Getting over the bust

The pace of economic recovery is frustrating. In the US, while the country has technically been out of the recession for several years, for those living and working in North America it is only just starting to feel like it, with new jobs originating and wage growth picking up.

As the US economy continues to gain strength, albeit gingerly, the construction sector follows suit. The pullback in construction activity has turned the corner, suggesting that the expansion phase of the construction cycle is well-established and that solid prospects from a business cycle perspective can be anticipated.

"With the exception of the upstream oil and gas sector, which seems to be the topic of the whole world right now, the overall market - the power, the petrochemicals maintenance work, the non-residential commercial projects, the infrastructure projects - are coast-to-coast extremely busy in the US right now," says Frank Bardonaro, president of sales and business development, Maxim Crane.

Bardonaro adds that business at Maxim Cranes is steady, and market visibility is key to success. "We like to look 24 to 36 months ahead into different types of projects by sector. What we see right now, in the next 12 to 24 months, is continued strength in infrastructure projects, in the petrochemical sector from maintenance and expansion work.

We're providing larger capacity, more specialised types of cranes, not your 100t and smaller boom trucks and truck cranes."

Mike Appling, CEO of TNT Cranes agrees: "Petrochemicals is doing really well especially on the construction side of things, and it is expected that this sector will grow."

Indeed, the US petrochemicals sector is in the midst of one of the largest industry expansions to ever occur in North America. Inexpensive shale gas is sparking a surge in the construction of new processing capacity. Total announced capital investments in capacity expansions, upgrades, plant restarts and greenfield facilities have climbed by over USD 100 billion, according to the US Energy Information Administration (EIA).

Petrochemical projects are popping up all over the US. The Midwest will be home to a number of new plants. Illinois, Iowa, Indiana and North Dakota will see the addition of 5.13 million metric tons per year of fertiliser capacity by 2018, while Iowa and Kansas will witness the addition of new ammonia facilities this year. Ohio will see a new fertiliser plant and an ethylene complex in 2017 and 2019, respectively, while North Dakota is scheduled to receive a new urea plant in 2017.

In addition, Appalachian Resins is constructing a plant in Salem, Ohio. The plant was originally planned for West Virginia, but the owner needed more land to accommodate the plant. The plant is expected to be operational by 2019, while Ohio Valley Resources will construct a USD 1 billion plant on 150 acres of land north of Rockport, Indiana.

In Texas and Louisiana, exports are forecast to increase from new, expanded and existing petrochemicals plants. Cheap natural gas feedstock from shale drilling is anticipated to fuel an extended boom in exports, despite the drop in crude oil prices. Construction projects for new and expanded petrochemical production capacity represent long-term, multi-billion-dollar capital ventures. According to the EIA, in the last few years, companies have announced some USD 35 billion in new and expanded petrochemicals export projects along the Houston Ship Channel, with several of those projects slated to begin operations this year.

"We've separated our company from our competition in key segments, where we've focussed on the petrochemical sector and the special use projects. We have very positive, long term relationships in the Gulf Coast refineries," says Bardonaro. While refining segments are expected to prosper, companies that have profits tied up to upstream operations will continue to experience difficulties if crude prices remain depressed.

"It's pretty well broadcasted that things are bad," says Appling. "I don't think people realise just how bad it is, and how many service providers are in trouble. The balance sheets are stressed and companies are basically operating at break even margins, just trying to keep doors open, so it's not in good shape.

There's varying forecasts of how this year is going to shape up. However, I I think demand for upstream oil and gas will stay flat, or maybe it increases by two million barrels per day (bpd), but right now we are oversupplied by one and a half bpd."

Appling adds that the road to recovery is a slow one, if it happens at all. "The prices could very well start coming up, but well will not be going back to USD 100 barrels any time soon, or ever, and so we will still have a large issue of oversupply for all those service providers. In 2012 and 2013 because the North American service providers ramped up too fast and got too greedy, the market got saturated and I'm not sure how it's going to work out."

Before the bust, the upstream oil and gas industry was riding high, with unprecedented growth in US production and years of USD 100 plus prices. But the drop came quickly and surprised many. Not to Maxim Crane though, says Bardonaro.

"Several years ago Bryan Carlisle, Maxim Crane's CEO, sat down with our regional presidents to identify some of the markets we wanted to focus on," notes Bardonaro. "At this time we saw some of our key competitors really ramping up to go pursue the upstream oil and gas sector, especially in the midwest and the northwest part of the US, and we didn't feel it was sustainable."

