Industrial Contractor Trends for 2015

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Over the next several years, the industrial construction sector in the U.S. is poised for a dramatic and welcome pattern of growth. Contractors who work in this sector are seeing several key trends that will significantly impact their operations. The emerging U.S. energy renaissance will certainly drive increased demand for services. Yet the ability of contractors to staff up to meet those demands is challenged by an overall lack of skilled tradespeople. Industry demographics indicate that many firms will be experiencing ownership transitions in the next decade; the attractiveness of this industry sector in the mergers & acquisitions (M&A) market may provide opportunities to facilitate these transitions.

Abundant Low-Cost Natural Gas Is Creating Tailwinds

Throughout the nation, for union and nonunion firms alike, backlogs are strong and margins are higher than they have been in recent memory. Whether focused on the power, food and beverage, petrochemical, or manufacturing segments, opportunities abound. The demand for U.S. manufacturing facility construction all but disappeared in the waning years of the last century, during the historical move to outsource manufacturing. However, rising incomes for Chinese and other emerging market workers, combined with U.S. manufacturing workers’ higher productivity, mean that the labor cost differential, particularly in the southern U.S., is projected to fall to less than 10 percent over the next five years. This makes the cost of energy in both manufacturing and transporting goods a much more important component of the manufacturing process. With the U.S. returning to net exporter of energy status in 2013, insourced manufacturing should continue to be a key demand driver for industrial and manufacturing construction.

By 2015 natural gas will account for only two percent of average U.S. manufacturing costs, and electricity will account for just one percent, according to Boston Consulting Group estimates. By contrast, natural gas will account for between five percent and eight percent of manufacturing costs in Japan and in Europe’s major exporting economies, where it is more expensive, while electricity will account for between two percent and five percent in Japan and Europe respectively. Cheap energy will also help further narrow the cost gap between the U.S. and China, where natural gas and electricity combined will account for six percent of manufacturing costs. 1

This reduction in energy and transportation cost for goods manufactured in the U.S. versus overseas will increase demand pressure on the industrial market segment. At first, some of this higher demand will be absorbed by increasing the number of shifts worked, but undoubtedly a surge in expansion, upgrades, and new construction will follow. Each of these means of handling surging demand has a different impact on the industrial contractor. During the initial focus on increased shifts to better leverage the factory assets, downtime management will be essential, so firms skilled in short-term maintenance shutdowns and turnarounds will see their services in high demand. During later stages, when renovations and new plant construction emerge to handle the manufacturing needs, larger project sizes will give big firms an increased opportunity as well. In short, if the expected onshoring trend holds true, the industrial construction segment is in for a boom of several years’ duration.

Succession Issues Threaten the Continuity of Many Firms

As mentioned, not only will the shortage of available labor affect the ability of firms to staff up, but also the demographics of an aging generation of leaders and managers is causing leadership gaps in firms. This cond