INSIGHT: Large construction cost overruns hit US chemical plants

Al Greenwood

21-Sep-2023

HOUSTON (ICIS)–A surge in new US industrial projects and a chronic shortage of construction labourers are contributing to cost overruns of about 50% for some renewable fuel and chemical projects.

  • Decades of labour shortages in skilled craftsmen have worsened in recent years with no easy fixes. In a recent survey of contractors, 61% said projects have been delayed because of labour shortages
  • Some material shortages persist. In the same survey, 65% said supply-chain problems have caused project delays
  • Half of the respondents in the survey said companies have cancelled, postponed or scaled back projects because of higher costs

LIST COST OVERRUNS

  • The capital budget for the second commercial-scale plant of Origin Materials rose to $1.60bn from $1.07bn. Origin also is splitting the project into two phases, delaying the startup and reducing the scale of the plant. The project will produce renewable oils that can be processed into biofuels and feedstock that can be converted into a component used to make polyethylene terephthalate (PET) or polyethylene furanoate (PEF)
  • Phillips 66 expects to spend $1.25bn to convert its San Francisco refinery in Rodeo, California, to produce renewable fuels, up 47% from an earlier estimate of $850m made in May 2022
  • The costs for an ultrapure sulphuric acid plant being built in Casa Grande, Arizona, have increased to $300m-380m, up 50%. The project, currently on hold, is being developed by Chemtrade Logistics and joint-venture partner Kanto Group

UPCOMING US PROJECTS
Chemical companies plan to add capacity through the rest of the decade in the US. The following table shows the chemicals that will have capacity increase by at least 1m tonnes in 2030 from 2023.

Ethylene
High density polyethylene (HDPE)
Methanol
Acetic Acid
Vinyl chloride monomer (VCM)
Ethylene Dichloride (EDC)
Caustic Soda
Chlorine
Polyvinyl Chloride (PVC)
Polyester polymer
Purified terephthalic acid (PTA)
Polyethylene Terephthalate (PET)
Propylene

Source: ICIS Supply and Demand Database

CHRONIC LABOUR SHORTAGES
Construction costs are rising in part because of labour shortages, which are contributing to higher salaries.

Construction pay is rising at its fastest rate in two decades, said Ken Simonson, chief economist for the Associated General Contractors (AGC), a trade group that represents companies that build infrastructure, industrial plants and other nonresidential construction projects.

Average hourly earnings for construction workers in non-supervisory roles reached $34.40 in August, a premium of 18.6% over the average, according to the US Bureau of Labor Statistics (BLS). Among private workers in non-supervisory roles, only utility and information employees earned more.

The AGC and Autodesk recently completed an annual survey of the construction workforce that illustrated how hard it is to find qualified workers.

  • 85% of the respondents have job openings they are trying to fill
  • 68% of applicants lack the skills needed to work in construction
  • A third fail to pass drug tests

Simonson summarised some of the reasons behind the labour challenges.

  • For decades, students were encouraged to pursue higher education at the expense of craft trades
  • Tightened immigration rules have made it more difficult to fill empty roles through employment-based immigration
  • Because of its nature, construction cannot offer employees hybrid or remote jobs
  • Employees tend to retire earlier in the construction industry because it is physically demanding

SOME MATERIAL SHORTAGES PERSIST
While costs for many construction materials have stabilised or fallen, some shortages persist, such as for transformers, switch gears and other electrical equipment, Simonson said.

Diesel prices have recently risen by their largest amount since 1990, contributing to construction costs.

Recent tariffs that the US imposed on steel and other materials have set a floor on prices, Simonson said. As inflation cools, those tariffs will keep prices for those materials at an elevated level.

SURGE IN MANUFACTURING CONSTRUCTION
An incredible surge in US manufacturing projects has increased demand for construction labour and materials, which could add more pressure on costs.

The following chart shows the increase in construction spending for manufacturing projects. Figures are in millions of dollars.

Source: US Census Bureau

In July 2023, the most recent month for which data are available, spending in manufacturing spending rose by 71% year on year.

Simonson listed some of the reasons behind the surge in spending.

  • Semiconductor fabrication plants (fabs), other electronics projects
  • Petrochemical plants and liquefied natural gas (LNG) plants
  • Electric vehicles (EVs) and associated battery plants
  • Projects intended to shorten and simplify supply chains by bringing manufacturing closer to customers
  • Renewable energy and carbon-capture projects
  • To qualify for many government incentives, projects need to contain a certain amount of materials made in the US. Consequently, companies are building more plants to produce those materials in the US

Insight article by Al Greenwood

Thumbnail shows hard hat worn by construction workers. Image by Shutterstock.

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