low and competitive. By enabling more people to get a foot on the property ladder, the demand for housing has been shored up.

This is reflective of the subdued economic sentiment across the EU and specifically the eurozone.

“[There is] no point having money in the bank, it will devalue [due to inflation] and some people are talking about even minus interest. People don't know where to invest so are investing in their own property and doing a revamp," said a PVC buyer.

"[Revamps] help with all sorts of profiles, including the PVC market. Savings are less and less every year in real terms, they don't want to buy a car because they don't know which one to buy, so they put in a new conservatory,” the buyer added.

The European Central Bank (ECB), the 19-country eurozone's central bank, has held interest rates low as inflation targets of 2% have remained out of reach so far this year.

Danish bank Jyske Bank has even started offering the world’s first negative interest rate mortgage in an attempt to coax would-be buyers into entering the property market.

Build Europe also cited the increasing costs for construction as one of the reasons that there is a squeeze on housing supply, as environmental regulations continue to limit the materials that can be used and can impact the price.

LUCRATIVE BUSINESS FOR CHEMS
Many petrochemicals have the construction industry as an end market. Isocyanates, for example, has posted a revival in 2019 thanks to regulations coming out of the EU.

"Mainly, the pickup [in isocyanates demand came from] polyisocyanurate (PIR) panels, partly driven by the EU's strategy regulating upgrades. Last I saw was the Dutch government issued policy demanding upgrade and issuing subsidies," said a distributors.

"This is one of the actions you will see in the market that could drive insulation.”

For those producing building materials, this bottleneck keeps demand high.

As one styrenics player said: “You don't decide today to build a housing estate in September; there's a lag. What you need to judge by is new projects. We will probably have more government spending – what's being built now was planned last year.”

For the chemicals sector, this means that construction is still a lucrative downstream industry to be involved in.

This is supported by BASF announcing the sale of their construction chemicals sector, which is tipped to bring in €3bn proceeds when a transaction is finalised.

The increasing demand for housing is both affected by and has an impact on the need for civil engineering.

According to the UK head of housing at KPMG, Jan Crosby, demand for housing and infrastructure is "pan-European" as the regions developed economies have an ongoing need to upgrade existing infrastructure, as well as build new projects.

"Meanwhile, a number of European countries have rising populations, putting pressure on existing infrastructure and contributing to the demand for new housing,” said Crosby.

The study from Oxford Economics indicates that construction backlogs in particular have bolstered demand for civil engineering, even if short-term demand started to decline.

“In particular, civil engineering and specialised construction have touched multi-years highs, while the backlog in buildings is decreasing but at around 11 months remains close to its peak since 2000," said the consultants.

“While the large number of backlogs are definitely positive for demand and output in the coming months, they are also an outcome of some structural issues.”

In fact, a styrenics source quipped that construction in Germany is still performing well, given those structural issues.

"Looking at roads or highways, you'll understand why [spending on infrastructure is necessary],” it said.

As feedback from some quarters suggests that activity in the construction sector is performing better than usual for the time of year, or in relation to other sectors, this appears to be the stronger economic sentiment of last year now coming to fruition.

Continued funding from the public sector may not be a consistent feature of the market, as data coming from many European countries indicate that several economies could be on the brink of a recession.

This means that continued funding for new projects may begin to subside, leaving demand for building materials to fade as European economies tighten purse strings in response to a more wearisome economic landscape.

Much like the difference between the speed of light and the speed of sound, the current strength shown in the construction sector may be like the clap of thunder lagging behind a flash of lightning – echoing what has already gone, rather than announcing what is on the horizon.

Pictured: A railway line being built in France; public works, or civil engineering, has propped up the European construction industry in 2019
Picture source: Sipa/Shutterstock

By Morgan Condon 

Additional reporting by Chris Barker, Jane Gibson, Fergus Jensen, Jane Massingham, Linda Naylor, and Helena Strathearn