Market Sense in an Irrational World

Robert Carpenter Editor Underground ConstructionRobert Carpenter | Editor-in-Chief

This is the time of the year when we start looking at the future for key underground infrastructure markets. Some call it predictions; I call it guesswork.

Now more than ever, there is no certainty, no clear path for our markets. Clearly, we have become a global economy in so many ways. Worldwide impacts range from economic to technological to academic, but nonetheless the impacts are real and significant.

Perhaps the most obviously connected worldwide underground infrastructure segment is oil and gas pipelines. Shale production has forever changed the U.S. industry and subsequently shaken up the world energy dynamic. The U.S. officially became an oil exporter in December and has been a gas exporter (LNG) for several years, and continues to dramatically expand in that area.

All that sounds great until you balance world supply and demand. Oil storage remains at record highs – the world is awash in oil. A slowing and uncertain world economy potentially could bolster oil stores. Oil prices had tumbled into the 40s at press time.

Yet Big U.S. Oil (those companies with capital to invest versus operating on borrowed money) continues to invest in shale plays. With the radically decreased cost of production for shale, majors can increase their shale output and still make a healthy profit.

This is where pipeline construction comes into play. After coming off one of its better years, the pipeline construction market should again be strong in 2019. Shale play ventures tend to be in remote or undeveloped areas, thus an entire pipeline infrastructure must be created and/or expanded.

While sewer and water markets tend to be more regionalized and, impacted by local conditions, issues are common across the planet. In fact, what the U.S. has been experiencing in terms of its aging and failing sewer/water/stormwater infrastructure, occurred in Europe decades ago. Much of the U.S. rehabilitation technologies originated in Europe.

Funding is the critical missing element in the mix for adequate rehabilitation and construction of North America’s infrastructure. Our forecasting partner, FMI, expects sewer/water expenditure to rise about 4 percent in 2019 through 2022. I would expect the biggest jump in spending to continue to be in rehabilitation. Growth in all areas could be even higher if an infrastructure spending plan finally clears Congress – a goal of both parties.

For those cities that have for decades played the reliability-versus-risk game, it is coming time to pay the piper. The costs of maintaining a system while keeping user fees below cost levels worked for many years, but not anymore. It’s not just the EPA those cities have to worry about. Rather, their citizenry has become increasingly aware of unhealthy sewer/water issues, and local candidates are learning how to do a two-step around this sensitive issue.

The Water Infrastructure Act of 2018 provides some much-needed federal support in the near term to cities,and the Drinking Water State Revolving Fund comes in at $4.4 billion for the next fiscal year. However, it’s still a drop in the bucket.

Telecommunications construction had another very strong year and work is predicted to grow another 5 percent in 2019. The explosion of 5G wireless communication onto the market is forcing carriers to beef up their fiber capabilities even more to accommodate the booming demand.

When we talk telecom, everyone generally thinks new construction. But time flies when you are building fiber systems, especially long-haul fiber. Those earlier projects are nearing the end of their useful life. With 5G and increased demand for bandwidth in general, maintenance and development of this existing infrastructure will have to be performed.

The electric power distribution market benefited in 2018 with an unexpected increase in spending. That is expected to continue in 2019. A key trend that continues to resonate with power companies is moving overhead to underground. Much of this increased work is also credited to aging systems approaching 70 years since installation. Lower annualized maintenance costs combined with longer life cycles are balancing out the higher initial cost of construction.

Gas distribution contractors have been on a multi-year up-cycle that shows no sign of slowing anytime soon. Replacement of cast iron and bare steel continues at aggressive rates. Some estimates project that $300 billion worth of work remains before replacement is complete. Plus, new construction pressures just keep growing.

However, through all the exciting opportunities, one major stumbling block refuses to go away. The lack of an adequate workforce persists despite extreme measures taken by industry. We’re desperate for skilled labor, general labor, any labor.

The critical lack of workforce has become a significant inhibitor to growth for essentially all elements in infrastructure. The dearth of workforce has many layers of complexity and root causes, much of which has been discussed ad nauseam. Solutions are trying to emerge, but for now the workforce problem persists.

Hang on to your hardhats; it’s going to be a wild year.

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