"What's more, the cranes they were buying to do that work were not part of our core fleet objectives.

Therefore, under our CEO and management team we made a very strategic decision to get away from upstream oil and gas work. We don't chase the latest dot com craze whatever that might be, and we stay very loyal to our core markets, and we ride the cycle with our core markets but we don't look for some sort of magic pill. Some of our competition went all in in that market and I think they are feeling some of the pains of that right now. But when we're looking at the upstream oil and gas market, it looks like it's going to be a good two or three years recovery minimum. From the cranes standpoint, I think these problems will work out a little sooner than that, but this isn't a problem Maxim Crane is facing."

However, Appling says that business isn't as strained for those in the crane business. "The cranes will do a bit better because they can be used across different industries, you can take a 90 - 160ft crane that are primarily used on oil fields and you can use them in power plants and you can use them in roadworks and so forth. So the crane side will repair itself more quickly. The main problem here is because of how strong the US dollar is, the normal refill markets in South America, the Middle East and China, it's just hard for them to buy right now. So you're left with North American buyers, well actually you can only really have US buyers, and there's only so much of the capacity they can soak up."

It's not all bad news; there is a copious amount of construction work across the US. "The hottest regions in the country, are literally the hottest regions in the country," says Bardonaro. "The states in the southeast - the warmer weather states - are the strongest markets we have at Maxim Crane right now. The west coast is also having a good, sustainable recovery with new projects coming out of the ground - expansion of existing commerce centres, hospitals, universities, and a lot of mega projects such as the most recent one featured on 60 minutes for Apple." Apple's new headquarters complex, nicknamed the 'spaceship' is currently under construction in Cupertino, California, on a 175-acre building site. When it's complete, the campus will be home base for some 13,000 Apple workers.

The ability to take your crane company anywhere is advantageous in today's marketplace. "In the US a lot of bigger customers are no longer staying based near their home office because they are travelling wherever the work is," says Bardonaro. "Our ability to go where they go is giving us a significant advantage over some of our competition, which may be very strong regionally but can't go coast to coast. For example, one of our large customers out of Missouri is building a large stadium project in Miami Florida and we continue to go wherever they go. We now have a large project ongoing in Florida, just by following our customer. We're solidifying our relationship with our top customers and that's allowing us to get a greater penetration of their business."

What's more, construction work in the US is plentiful across many sectors. Nonresidential construction is encouraging, in fact the recovery is now established. While US nonresidential construction did not suffer the same deep contraction as its residential counterpart following the 2008 crash, construction numbers have been low in recent years.

However, spending on nonresidential building turned a corner in 2014 when activity increased 7 percent for the year, with commercial and industrial activity each up by more than 15 percent for the year, according to the American Institutes of Architects (AIA).

The AIA expects spending on nonresidential buildings to approach USD 390bn this year. While that would leave the industry more than 10 percent below its most recent high in 2008, if these forecasts are obtained then spending on nonresidential construction would have increased over 25 percent between 2013 and 2016.

As the construction sector heats up, so does worker shortage. Industry-wide employment cratered from 2006 to 2011, losing some 2.3 million jobs. Many construction workers left the industry during the downturn to become truck drivers, factory workers or headed to the then-booming oil industry. Most haven't returned, even as construction work rebounds.

Bardonaro says that Maxim Crane is a union crane rental company and draws from a solid, full time labour pool. "We're able to get spiked labour requirements during plant shutdowns and turnarounds from the local operating engineers union, which guarantees us availability of qualified labour. The labour shortage probably has a greater impact from the crane rental standpoint of nonunion companies during peak projects where they have a little more difficulty finding the excess - the night shift and triple shift work. Overall, the North American crane rental operating market is very strong, with years of training and certification, and the crane rental companies both union and nonunion have benefited from that. I don't want to say there has been a shortage of any qualified or trained operators but I will say there is a high demand for them, and there's plenty of competition for them working for your company instead of going to a competitor's company."

While the US construction market has been walking the economic tightrope, with the upstream oil and gas sector still in a state of flux, the crane business hasn't had to suffer too much. "The nice thing about cranes is if you're a crane provider you can work in other industries," says Appling. "If you're a service provider and you work in oil rigs, that's all you can do. We're lucky."